Tag Archives: company news

Whole Foods (WFM) and Millennials

May 11, 2015 By in earnings conference calls, Recent Market Action, Retail, Stock ideas, supermarkets Tags: , , , , , , , 1 Comment

What should we make of the announcement by WFM that it’s launching a new chain of supermarkets–smaller stores, selling less expensive merchandise, targeted to Millennials?

preliminaries

I was an early investor in WFM.  My family shops there on occasion.  But I haven’t followed the company for years.

Over almost any period during the past decade, the traditional supermarket chain Kroger (KR) would have been a better investment.

The stock’s strong performance from the depths of the recession comes in part from its starting point–a loss of over 3/4 of its stock market value and the need for a $425 million cash injection from private equity firm Green Equity Investors.

my thoughts

new brand–As I once heard a hotel marketing executive say, “You don’t start selling chocolate ice cream until the market for vanilla is saturated.”  Put a different way, if there’s still growth in the tried and true, it’s a waste of time to segment the market.  Therefore, the move to a second brand signals, at least in the minds of the managers who are doing this (and who presumably know their company the best), the end to growth in the first.

less expensive food–Pricing and brand image are intertwined.  Paying a high price for goods can confer status both on the product and the buyer.  Lowering prices can do the opposite.  It seems to me that WFM judges it can’t lower prices further in its Whole Foods stores without risking the brand’s premium image.  It may also be that WFM thinks it needs the pricing to pay for the big stores/prime locations it already has.  That would be worse.

smaller stores–This is less obvious.  The straightforward conclusion is that WFM has exhausted all the US locations where the demographics justify a big store.  My impression is that this happened years ago, however, when WFM began to decrease the square footage of its new stores.  On the other hand, it may also be that in their search for “authenticity,” Millennials react badly to big stores.

Millennials–Millennials and Baby Boomers are each about a quarter of the population.  Boomers have about twice the income of Millennials.  But as Boomers fade into retirement, their incomes will drop.  Millennials, in contrast, are just entering their prime working years, when salaries will rise significantly.  So targeting Millennials makes sense.

 

It’s not surprising that WFM shares dropped on the news.   It signals the end of the road for the proven brand and a venture into the unknown for which no details have been provided.  Why announce this now in the first place?

What Amazon (AMZN) said about its web services Thursday night

April 28, 2015 By in Amazon, cloud services, earnings conference calls, Industry Analysis, internet, software, Stock ideas, Technology Tags: , , , , , , Leave a comment

AMZN shares rose by 15% last Friday, after the company gave its first income statement details about Amazon Web Services (AWS), its cloud business.  In its quarterly reporting from now on, AMZN will break out three business segments:  US sales, International Sales and AWS.

IN the late Thursday earnings release, Jeff Bezos said that AWS is growing fast and “in fact, it’s accelerating.”

the data

operating income

–during calendar 2013, AWS had segment operating income of $673 million, according to the GAAP accounting rules used in financial accounting.  That was 35.3% of AMZN’s total segment income.

—for 2014, AMS had segment operating income of $660 million, or 36.5% of the total

–in 1Q15, AMS had segment income of $265 million, 37.5% of the corporate total

cash flow

–on GAAP principles, AWS had cash flow of $2.4 billion last year.

capital spending

–AWS represents over a third of AMZN’s plant and equipment of $17 billion.  With $4.3 billion in plant additions in 2014, AWS was almost half the company’s total capital spending.  Of the $4.3 billion in new plant, $3 billion was acquired using capital leases–meaning a kind of financing which looks like a loan but which allows AWS to buy the stuff cheaply at the end of the lease.

plant life

–if we divide last year’s depreciation into the average of 2013 and 2014 plant, we get an average plant life of 4 1/2 years.

–return on capital

–last year AWS earned $660 million, using capital of $4.6 billion, meaning a return of 14%.

what to make of this

It’s hard to make a lot out of two years’ data, especially in such a fast-moving and capital-intensive business as AWS’s.

The GAAP numbers look good. Nevertheless, AWS is cash-flow negative, which isn’t troubling if we’re certain that the company will continue to earn a significant return on the capital it is pouring into AWS.  Also, although there’s no way to tell for sure, it seems to me likely that on its IRS books, AWS is losing money.  How so?   …tax breaks for technology investment, including depreciation that’s heavily front-loaded (vs. spread out evenly over the assumed life of the equipment, as GAAP calls for).

Certainly, if Wall Street’s view has been that AWS is bleeding red GAAP ink, the reality is hugely better.  As time goes on, we’ll be better able to judge how insatiable AWS’s need for capital is–or whether, as one would hope, AWS will turn cash flow positive .  My guess is that before then, AWS will be more than half AMZN’s profits, as well.  So holders will have to figure out whether or not it’s an uptick to hold shares in an internet infrastructure business that happens to retail stuff online, too.

 

 

1Q15 results for Intel (INTC)

April 16, 2015 By in earnings conference calls, internet, semiconductor manufacturing, Stock ideas, Technology Tags: , , , , Leave a comment

the results

INTC reported 1Q15 earnings after the close on Tuesday.   Results were flattish year-on-year, matching analysts’ forecasts.  This was unsurprising, given  INTC had preannounced 1Q15 was not going as well as expected.  The company thinks some, but not much, relief from the current doldrums will appear in the second half.

The culprit has been the traditional PC business.  Small-and medium-sized firms haven’t been converting their old Windows XP desktops to newer machines.  Maybe they’ve decided to wait for Windows 10, or they don’t want to update their (pirated?) Office programs or they just figure they’ll use XP until something breaks.  Whatever the reason they’re not buying.

This hurts INTC in two related ways:  OEMs don’t have to reorder parts   …and they run down their inventory levels to match weaker demand.  INTC thinks the second process was pretty much over by the end of March.

Notebooks and tablets were up, though, and the server-related businesses are going great guns.

picky stuff

INTC now thinks its full-year tax rate will be 25%, not the 27% previously forecast.  This suggests the current mix of business is more Asia, less US than the company previously thought.

INTC is cutting capital expenditure plans.  Weaker PC demand means less need for older factories, which can be refit for more cutting-edge use.  Hence, less need to build from scratch.

Tablet demand was up 45% yoy in 1Q15.  This is good news and bad.  Good that someone wants the chips, bad in that INTC is essentially paying users to take them.  Nothing new here.  However, INTC had expected to begin to show profits on them by yearend.  That apparently is not going to happen.  INTC was likely planning to get out of the hole both by raising prices and by driving down unit manufacturing costs.  My guess is that the first isn’t happening yet.  (My view is that whatever it takes to get INTC parts into the hands of manufacturers is the correct strategy.  Ideally, the prior CEO would have understood the movement away from big clunky tethered PCs and reacted years ago.  But that’s water under the bridge.)

the big change (in my view)

INTC has changed the way it is presenting results to investors, effective with 1Q15.  It is folding the loss-making Mobile and Communications Group into the former PC Client Group, now dubbed Client Computing Group.

Some of this is just optics–the MCG lost about $1 billion a quarter during 2014, mostly trying to jumpstart the tablet business.  So we won’t see the red ink any more.

At the same time, through the magic of subtracting mobile losses from PC profits, the server business  becomes the largest single earner INTC has.

conclusions

In a sense, INTC is saying it wants to be known as an internet infrastructure company that happens to make PCs, rather than as a PC firm that happens to make servers.

Who wouldn’t!, a cynic might comment.

I think  the move is more than that, however.  It may also signal a change in behavior.  The new line of business table neatly divides the company into a growth segment–servers, embedded internet-of-things chips, 3-D flash…–and a mature cash cow, Client Computing.

If so, the first will be run as a profit center and measured by growth, the second more or less a cost center and measured by contribution margin (the reason I wrote about this topic yesterday).

During the conference call (as usual, I read the Seeking Alpha transcript) INTC said the servers etc. are accounting for 60% of the company’s profits right now.  If we assume that these businesses can continue to grow at 20% annually and that CCG stays flat, then servers etc. would be 75% of INTC’s profits–and expanding in scale–in 2018.

This would presumably result in a higher PE multiple at come point, as well as higher earnings.  The question I’m currently pondering is whether this prospect makes INTC more attractive than a tech-oriented ETF.

 

Intel (INTC) and Altera (ALTR): the numbers

April 2, 2015 By in mergers and acquisitions, semiconductor manufacturing, stock market, Technology Tags: , , , , , , , , 2 Comments

Let’s look at ALTR before word leaked to Wall Street that INTC was considering buying the firm.

the basics

ALTR was trading at about $35 a share, with earnings of, say, $1.75 a share in prospect for 2015   …in other words at about a 20x multiple.  The long-term growth rate of eps is probably in the low teens.   The market cap was $10.5 billion or so.

ALTR is one of two firms that together dominate the highly specialized market for programmable logic devices–a relatively stable, by technology standards at any rate, area.

20x for 10%-12% earnings growth doesn’t sent me running to the computer to place a buy order.

where the value is

small stuff

ALTR had $1.6 billion in net cash on the balance sheet at the end of 2014–that after spending $655 million buying back stock last year.

Yearly SG&A is running at about $300 million.  Let’s say INTC could eliminate half of this by substituting its own corporate infrastructure.  That would be enough to boost eps by 25%, so we’re looking at a 16 multiple on current earnings, which would be more reasonable.

the big attraction–intellectual property

The main source of value for INTC is the company’s accumulated knowledge, experience and computer code for creating and operating PLDs. How do we measure that?

The simplest, and only straightforward, thing to do is to add up R&D expenditures over, say, the past decade and see what that totals.  This will be an understatement, of the value of ALTR’s intellectual property because:

–there will always be some R&D related expenditure elsewhere on the income statement,

–duplicating the firm’s accumulated knowledge means spending in today’s and tomorrow’s dollars–not yesterday’s.  The former is always more expensive, and

–we won’t capture stock based compensation.

measuring

1. For ALTR, the 10-year total R&D  is $3 billion.  Arbitrarily add $500 million for stock based compensation.  Add in the net cash.  We get a total of $5 billion in “asset value.”  That doesn’t stack up well with ALTR’s pre-leak market cap.

2. Another approach.  Current R&D expenditure is running over $400 million a year.  Let’s say it would take ten years of spending at the current rate to duplicate ALTR’s intellectual property.  That gets us to $6 billion in “asset value.”

3. Let’s consider the future earnings stream (this is arguably just dart throwing).  Ignoring SG&A synergies, and with 300 million shares outstanding, $1.75 a share in eps translates into net income of $525 million.  Let’s say earnings in eight years are double that, or $1.05 billion.  If earnings progress in a linear fashion (another incredible simplification–but, hey, this is what securities analysts do), then the total earnings over the next eight years will be just over $6 billion.  (Why eight years?  My experience in analyzing corporate behavior in takeovers is that eight years is the outer limit of future earnings that companies are willing to pay for in an acquisition.)

 

Okay, we’ve got one figure, #1, that’s too low and another, #3, that’s too high- (and a giant leap of faith).  Let’s add them together!

They total $11 billion.

Ta da!

That gets us to around the market cap of ALTR before the leak.  To be clear, I’m not willing to defend to the death anything I’ve written so far.  But Wall Street had to be tacitly thinking something like this for the price of ALTR to be at $35.

the leak   …and a dilemma

Look back at #2 above.  For INTC, the alternative to acquiring ALTR is doing #2.  This would be expensive.  More important, it would be time-consuming–time that INTC probably doesn’t have.  And there’s the risk that its effort wouldn’t be successful.

Therefore, the value of ALTR is higher to INTC than to you or me.  INTC is probably also figuring that it can expand the ALTR business dramatically over the coming years by stuffing every one of its servers full of ALTR chips.  Therefore, $10 billion price leaves room for the acquisition to be accretive to earnings in a few years.  Also, SG&A synergies.

On the other hand, any of us with a loose $10+ billion will probably find a lot of things we’d rather do than plunk it all down to buy ALTR.  For us, $35 a share is a pretty rich price.

this brings us to the leak…

Both sides can make up numbers as well as I can.

Both know there are no other suitors.

Both know that INTC really wants ALTR.

Hence, the leak, which I would bet came from bankers representing ALTR.  The idea is–let the market bid up the price/decide what the price should be.

I’m not sure whether the leak makes the situation better or worse.  My guess is that a deal gets done somewhere between $35 and $40.

 

 

 

 

 

Intel (INTC0 and Altera (ALTR): implications

March 31, 2015 By in Industry Analysis, semiconductor manufacturing, Technology Tags: , , , , , , , , , Leave a comment

What can we conclude from INTC’s interest in acquiring ALTR?

–when I became interested in INTC as a stock a couple of years ago, it seemed to me that the firm could be viewed as having two businesses–a high-growth one selling servers and a low-growth, cash cow one selling chips for PCs.   At the time, I thought the server business alone more than justified the then stock price, and that the PC business was mainly important for its contribution to overhead and its free cash flow generation.  A desire to acquire ALTR seems to confirm that this is also INTC management’s view.

–good companies periodically reinvent themselves.  After a period of stagnation, this appears to be what INTC is doing

–the threat of low power servers run by ARM chips is serious

–my guess is that a bid will take the form of all or mostly INTC stock.  An all or largely cash offer would imply either that INTC thinks its shares are deeply undervalued, that debt financing is too ridiculously cheap to pass up, or that long-suffering ALTR shareholders want  to declare investment victory and move on.

–an INTC-ALTR merger spells trouble for Xilinx (XLNX), the main competitor to ALTR

–the main source of value in ALTR is its software.  Assessing that, thorough accumulated R&D spending, is the key.

Numbers tomorrow.