Friday, June 10, 2016

Here’s our annual high-level comparison of Amazon vs. Walmart.

From a growth perspective, Amazon wiped the floor with Walmart. AMZN added $18 billion in revenue for a 20.2% growth rate, while WMT shrank by $(3.5) billion or (0.7%).  WMT’s revenue was negatively affected by currency exchange rates moving against it, but even adjusting for that WMT’s revenue wasn’t in the realm of AMZN

From a GAAP earnings perspective, WMT maintains its lead, although that is diminishing. WMT’s GAAP operating margin was 5.0%, which was a 0.6 PPT improvement, while AMZN delivered 2.1% operating margin. However, AMZN’s margin improved a whopping 1.9 PPT.

WMT’s net income still dwarfs AMZN at $14.7 billion vs. $0.6 billion. But again, the change is informative: as WMT launched programs for higher associate pay and stronger e-commerce capability, its net income fell by 10.2% or $1.7 billion. Conversely, AMZN increased income by $0.8 billion from a prior year loss. While this is an annual comparison, I’d be remiss if I didn’t note that AMZN’s operating income exploded in the fourth quarter.

Cash provided by operations shows just how much AMZN is closing the gap to WMT in overall performance. WMT delivered a huge $27.4 billion in cash from operations, or 5.7% of revenue, but that was a decrease of $1.2 billion or a reduction of 0.2 PPT as a percentage of revenue. AMZN’s $11.9 billion of cash generated was 11.1% of revenue, a $5.1 billion increase and 3.45 PPT higher than the prior year.

WMT remains much better at returns on investment. Its ROIC was 12.8% compared to 3.6% for AMZN, and its ROE was 17.3% vs. AMZN’s 4.9%.  (Returns were calculated using a two-point BOY/EOY average).

Of course, valuation metrics are hugely in AMZN’s favor. As of this writing on June 10th, you’ll need to pay 296 times earnings to own AMZN at a price to sales ratio of 317%, while WMT can be purchased for 15.8 times earnings at a price to sales ratio of 46%.

Full disclosure, I own shares of WMT.

Friday, April 15, 2016

Tax Inversions

A savvy businessman once told me “it’s important to know what problem you are trying to solve”.

Let’s ignore for the moment whether or not Treasury or the IRS had the power to change the rules on so-called tax inversions without Congressional action. (The power they said they didn’t have only a few months ago.)

Rather, let’s focus on what problem we are trying to solve. That is, why is the greatest country on earth chasing companies away? Shouldn’t the U.S. be the place that companies want to locate their headquarters?

Imagine this: the U.S. legal structure and tax regime was so attractive that Mercedes, Toyota, Astra Zeneca, Samsung, Total, Singapore Air, Banco Santander, Petrobras, Fujitsu, Nokia, SAP, Audi, Tata Group, Lenovo, Pirelli, Deutsche Bank, Honda, LG, Hyundai, Roche, Credit Suisse, Four Seasons, Siemens, Phillips, Bridgestone, Anglo-America, DeBeers, Volkswagen, Canon,  L’OrĂ©al, Swatch, Armani, LVMH, Toshiba, H&M, Mahindra, Aldi, Kubota, Onex, Ducati, Pemex, Saudi-Aramco, Hudson Bay, Panasonic, Nestle, Unilever, Tesco, Nissan, Royal Dutch Shell, Michelin, Rolex, Sony, Axis Group, Swiss Re, Barclays, DBS, Ikea, Uniqlo, Ferrari, Maersk, Carrefour, Rio Tinto Zinc, Mittel, Reliance Group, HSBC, BP, BMW, Richemont, Zara, Canadian Pacific, all rushed to move their headquarters here. Wouldn’t that help income inequality?

Wouldn’t that set off a wave of prosperity?

Wouldn’t it be a good thing?

What problem are we trying to solve?

You can buy my latest book: Survive and Prosper, Fifty Steps to Job and Career Security on Amazon Kindle. It’s a steal at $2.99.

Monday, February 15, 2016

The Acceleration of Asset Lite Business Models

The number of asset lite businesses is steadily increasing, as is the breadth of industries effected.  I first noticed them in the 1970’s, when Baron Hilton sold several flagship Hilton hotels while retaining management contracts that entitled Hilton Corporation to a share of revenue and earnings. Over the next two decades, Marriott Corp copied and then perfected the hotel management agreement business approach, coupling a Marriott franchise with a management agreement for any one of a growing stable of brands (Fairfield Inns, Courtyard by Marriott, Residence Inns, J.W. Marriott, etc. etc.), enabling absentee investor/owners.  It turns out, however, that asset lite business structures date back much earlier.

Franchises and Dealers
Early versions of asset lite businesses include franchise and dealer organizations. Soft drink and beer distributors, auto dealers and tire and repair franchises date to the early nineteen hundreds, as manufacturers needed mass distribution. The dealers furnished growth capital for manufacturers in the form of distribution outlets. Some of those early distributors not only still exist, but have become large enterprises and illustrated by the large regional cola bottlers and beer distributors.
But globalization, the Internet and the ubiquity of smartphones and other mobile devices have created an explosion in new forms of asset lite businesses. Some are services providing information on other businesses, others are becoming known as marketplaces,  and still others  may be filed under the rubric of “the sharing economy”.

Knowledge Experts Leverage Asset Holders
As more firms expand international distribution and outsource manufacturing, especially to Asia, they encounter the difficulty of managing complex supply chains. Those may extend into the interior of China, Malaysia, Indonesia and Viet Nam. Multiple languages, customs and duty requirements, inter-modal shipping, scheduling and departure dates of vessels and aircraft, and so on will hobble all but the largest and most sophisticated operator. As a result, many multinationals and importers turn to firms like C. H. Robinson to manage the flow of goods and merchandise. Robinson doesn’t own aircraft or freighters or rail lines, but its on-the-ground and onsite employees coordinate freight activity for thousands of businesses. Its balance sheet is far smaller than giant cargo ship owner-operators or freight airlines, but nonetheless produces attractive returns to shareholders.

Pharmacy Benefit Managers (“PBM’s) are best exemplified by Express Scripts.  Express Scripts occupies a complex interstice among drug manufacturers and wholesalers, individual patients, and payers and providers.  That is, an employee of Company A with a health insurance plan from, say, Anthem, goes to a Walgreens store and gets a prescription filled. Walgreens bills Express Scripts.  Express Scripts bills Anthem. Express Scripts negotiates discounts from the drug manufacturers, and shares some of that discount with Anthem and keeps the rest. It also keeps a little toll it charges Walgreens. The drug manufacturer has invested in R&D and expensive manufacturing facilities. Walgreens has invested in physical stores and drug inventory.  Express Scripts basically invests in software.  Asset lite Express Scripts yields attractive returns to its investors, while having made a minuscule investment compared to Walgreens and the pharma companies.

While marketplace business models have been around for a while, growth is suddenly spiraling.  Marketplaces The Knot and WeddingWire serve customers in the bridal industry. Those businesses connect brides-to-be with wedding goods and service providers such as caterers, jewelers and wedding photographers. They charge fees for ad placement, much like the business they’ve disrupted: bridal magazines. One of the advantages they have over magazines is that brides that register with The Knot and WeddingWire know that their contact information will be passed along to various suppliers and that those suppliers will contact them.  That saves brides time, while the suppliers know the bride will likely have multiple offers so they must be competitive.
Registration models such as Expedia and Orbitz take the place of travel agents.  Marketplace PriceLine auctions travel capacity that increases utilization of hotel rooms and airline seats that might otherwise be vacant. Open Table inserts itself into the business of making restaurant reservations.

Information About Information
While information aggregators have been around for a century or more, collecting and distributing information about stock prices, or construction activity, or oil exploration, drilling and production, there are now companies providing information about information. Trivago trolls travel websites, which are collecting prices or contracting for hotel rooms and aggregates it by city. That’s about as asset lite as one can get.

Conversion of Consumer Assets to Commercial Assets
There is now a newer twist on this business design. That twist takes existing, consumer properties and converts them to revenue-producing assets. That twist is best illustrated by Uber and AirBNB.  Also labeled marketplaces, Uber, its competitor Lyft and AirBNB represent a new class of asset lite. Not only do they not own the assets they collect a toll on, those assets were previously largely idle, and furthermore were purchased for consumption, not investment. Using the intersection of the ubiquity of real-time intelligent communication devices and otherwise idle assets, these businesses have created tremendous value for their investors and disrupted markets (e.g.-taxi companies and hotels).

Future Valuation?

Clearly asset lite business models are widely accepted by investors; indeed, given valuations, in many cases they seem to be preferred.  However, as a long run investor, I’d rather own the hotel and real property than a sales commission agreement with the hotel. But I might very well be a distinct minority. Entrepreneurs are racing to develop the next asset lite model, with a lot describing themselves as the “Uber of X”. I don’t think there are that many Uber-opportunities that won’t be exploited by, well, Uber. As to what industries will find themselves upset by asset lite businesses, we’ll see won’t we?

Tuesday, January 05, 2016

On An Alternative Theory of Income Inequality

Why is there growing earnings gap between the highest earners and the rest of the U.S. workforce? While a number of hypotheses have been advanced, I think many miss important developments. In my view, the following culprits have materially affected the wages, salaries and income of the lowest ranks.
  1.  Both governmental and cultural destruction of the family. I’m not going to dwell on this, but, statistically, the fastest path to poverty is to be a single mom. Want to not be poor? Finish high school and get married before getting pregnant. Harsh perhaps, but statistically unarguable.
  2. The Federal Reserve continues to oppress lower earners. For most folks, building wealth starts with home ownership. Replacing rent payments with mortgage payments generally results in owning an asset (home). In some markets, that asset appreciates. When my wife and I were apartment dwellers, we saved for a home down payment. Our savings earned interest. Now, I won’t say that the interest was huge, but it was noticeable and helped in accumulating a down payment. With interest on savings essentially at zero, it is harder to accumulate that critical down payment. Further, and likely more significant, the Fed’s multiyear zero interest policy has pressured bank earnings. Banks, scrambling to replace the lost earnings that used to accrue from customer deposits, have jacked up every kind of fee. Minimum balance fees, ATM fees, rather shocking fees for a bounced check and much more.  The wealthy never experience those fees, only those at the bottom of the financial ladder. Those costs strip savings.
  3.  Government agencies are intentionally putting companies out of business, and raising the cost of doing business for others. Don’t think the U.S. government drives firm right out of business? Read this article on Bucky Balls. EPA has a war on coal and doesn’t care that formerly well-paid coal miners have few job alternatives. And the Dodd-Frank financial regulation bill imposes simply staggering costs on banks.  JP Morgan added 5,000 additional compliance employees. Those employees aren’t helping write new loans or grow the bank’s income; they are raising its expenses. And higher expenses means less income to invest in the business, grow and hire more.
  4. The abandonment of higher education by state governments. I won't say just how cheap my tuition was at The University of Memphis in the 1960's, but it is a tiny fraction of today's state university tuition. I was able to pay my tuition with a couple of part-time jobs (neither of which was very high-paying). I'm guessing that the rising cost of Medicare has squeezed colleges right out of the picture. Whatever the cause, it is inescapable that fewer people can afford college, and many that do graduate with massive student debt. The 21st century equivalent of indentured servitude. Less educated people have a massive handicap in the knowledge economy, and those with debt start work with a financial handicap.
  5.  Here’s the sleeper: The Financial Accounting Standards Board (FASB). Unless you are an accountant or public company board member, you’ve probably never heard of them. But they rule accounting practices. It is an isolated group of Mandarins, who frequently change once practical accounting policies to far more complex and recondite structures. Several years ago, they made a landmark change in the rules governing how companies must account for stock options granted to employees. Tech companies in particular had made widespread use of options to attract and retain workers. If the business was successful, workers could accumulate wealth. And many at firms like Lotus, Dell, Apple and Microsoft did just that. Some academicians whined that the accounting practices of that era failed to capture the cost of options, and thereby overstated business income, and, as a result, that the accounting treatment should change.  Companies and accountants in general opposed a rule change, arguing that the then-current treatment was reasonable and understood by investors.  The FASB ignored the practical accountants and imposed a rather complex rule that resulted in companies recording an expense for options. And, predictably, it resulted in far fewer options being granted. And those that were issued are generally granted only to the most senior executives. Those lower in the corporate structure no longer have the opportunity to build real wealth if their company becomes successful. Now, some companies still do issue options to all employees. But most of those are smaller tech start-ups. Very few larger companies grant options beyond executives.

There you have it. Income inequality isn’t just the result of globalization and automation, or greedy rich preying on the unlucky. It is at least somewhat the consequence of actions by government and government sanctioned entities.

Make 2016 healthier, more successful and productive: buy Survive and Prosper: Fifty Steps to Job and Career Security on Amazon Kindle.

Tuesday, October 13, 2015

Don't Die of F****** Pneumonia

One of my cousins was recently admitted to the hospital with pneumonia, and went straight into the ICU. People tend to ignore pneumonia, or minimize its seriousness. You might have even heard people talking about “walking pneumonia”. That, in technical terms, is BS. Pneumonia is a badass illness. According to Centers for Disease Control, 53,000 people died of pneumonia last year.
For those of us over 65, vaccinations are recommended, with the usual exceptions for certain conditions. And it is recommended for many under 65 with certain conditions. There are two different vaccines that cover different strains. You need both shots. Of course it isn’t foolproof. The vaccines aren’t 100% effective, and new strains emerge. Still, there is no reason to get seriously ill from a strain that a vax would have likely prevented.

If you are over 65 and haven’t had the shots, go see your doc. Don’t screw around. And if you are younger, check with your parents, other relatives and friends to make sure they’ve gotten the shots.

It’s likely that a lot of those 53,000 didn’t have to die.

Friday, June 05, 2015

Ten Reasons Stock Buybacks Are The Tool of Lazy Management

Stock buybacks are all the rage. There is even an investing newsletter called Total Yield that adds dividends and stock repurchases and uses that measure as a key criterion for investment decisions.
Despite its widespread popularity, I’m not crazy about stock buybacks. In fact, they are increasingly signs of dumb, lazy or incompetent management. Here’s why:

1.       They are frequently used as a palliative to offset bad news.  About to issue an earnings release with a sales decline and a miss to analyst estimates? Throw in a stock buyback to see if it will relieve some investor pain, or even better, moderate a certain stock price decline.

2.       It doesn’t return money to shareholders; it gives money to people who no longer want to be shareholders. Real believers in a company’s story want to hold the stock. Who sells into a buyback? People who no longer believe.

3.       It raises questions about management motives. The proxy report, with all those new government-required compensation disclosures, is now as long as or longer than the financial statements. Is management somehow incented on earnings per share growth? Even if revenue doesn’t grow? Even if earnings don’t increase- just shares decrease? Easy to bury that in those endless proxy statements.
4.       It raises this question-is this the best that management can do?  Aside from Apple and perhaps Microsoft, what company has more cash than it can readily deploy above its cost of capital? Now, I know that plenty of managers have wasted a lot of shareholders’ money on bad acquisitions (Time Warner/AOL), failed products (New Coke), and poorly executed international expansions (Target). If there is simply no place a company can find in its market space to put money to work with a reasonable expectation that it will return its cost of capital, then it is right to return it to shareholders. Otherwise, long-term holders want to see the money put to work.
5.       Special dividends are better. OK, there may be some minor personal tax rate differences. But companies like The Buckle [BKE: NYSE] and RLI Corp [RLI: NYSE] have a history of issuing special dividends when management believes they’ve accumulated excess cash. Since that really is returning cash to shareholders, isn’t that better?
6.       It indicates a lack of confidence in the future. A company sitting on a pile of cash that spends it on a buyback rather than increasing its dividend is signaling a lack of confidence in its future. It’s simple: they are afraid that they’ll have to cut the dividend in the future. Cutting dividends is always seen as a bad sign. As a result, companies hold back on dividend increases even when projections indicate the dividend can be supported. Instead, they execute a stock repurchase.
7.       Companies are horrible market timers. There is a lot of stock repurchasing going on at market tops; not so much at market bottoms. If a Board is just totally committed to buying back shares, it would be wise to use some simple timing criteria. If a company’s average PE over the last ten years is fifteen, and it is currently trading at a twenty-five multiple, it probably isn’t a good time to repurchase. But if it is trading at a price-to-earnings ratio of ten, it might indeed be an excellent time.
8.       Companies repurchase stock while sitting on other obligations. I find this one particularly troublesome. Further, elected and regulatory officials are actively aiding and abetting this behavior.  Some background: The Financial Accounting Standards Board (FASB), The Securities and Exchange Commission (SEC), the American Institute of Certified Public Accountants (AICPA) and the Public Company Accounting Oversight Board (PCAOB) share ruling-making authority for accounting principles.  Full disclosure (confession?) I’m a member of the AICPA. Collectively, those bodies have made a complete mess of pension accounting and reporting. I will wager that ninety percent of sell-side analysts have little or no understanding of companies’ pension footnotes, or what pension liabilities really are. If, however, one parses through the recondite disclosures of a company’s pension assets and liabilities and concludes that the company is including a liability on its balance sheet, one may nevertheless find that company is repurchasing some of its outstanding stock. That is, rather than fully funding a liability that reduces the future value of the business and thereby increases shareholder wealth, it gives money to folks who no longer want to hold the stock. [An example: in the 2014 GE annual report, it states that “The GE Pension Plan was underfunded by $15.8 billion….at December 31, 2014”.  It also states: “We did not make contributions to the GE Pension Plan in 2014 and 2013. The ERISA minimum funding requirements do not require a contribution in 2015”. In the letter to shareholders, GE’s describes its plans to dispose of more of its financial services business. The proceeds of that disposition will be returned to shareholders in the form of stock repurchases. In other words, while sitting with a $15.8 billion problem, it is going to further reduce equity.] Now, why would I say that officials are actively abetting this activity? Because legislation allows companies to fund to a level found satisfactory under ERISA, even though actuaries find that amount insufficient. Skeptical of my point of view? Grab a few annual reports and spend some time actually trying to interpret the abstruse FASB/SEC mandated pension disclosures. Notice how optimistic some firms are about the long-term rate of return they expect on pension assets, even though interest rates on fixed income investments-a pension fund mainstay-bump along at record lows. Finally, the Federal Reserve, by manipulating interest rates rather than let markets determine rates, has become the enabler of the borrow-to-pay-dividends movement.
9.       Shareholders can borrow on their own.  Companies are now borrowing to pay dividends and buy back stock. If I want to pay myself a dividend, I can margin my shareholdings; I don’t need a company to do it. And I control the timing. And I can sell my stock in the market anytime I like. Saddling my equity position with future interest and principal obligations to fund a stock purchase doesn’t create any value.
10.   Reflect for a moment on why corporations exist. While they predate the mercantilist period, they began to be more widely used then, as a collection of individual investors could bear more risk than single investors. That is, corporations were formed to take risks. While one might not suspect that as consultants hustle “Enterprise Risk Mangement” programs, and companies hire more risk and compliance staff than sales and marketing folks, that nonetheless is their purpose. To take risks that individuals can’t afford.
Boards and CEOs, here’s what I believe is more appropriate:
Invest in the business. Search for growth opportunities. Look for productivity-enhancing investments. Energy reduction. Supply chain improvements. New product introduction.  

Cash burning a hole in your pocket? Lousy earnings release in your immediate future and you’d like to dilute its effect on your option value? Announce an increase in the dividend. Distribute a special dividend. But true up other obligations first. Clean up any old accounts payable. Fund your retirement liabilities like grown-ups. Settle outstanding litigation.  All those things will provide us owners with real value over the long term. 

Take some risks. Like these guys: Tesla. Google. Gilead. Chipotle. Whole Foods. Celgene. Continental Resources.  Give us more of that.

-          Gene Morphis

Saturday, May 09, 2015

As happens this time of year, publishers list their most important/influential/etc. youngsters.  As an example, the May issue of Wired has “20 Unsung Geniuses”.  We think mature adults deserve recognition just as much as 20-something billionaires.  Here is our Sixty Over Sixty list of the most influential, annoying, important or folks we just find interesting.  Here then, sorted by age, is The Sixty Most Important Leaders Over Sixty.

Henry Kissinger.  Still the U.S. best thinker on foreign policy and diplomacy. His recently published book (at age 91) World Order is not only a best seller, it is extraorinary.
Jimmy Carter.  Better as an ex-President than President.  His work for Habitat for Humanity is a lesson for all of us.
T. Boone Pickens.  Oilman, energy expert.  Creator of The Pickens Plan for energy independence.
Frank Gehry.  Showing the world what new materials and CAD design can do to architecture.
Warren Bufett. Best investor in history.  Becoming one of the best philanthropists in history.
Alan Simpson.  Former Senator who, along with Bowles (below) is trying to get U.S. to fiscal sanity.
Diane Feinstein.  Influential Sr. Senator from CA.
Jack Welch. Executive, author, educator
Carl Icahn.  Activist investor.
Anthony Kennedy.  Supreme Court Justice
Jack Nicholson.  Actor
Freeman Morgan.  Actor.  “Through the Wormhole” commentator.
Yvon Chouinard. Founder of Patagonia, environmental activist and enemy of dams.
Ralph Lauren.  Fashion industry titan.
Harry Reid.  Senate Minority Leader.
Toby Cosgrove.  MD and President of The Cleveland Clinic.
Nancy Pelosi.  House Minority Leader.
William Koch.  Billionaire businessman and Libertarian.
Roger Ailes.  Founder of Fox News.
Don Imus. Radio personality, philanthropist, professional curmudgeon.
Martha Stewart.  Fashion arbiter, CEO of Martha Stewart Omnimedia.
Michael Bloomberg.  Former Mayor of NYC; eponymous founder of Bloomberg.
Mitch McConnell.  Senate Majority Leader.
Aretha Franklin.  Soul and R&B singer.
Joe Biden.  VP of the U.S.
Jerry Bruckheimer.  Co-creator of CSI, Cold Case, many others.
Joyce Meyer. Evangelist and author.
George Lucas. Motion picture producer and director; world builder.
Larry Ellison.  Founder of Oracle.
Lorne Michaels.  Founder of Saturday Night Live.
Erskine Bowles.  Co-leader of Simpson Bowles Committee. Prophet.
Harold Hamm.  Founder & CEO of Continental Resources, shale/fracking leader.
Dolly Parton.  Singer, songwriter, entrepreneur
Roger Altman. Founder-Evercore. Democratic kingmaker.
Cher Sarkisian.  Singer and entertainer.
Janet Yellen.  President-Federal Reserve Bank; arguably the world’s most powerful woman.
Bill Clinton.  Former President.  Co-founder of Clinton Global Initiative.
Stephen Spielberg.  Motion picture producer and director.
Dick Wolfe.  Co-creator of Law & Order franchise.
James Rothman.  Yale Professor of Biomedical Science; Nobel Prize Winner.
Mike Krzyzewski. Aruguably the finest men’s college basketball coach ever.
Hillary Clinton.  Former Senator, former Secretary of State, Presidential candidate.
Dick Parsons. Former CEO of Citibank, former CEO of Time-Warner, advisor to Providence Equity.
Randy Schekman. California University Cell Biologist; Nobel Prize Winner.
David Rubenstein.  CEO of private equity firm Carlyle.
Bruce Springsteen.  Singer and songwriter.
Timothy Dolan.  Cardinal of NY.
Francis Collins.  Director, National Institute of Health.
Chuck Schumer.  Sr. Senator from NY.
Rush Limbaugh. Talk show host; most influential conservative.
Bob Iger.  Chairman & CEO: Disney.
John Noseworthy.  CEO of The Mayo Clinic.
Danielle Steele.  Top ten best-selling author of all time.
Maureen Dowd.  Influential NY Times editorialist.
Martin Dempsey.  General-U.S. Army. Chairman, Joint Chiefs of Staff
Bill Belichick. New England Patriots head coach. Probably the best pro football coach ever.
Howard Schultz.  Founder and CEO of Starbucks
John Mackey. Co-founder and CEO of Whole Foods Market
Oprah Winfrey. Talk show host and most powerful woman in media
Carly Fiorina. Presidential Candidate

There were many other excellent choices, and my selection is largely arbitrary.  But I welcome your suggestions for additions (please don’t bother with deletions) and will consider them for my next update.  Post your comment here, or email gene@jobsoverfifty.

Gene Morphis