Tag Archives: stock market

Microsoft (MSFT) buying the Nook e-reader?

May 10, 2013 By in Current Market Thoughts, e-readers, Industry Analysis, Publishing, Stock ideas Tags: , , , , , , , , Leave a comment

the news

Yesterday, the stock of Barnes and Noble (BKS) soared 22% on more than 10x normal volume.

The reason?

…a TechCrunch post saying MSFT is preparing a $1 billion offer for the company’s Nook-related digital assets.  The assets are held in BKS’s Nook Media subsidiary, which also contains the company’s college bookstore operations.  Leonard Riggio, who controls 31% of BKS, owned the college bookstore business privately but sold it it BKS in 2009 for $514 million.

The TechCrunch report is based on its examination of internal MSFTdocuments which the New York Times says are genuine, though perhaps dated.

is the headline figure, $1 billion, all that it seems?

Maybe not.  The most favorable interpretation of the TC scoop is that MSFT is willing to pay $1 billion for the portion of the BKS digital assets it doesn’t already own.  The least favorable is that the offer values the entire Nook Media at $1 billion.

The difference?  Three factors:

1.  MSFT already owns 17.6% of Nook Media.  Pearson owns another 5%.  Under the more favorable interpretation, the $1 billion would be split between Pearson and BKS, with the latter getting $940 million.  Under the less favorable, which I think is probably the correct interpretation, BKS would collect $774 million.

2.  Does the $1 billion value include the college bookstores, which–as I read the BKS financials–are the company’s most profitable operations?  If so, cut the MSFT offer in half.

3.  In its original deal with BKS, MSFT promised to fund up to $180 million in Nook R&D.  I think this was a loan, not a gift.  If so, part of the $1 billion may be forgiveness of the loan, not a new cash inflow.

In the least favorable case for BKS, subtract $500 million from the $1 billion headline number if the college book stores aren’t included.  Another $176 million represents the stock MSFT already owns.  Let’s say a further $100 million represents repayment of the R&D advance.  Then, the “$1 billion” offer would mean a cash outflow of  about $250 million, of which BKS would get about $235 million.

the Nook is bleeding red ink…

…for three reasons.

In the Darwinian world of consumer electronics, stand-alone e-readers like the Nook are an evolutionary dead end.  They’re being replaced by small, light tablets.

The Nook is an also-ran among e-readers.

As I read the BKS  financials, the company has a razor/razor blade strategy for the Nook.  It prices the device roughly at cost in the hopes of generating a lot of high-profit e-book sales from users.  In fiscal 2013 (ended in April), however, BKS appears to have lost $350 million trying to persuade consumers to take Nooks off their hands.  It’s hard for me to see how BKS can sustain deficits of this size.

why buy the Nook? 

1.  MSFT takes in $1 billion in cash every two weeks.

2.  To compete in the tablet and smartphone businesses, MSFT needs an e-reader feature.  Because of the company’s tiny market share in both businesses, developers aren’t beating down the doors in Redmond to make reading apps for it.  MSFT’s plan would apparently be to stop making e-readers and refocus the Nook division on creating/enhancing e-reader apps, especially for Windows devices.

3.  According to TechCrunch, the MSFT documents project Nook “ revenues to gradually recover, up to $1.976 billion by fiscal year 2017, for EBITDA profit of $362 million.”

Given that sales of e-readers make up the huge bulk of Nook Media’s sales, the most polite thing I can say is that this forecast is extremely optimistic.  Revenue growth appears to assume a rocketship ride for sales of digital content.  The $750 million positive swing in EBITDA looks too good to be true.  But it does make Nook Media look cheap.  My hunch is that this is its main purpose–to justify the purchase.

(One caveat:  it’s impossible for me to judge how revenues and costs for the Nook devices and for digital content are figured and split between the retail and Nook divisions of BKS.  The only way I can see for Nook Media revenues to rise without hardware sales is if the whole basis of revenue calculation is somehow changed.  EBITDA of $362 million is only plausible to me if somehow post-acquisition Nook Media’s SG&A expense of around $400 million a year completely disappears, or if somehow a whole bunch of digital content profits are now being attributed to the retail division but revert to Nook Media post-acquisition.)

For what it’s worth, TC says the MSFT documents value BKS as presently constituted at $1.66 billion.

4.  MSFT is anything but a shrewd acquirer, in my view.  Just look at its $40+ billion bid for YHOO in 2007 (it has taken a 70% rise in YHOO’s stock price over the past year for that company to recover to a market cap of $30 billion-).

5.  Nook Media may be MSFT’s best alternative–and it may feel it can’t allow the business to die.

I don’t have an investment opinion about BKS.  I don’t own the stock and I have no inclination to be a buyer.  Any holder must ask himself where he sees upside from the current level, and how much that might be.

PS:  I wonder who leaked the documents   …and why.

bird flu: investment implications from the SARS experience

May 9, 2013 By in Current Market Thoughts, Portfolio management, Stock ideas Tags: , , , , , , , , , Leave a comment

coronaviruses

Three times in the past decade we’ve had global flu pandemic scares from coronaviruses:

–SARS in 2002-03

–H5N1 in 2008, and

–H7N9 currently.

I don’t know enough to say any more than that in each case the disease is carried by birds or animals and transmitted to humans through contact,  Contact can come either from physical proximity to live animals or from eating undercooked meat.

The truly dangerous development would be a virus mutation that allowed the disease to be transmitted from an infected human to other humans.  In the case of H7N9, this possibility hasn’t been ruled out, but the evidence for or against appears to be unclear.

SARS

The S&P 500 dropped by about 10% once the threat of SARS became apparent;  the Hang Send fell by closer to 20%.  The emergence of the following two viruses have been greeted mostly with yawns.  Still, I think it’s worth looking back at the SARS episode to remember what happened then–just in case H7N9 takes a negative turn.

Beijing

One key difference between SARS and the others is that the government in China, where all these flu strains have originated, initially tried to cover up the SARS outbreak.  That allowed the disease to spread for months before any systematic action was taken to combat it.  And even then China didn’t want to release details to the international medical community about how bad SARS had become.  And it rebuffed foreign offers of medical cooperation and assistance.

As a result, before the spread of the disease was controlled through quarantine, 8,273 cases of SARS were reported, the vast majority in China and Hong Kong.  About 10% of those infected died.

Beijing’s attitude is now completely different.  China has already supplied virus samples to world medical agencies so they can begin work on possible vaccines.

what a repeat would mean for stocks

Economically, what would a repeat of the SARS experience look like?  Here’s what I think:

1.  World GDP growth would slow down.  Factories in the affected areas would cease production, with employees possibly quarantined.  As in the case of the recent floods in Thailand, we would doubtless find that shuttered manufacturers made some low value-added, but nevertheless key, industrial components that would force work to be curtailed all through the supply chain.

2.  International trade would decrease markedly.  Export destinations would be reluctant to accept shipments of goods for fear of contamination.  transport hubs wouldn’t want to handle cargoes.

3.  Global travel would come to a screeching halt.  Travelers would fear being infected while on aircraft.  For the same reason, no one would want to receive business visitors, especially from affected areas.  Less obvious, though most important, travelers would fear being quarantined–possibly for months–at a foreign destination and not allowed to return home.  That could reduce their work effectiveness, as well as potentially forcing them to remain in an area where medical care might be sub-par.

stock market effects

In the SARS case, stocks stayed depressed for around three months.  They began to rebound once signs emerged that quarantine was effective and the virus was coming under control.

Back then, stocks in Hong Kong were hurt across the board (in today’s world, the biggest losers would likely be the casinos in Macau). Industries badly hit around the world included, as you might expect, hotels, ports, airlines and all businesses in international tourist/business destinations.

Pharmaceutical companies, especially those with related expertise, did well.

Were H5N9 to mutate into a form that’s more dangerous than it is now, I’d expect the same general pattern to recur.

Let’s hope it doesn’t.

lessons from J C Penney (JCP)

May 8, 2013 By in Recent Market Action, Portfolio management, Fixing mistakes, developing competence as an investor Tags: , , , , , , , , Leave a comment

preliminary 1Q13 results

In conjunction with arranging a five-year $1.75 billion loan through Goldman, JCP has filed an 8-k in which it gives preliminary information about the April 2013 quarter.

–Sales were $2.635 billion, down 16.4% year-on-year (comp store sales = -16.6%).  Looking at a two-year comparison, sales are down by 33.2% from (the pre-Ron Johnson) 1Q11.

–Cash on hand at the end of 4Q12 was $930 million.  During 1Q13, JCP borrowed an additional $850 million, by drawing half its beefed-up bank credit line.  As of May 4th, the company had cash of $821 million.  In other words, JCP has blown through the entire $850 million, plus another $109 million in three months.

lessons

1.  When things go wrong, they often have a runaway train character.  Ron Johnson joined JCP in late 2011.  Almost immediately, sales went into a tailspin.  By mid-2012 it was clear that something was desperately wrong and needed to be fixed.

But no one acts right away.  There’s always the temptation to wait just a little while longer in hopes the tide will change.

In addition, a company’s plans may be set in stone months in advance.  There are advertising campaigns, construction plans, and billions of dollars of (the wrong) merchandise in the stores–with more of the same on order.

In this case, nine months after starting to back away from the Johnson strategy, JCP is still losing cash at the rate of over $250 million a month.

2.  Cash tells the story, in a trouble company.  That’s cash flow, cash on hand and cash the company can borrow.

In the JCP case:

–cash flow is -$250 a month,

–cash on hand is $821 million, and

–borrowing power is $2.6 billion (the $1.75 billion loan arranged by Goldman plus the remaining $850 million in JCP’s bank credit line).

Assuming its banks don’t get cold feet and withdraw the credit line, JCP has total cash available of $3.4 billion.  That’s enough to sustain a cash drain at the 1Q13 rate for another 13 months.

3.  Riding coattails is a risky business.  The Financial Times website posted an article last evening titled “Tips from Wall Street gurus fail to reward faithful.”  In it, the FT looks at the performance of the hedge fund “best ideas” presented at last year’s Ira Sohn conference in New York.  In the aggregate, the tips underperformed the S&P 500.  Some, like JCP, were unbelievable clunkers.

Two factors:

–even the best equity managers are wrong 40% of the time, and

–some managers become celebrities mostly through their own aggressive marketing efforts rather than by having stellar performance.  Or they parlay a one- or two-year hot streak into an entire career.  Caveat emptor.

Dr. Copper is speaking–but what is he saying?

May 7, 2013 By in Mining, Portfolio management, Recent Market Action, Stock ideas, Strategy Tags: , , , , , , , , , Leave a comment

Albert Edwards

Albert Edwards of Société Générale is one of the longest-tenured strategists of global securities markets around.  He’s very smart.  He foresaw the problems that would result in the peripheral EU countries from the very beginning.  He predicted long ago the current condition of globally low interest rates and slow growth, which he dubbed the “ice age.”  It took a more uplifting spin by marketing juggernaut Pimco, which called the situation the “new normal,” before the idea gained wide acceptance.

In some sense, Mr. Edwards’ predictions are  …well, predictable.  He’s almost always bearish.

Dr. Copper

He’s currently listening to “Dr. Copper,”  whose price has been falling since the beginning of the year.  Mr. Edwards likens today’s situation to that in 2007, when a swoon in the red metal (it ultimately lost 2/3 of its value) presaged recession.

Why is copper so important?  Its use is highly economically sensitive.  It’s tubing and wiring in building construction; it’s the guts of an electric power generator; and a new car can contain up to a hundred pounds of it.

Recession in the back half of 2013 wouldn’t be pleasant.  Monetary spigots around the world are already wide open.  Fiscal loosening takes a long time to have an effect–and, ex the EU, dysfunctional legislatures are unlikely to agree on anything positive in any event.  So for the first time since WW II, we’d just have to take our lumps.

is this right?

I’m not sure that Mr. Edwards is correct, though, about what’s causing the copper price to fall this time.  A tripling in the price of copper since 2006 has caused new mine projects to start up  and existing mine production to rise steadily.  I haven’t been able to find good statistics for recycled copper, another important source of supply, but I’m confident that it’s up as well.  As a result, a market that was chronically short of supply has recently turned into one where supply is now slightly ahead of demand.  Hence the price fall.  Unlike 2007, my view is that Dr. Copper is swhispering that supplies will be plentiful from now on, not that demand is drying up.

Europe is cheap

By the way, Albert Edwards has another big insight.  This one is bullish.  So, coming from a bear, it’s well worth listening to.

He thinks European stocks are startlingly cheap.  Copper is telling him that world economies are going to hell in a handbasket over the next eighteen months, so the timing isn’t quite right today.  But if–like me–you think he’s getting the wrong message from Cu, they’re worth taking a look at now.

Yahoo, welcome to France!

May 6, 2013 By in capital flight/brain drain, economics, Foreign markets, Recent Market Action Tags: , , , , , , , Leave a comment

Dailymotion

For the past half-year, Yahoo (YHOO) has been negotiating with France Telecom to buy a controlling interest in Dailymotion, an online-video website that FT acquired in 2011 for €127 million ($165 million).  According to the Wall Street Journal, the two parties reached an agreement last month in which YHOO would pay $225 million for 75% of Dailymotion, the 10th largest You Tube competitor.

This looked like a sweet deal for both sides.  FT would get all its cash back plus a profit and would retain a 25% interest in Dailymotion, while YHOO shouldered all the financial and operational burden of growing Dailymotion as fast as possible.  YHOO would take a big step forward in developing an online video arm.

redressement productif intervenes

Then Paris stepped in.  In a move reminiscent of its rejection of Pepsi’s bid to acquire yogurt-maker Danone, the parties were summoned to the offices of the French Minister of Industry (=redressement productif), Arnaud Montebourg on April 12th.  Le Monde says M. Montebourg yelled at FT, described Dailymotion as a national treasure that must remain in French hands and vetoed the deal.

Odd behavior for an official who is a central figure Paris’s campaign to convince foreigners to invest in French companies (“Say Oui to France, Say Oui to Innovation”).  On the other hand, this is France we’re talking about.

damage done

This government move has bad consequences both for France, and for Dailymotion:

–Dailymotion is now stuck being a part of a telephone utility, which doesn’t have the skills, connections or capital to help it grow.

–Dailymotion employees see that their dreams of making a large profit by cashing out in a sale, or of being key figures in a large internet entity have gone up in smoke.  The most talented are doubtless already cutting their losses and leaving France for tech jobs elsewhere.

–Paris has just shown foreigners that any capital they put into France is subject to the whims of the ruling elite and could easily be trapped there forever.   M. Montebourg’s public post-meeting gloating about his action only reinforces this idea.

–the move is another significant step down the path to economic irrelevance blazed by Japan.

France is not the only chauvinist…

…although it is the birthplace of the Nicholas Chauvin legend.

Every country restricts foreign investment to some degree.  Almost no one lets non-citizens control essential industries like defense, telecommunications or media, for example.  Developing economies, fearing that rich foreigners will spirit away local businesses on the cheap, often enact wider restrictions.  Continental European nations, where preserving the position of a small group of “haves” is a very high priority, do the same.  The US, fearing its growing economic power, won’t let China buy much of anything.

ironies

M. Montebourg seems to have no clue that he has highlighted the negative reality behind the “Say Oui to France-innovation” campaign.

The campaign’s website, which I thought was well done, features prominently an explanatory video driven by the same Dailymotion Montebourg has just eviscerated.

The French love to disparage American intellect and culture.  According to one recent description, we have been mentally ensnared by our greatest creation, Disneyland, and are now unable find our way back to the real world.  They don’t seem to get it that venerating yogurt and online videos suggests you’re a lot more confused than we are.   Or that being lost in memories of the glory of the Ancien Régime is not such a hot thing, either.

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