Jeep as a Chinese brand

A mainland Chinese company, Great Wall Motor of China, has recently expressed interest in acquiring either the Jeep brand + manufacturing operations or all of Fiat/Chrysler.

The press has since been filled with commentary whose thrust is that Washington will oppose either sale proposition.

Several things strike me as odd about this:

–brands like Volvo and Jaguar have looked a lot more interesting recently since coming into Asian hands, so that shouldn’t be an issue (although this is likely the crux of the matter)

Jeep is now part of an Italian company   …which bought it from a German firm that was slowly sinking under the weight of a senescent Chrysler   …which had been foundering despite a government bailout in the 1970s and a huge injection of badly needed engineering talent under Daimler.  So a firmer economic footing for the whole Chrysler enterprise is unlikely to come without outside-the-box thinking.  Also, it’s hard to make a logical argument that foreign ownership for any part of Chrysler is a problem

–if the Great Wall Motor interest is real, it suggests the company has access to foreign exchange at a time when Beijing is cracking down on reckless foreign m&a by domestic corporations.  That likely means that Great Wall has enough influence in China to be able to expand the Jeep brand’s reach quickly

–I haven’t heard a lot of posturing from Washington.  Either I’m really out of touch on this one, or the anti-Great Wall sentiment is mostly in the minds of reporters.

Blue Apron (APRN) at $5+

APRN went public less than two months ago at an offering price of $10 a share.  That was down from pre-offer brokerage chatter (which is  always very optimistic) of $15 – $17.   Given that the average cost for pre-IPO shareholders is just above $1.60, though, any double-digit price must have looked good.

Certainly, the possibility of Amazon/Whole Foods as a competitor was–and still is–a worry.  There are, however, others:

–lack of barriers to entry

–churn:  stories that very large numbers of customers who signed up for trials at promotional discounts balked at continuing at the full price of about $10 a meal

–continuing working capital deterioration.  According to the prospectus, at yearend 2015, APRN had $127 million in unrestricted cash.  By 3/31/17, that figure had shrunk to $61 million, despite APRN taking in $121 million through long-term borrowing and advance subscription payments by customers (listed on the balance sheet as deferred revenue).  Looked at this way, APRN’s operations gobbled up over $180 million in fifteen months.  By 6/30/17, the situation was $30 million worse.

As it turns out, one of my sons had a Blue Apron subscription in the months before the IPO.  I helped prepare some of the meals.  I thought the recipes were excellent but that the ingredients supplied suffered from trying to keep costs down.  So I’m not a fan.  In fact, I’m a bit surprised the IPO went as smoothly as it did.

where to from here?

My initial take is that IPOs like APRN or Snap indicate there’s too much cash sloshing around in the system.  That always seems to end up chasing speculative deals.  My hunch is that APRN won’t be a big success without a significant revamp of strategy.

On the other hand, there’s arguably a price for everything.  In addition, the activist investor that pushed for changes at Whole Foods, Jana Partners, has just disclosed a 2% stake in APRN.

…maybe a turn for the better.  But, as things stand now, I’ll be watching from the sidelines.



Disney (DIS) as a conglomerate

DIS can be seen as a collection of only loosely connected businesses:  ESPN; the ABC television network; Disney theme parks; and Marvel, Pixar, Lucasfilm and Disney movies.

The sharpest line of separation can be drawn between ESPN (or ESPN + ABC), on the one hand, and the DIS animation, film and theme park businesses, on the other.

When I began to examine DIS stock about a decade ago, my first thought was that the company should change its name to ESPN, to reflect the fact that ESPN represented about three-quarters of the company’s earnings and virtually all of its growth.

That situation has changed dramatically during Bob Iger’s tenure as chairman, on two fronts.

–Iger fixed the formerly ailing Disney movie studio.  He acquired Marvel and Lucasfilms, which provided DIS with rich sources of underdeveloped content, as well as a collection of male characters to balance its previously almost completely female lineup.  In addition, the new characters allowed the theme parks to increase their attractions and merchandising to become a more important part of the profit picture.

–ESPN’s profits stopped growing.  This changed its investment attraction from earnings expansion to cash flow generation.  The shift arguably makes the case for splitting DIS up into ESPN and the residual DIS a stronger one, since the company now seems to consist of an income component and a capital gains one.

Arguably, investors interested in capital gains would pay a higher price for residual DIS earnings if they didn’t have to worry about ESPN.  Income-oriented investors would pay a higher price for ESPN cash flow if it were being dividended to them and if they didn’t have the unwanted risk of the business cycle sensitivity of the residual DIS businesses.


why I think a voluntary breakup won’t happen

Two reasons:

–ESPN cash flow may be in slow secular decline.  But it is still a large and convenient source of funding for the rest of DIS, and

–the current market cap of DIS is $160 billion, too large to be a takeover target.  Post-breakup DIS would have a market cap of, to pluck a figure out of the air, $85 billion.  Yes, that’s a large number, but it would change the takeover calculation from impossible to hard-but-doable.

So management likely has zero interest in breaking the company up.

selling: average cost or specific shares?

I’ve had a Fidelity brokerage account for a long time.  I’ve been relatively happy, with only two complaints:

–The first is a “just me” concern.  The Hong Kong stocks I own are always mispriced, except during Hong Kong trading hours.  Other than when that market is live, prices are typically two days old.

I’ve discussed this numerous times with Fidelity representatives (who probably think:  “Oh, him again!”);  I’ve also mentioned this in many surveys I’ve filled out over the years.  Apparently, it isn’t important enough to fix.  Every once in a while a Fidelity trader will advise me to trade these shares on the OTC market in the US, where they will be priced in my account, if accurate quotes are so important.  I don’t see the advantage for me, since my experience is that in times of stress US volumes for stocks like these evaporates.   In such circumstances, my observation is that prices can easily be 5% -10% less favorable in the US than in Hong Kong.  They’re also cheaper to trade in Hong Kong, too, but that’s a lesser issue.


–The second is more serious.  For some years, brokers have been required to report gains an losses from trading in taxable accounts to the IRS.  Determining selling price is straightforward.  The default option Fidelity uses for the cost of the shares sold, however, is the average price paid for all the shares in the position.

This is apparently the easiest thing for Fidelity to deliver.  But it’s not always the best for the client.  And the layout of the Fidelity online trade ticket doesn’t really highlight this important issue.  Unless you click on the expanded ticket link at the bottom of the form, you won’t be able to specify the tax lots that will be sold.

What is this about?

Two considerations:

–gains from stocks held for a year or less are taxed as ordinary income;  gains on stocks held longer than that are taxed at the (lower) long-term gains rate (more information from Turbotax).  So all other things being equal, it’s better to recognize a long-term gain than a short-term one.

–I generally try to sell my highest-cost shares first.  This results in recognizing the largest loss or smallest gain.  A net loss can have a tax value (see the Turbotax link above); subject to the holding period rules, the smallest gain should also mean the smallest income tax payment.

An example:

Suppose I hold 100 shares of JPM that I’ve bought at $50 and another 100 at $80.  Both lots are short-term.

I decide to sell 100 shares and net $9000 for them.

If at the time of sale I specify the shares with the $80 cost, my taxable gain is $1000.

If I specify the $50 shares, my gain is $4000. (I would probably only do this if I expected to offset this gain with a loss from other stock sales or from losses carried forward from prior years.)

If I let the Fidelity computer do the work, my capital gain is $2500.


If I’m in the 25% tax bracket, my income tax on the sale will be $250, $625 or $1000–depending on how I handle my cost basis.


Yes, I’ll likely sell the remainder of the position eventually, so I’m only postponing tax by choosing the highest cost shares.  Even so, in the meantime I have more money to put back to work today if I minimize current taxes.




…finally, internet again

I’ve been travelling in the rural Northwest the past week and have had only intermittent internet access   …until now.

Stepping back from the day-to-day, has its advantages, though.  Having little up-to-the-minute data, I’ve been forced to look at the longer-range stock market picture. 
The first two or three months after the election, the dollar and stocks both rose as investors celebrated the presidential results.  The strongest groups were Energy, Materials and Industrials–the ones that would benefit both from an acceleration in economic growth and implementation of the professed Trump agenda of tax reform and infrastructure spending.

This period ended rght around the inaguration.  It was replaced by a market that embraced secular growth areas of Technology and Healthcare.  The dollar began to drift downward, as well.  This sector/currency shift was partly, I think, a rotation from leaders to laggards that happens in every market that’s not going sideways.  Part was also concern that delivering on the Trump agenda might not be as easy as investors had supposed over the previous months.

During 2Q17, the stock market began to understand how deep the problems are that the Republican party and the adminstration are having in getting anything done.  The main direct consequence of this loss of confidence has been a sharp fall in the dollar, I think, on the idea that failure of the administration and congress to engineer fisal stimulus would translate into a slower pace of interest rate increases by the Fed.  A weaker dollar benefits multinationals, so IT continued to be a winner, along with many members of the Staples group, which also has large foreign exposure.

This last movement has also played itself out in recent weeks, I think.  The market as a whole, and major tech stocks in particular, have begun to move sideways, expressing Wall Street’s belief (mine, too) that they’ve gone up enough for now.  As I see it, action has been based chiefly on relative valuation– rotations deeper into IT via smaller stocks and back into the Trump stock winners of late 2016.  
The kind of movement described in the last paragrah doesn’t typically last long.  At some point, the market will return to the question of whether structural reform in Washington is possible.  As I see it, the underlying notion investors now have is that important change can and will happen, although people may have substantially different pictures of how this will occur.  

It seems to me that as long as investors hold this belief, the US stock market will move sideways to up, driven by earnings gains.

Verizon (VZ) and Disney (DIS)

A short while ago, rumors began circulating on Wall Street that VZ is interested in acquiring DIS.

Yesterday, the CEO of VZ said the company has no interest.

some sense…

The rumors made a little sense, in my view, for two reasons:

–the cellphone market in the US is maturing.  The main competitors to VZ all appear to be acquiring content producers to make that the next battleground for attracting and keeping customers, and

–the Japanese firm Softbank, which controls Sprint, seems intent on disrupting the current service price structure in the same way is did years ago in its home country.

…but really?

On the other hand, it seems to me that DIS is too big a mouthful for VZ to swallow.

How so?

–DIS and VZ are both about the same size, each with total equity value of around $175 billion.  If we figure that VZ would have to offer (at least) a 20% premium to the current DIS stock price, the total bill would be north of $200 billion.

How would VZ finance a large deal like this?  VZ’s first instinct would be to use debt.  But it already has $115 billion in borrowings on the balance sheet, so an additional $200 billion might be hard to manage, even though DIS is relatively debt-free.

Equity?  …a combination of debt and equity?

An open question is whether shareholders in an entertainment company like DIS would be content to hold shares in a quasi-utility.  If not, VZ shares might come under enough pressure for both parties to want to tear up a potential agreement.

dismember DIS?

VZ might also think of selling off the pieces of DIS–like the theme parks–that it doesn’t want.  The issue here is that all the parts of DIS, except maybe ESPN, are increasingly closely interwoven through cross-promotion, theme park attractions and merchandise marketing.  So it’s not clear the company can be neatly sectioned off.

Also, as the history of DIS’s film efforts illustrates, the company is not only a repository of intellectual property.  It’s the product of the work of a cadre of highly creative entertainers.  Retaining key people after a takeover–particularly if it were an unfriendly one–would be a significant worry.

From what might be considered an office politics point of view, VZ’s top management must have to consider the possibility that after a short amount of time, they would be ushered out the door and the DIS management would take their place running the combined firm.  Would key DIS decision makers want to work for a communications utility?

my bottom line

All in all, an interesting rumor in the sense that it highlights the weakness of VZ’s competitive position, but otherwise hard to believe.




the Blue Apron (APRN) offering

Meal delivery service APRN (originally named Petridish Media) went public yesterday at an offering price of $10 per share through an underwriting syndicate led by Goldman Sachs.

The original pricing range was reportedly $15 – $17, but was reduced to $10 – $11 after Amazon and Whole Foods announced their intention to merge.

The stock traded as high as $11 yesterday, before fading back to the offering price later in the day.  I didn’t watch the stock and there’s surprisingly little price information from yesterday’s trading available this morning, but it seems as if the underwriters made few (if any) “stabilizing” purchases at $10 to keep the stock from closing below the offering quote.

Today APRN opened at $9.98, slipped to $9.50, and is trading at around $9.70 or so as I’m writing this.

Although I have zero interest in owning APRN at this point, I think it’s an interesting issue from a number of perspectives:

–the concept is, I think, for APRN to be the “first mover” in home meal kit delivery.  Doing so would give it brand recognition and scale that rivals starting up later would find difficult to match.  Whether APRN can achieve this position remains to be seen

–as I read the prospectus (meaning: I find it hard to believe what I’ve read), 100% of the proceeds from the offering are going to the company.  None of the VC backers or otheer insiders are cashing out any portion of their positions.  If so, this is either very good (they think APRN is a gold mine) or not so much (they don’t want to scare away buyers)

–APRN is an “emerging growth company,” listing under the provisions of the Jumpstart Our Business Startups Act (JOBS).  JOBS allows early-stage companies to go public without meeting all the SEC-mandated disclosure requirements for public companies.  This makes the financials hard to interpret.  Still, it seems to me that there may be a serious deterioration in APRN’s working capital during 1Q17

–the main metrics/issues for APRN are the cost of acquiring a customer and its ability to retain one once acquired.  Again, it’s hard to get a good read, but Wall Street’s apparent worry–apart from AMZN/WFM–is that the answers to these questions are “high” and “low.”

All in all, the risks of APRN are too high for me, but this will be an informative one to watch.