your mileage may vary...

Sep 11

Mobile Banking numbers are strong

ComScore’s latest mobile usage numbers provide useful context as you head in to the 2013 business planning cycle. With 42 million monthly smartphone users, mobile banking penetration (38%) is similar to other specialized information services such as sports (39%), news (49%), and movie info (30%).


Aug 27

IBM buys Kenexa

International Business Machines Corp. (IBM) agreed to acquire Kenexa Corp. (KNXA) for $1.3 billion in cash as IBM bolsters its offerings to clients looking to use data from social media to enhance their recruitment processes.

You’ve got to admire Big Blue’s chutzpah. It’s not every stodgy tech company that’s willing to pay a 42% premium for an HR SaaS vendor with an unprofitable history.

I wonder how Uncle Warren feels about this one?


Aug 23

I think I’m turning Japanese, I really think so!

The Fed debated a variety of tools for boosting growth, including extending its commitment to ultra-low federal funds rates past 2014, linking those rates to economic indicators, launching a new round of purchases of Treasury and mortgage securities, and initiating a plan to encourage bank lending.

It would be comical if it weren’t so sad.

(Source: Washington Post)

Wal-Mart’s ‘Paycheck Cycle’ Problem is Going Global

Still, customers living paycheck-to-paycheck “remains pronounced” in the U.S, said Chief Executive Mike Duke. There are “continuing economic pressures.”

Wal-Mart has been challenged recently as its core lower-income customers in the U.S. contend with high gasoline prices and persistently high unemployment levels. The company also expects inflation to rise in the back half of the year, particularly on food and drought-related items like corn and soybeans.

Wal-Mart cautioned that it is now seeing in international markets the same “paycheck cycle” it saw in the U.S., where customers buy immediately after payday and then make smaller purchases as money runs out.

I think we can safely say that the consumer is not participating in the great recovery.

(Source: The Wall Street Journal)

Aug 16

To hedge or not to hedge?

Hedging—a strategy used to lock in the price at which they can sell their gold in the future—is common among producers of commodities ranging from copper to natural gas seeking to protect themselves from fluctuations in the market. But it has largely fallen out of favor among gold miners after an almost uninterrupted rise in the precious metal’s price over a decade.

WSJ: After Gold’s Climb, Few Miners Look Down

One of the benefits of working in the manufacturing industry (in the past) is that you get to spend a lot of time dealing with commodity prices. And you learn a lot about human behavior in the process. Time and time again you see the same behavior. In the face of rising prices, purchasers I dealt with would insist that the price rise was an aberration that would soon fix itself. They would have already reduced price hedges because they were losing too much money and it was impeding margins.

Then after several years of rising prices they would capitulate and begin stockpiling commodities in inventory. They also would start hedging almost 100% of production because the sky high prices were impeding margin. Then, like clockwork, prices would start to fall and they would be sitting on top of lots of purchase agreements to buy commodities at higher prices.

These were all people who got up every day and worked very hard to get their company an edge. I would hire any one of them in a second to run a purchasing organization. The trouble is not one of them ever internalized that when your business is dependent (either long or short) commodities, your hedging program is designed to hedge, not make money. The goal of the program is to stabilize margins…not maximize them.

Regardless of what you think gold prices are going to do from here, I’d be concerned about investing in gold producers, because they are no longer sticking to their knitting.

Commonwealth Bank of Australia reported an 11% rise in profit in fiscal 2012, helping support the reputation of Australia’s banks as a relative safe haven amid the turmoil roiling global markets.

WSJ: Commonwealth Bank Profit Climbs

I know next to nothing about Commonwealth Bank, but let me just say here and now that if China continues to slowly implode, the last place I want to invest my money is an Australian bank. A Chinese bank may be a worse investment, but there’s a chance that the political connections in China could bail you out.

Aug 09

Robbins & Myers purchased by National Oilwell Varco

Bloomberg article

Just in case you had any doubt that the consolidation in the manufacturing industry was far from over.

Aug 02

Tales from the Short Side

Company X is consumer electronics company that has a razor/blades model where they sell you a piece of hardware that allows you to connect with their internet service. They include a year of service in the selling price and then seek to sign you up for long-term contracts on their service. They also sell related add-on packages. Since Company X’s management has a history of aggressive behavior, fairly deep pockets, and has demonstrated a willingness to engage in frivolous lawsuits to get what they want, they shall remain nameless.

Because their services are paid for in typical contract terms of one to three years, they take in a lot of cash as the business is growing. Since the product is not delivered when the cash is received, this gets booked as deferred revenue on the balance sheet. Since the business is relatively new, the deferred revenue growth has been impressive.

To value this company, you would want to know three things:

The company’s filings provide very little help in that regard. The income statement is riddled with one off gains from a whole host of activities, including speculative bets on the company’s stock. There are no comments about unit sales of the product. Customer churn numbers are not mentioned at all. The only figure you can glean from any of the company filings are total cumulative product sales rounded to the nearest million. By my estimates they sell around 1.5mm units/year, so that level of rounding is not very helpful quarter to quarter.

Since management claims their product is revolutionary, you would expect the customers to be ecstatic about it. Looking at the subscription revenues, it appears that the retention rate of customers is around 33%. So 2 out of 3 customers leave the service every year. Not very impressive when you consider that just buying the product locks you in for a year. Given that some of these customers have signed multi-year contracts, that retention rate is abysmally low. It’s the kind of retention rate that would suggest that the service is not at all revolutionary.

Consider the sales growth of SolarWinds (SWI), a tech company that does enterprise infrastructure management software. The company has made some acquisitions, but the trend is reminiscent of a company that is changing the way its customers conduct their business.

Now consider Company X’s product sales figures over the last few years.

If you start hunting around for an explanation for the poor customer acceptance, you quickly stumble across a whole host of review sites that grumble about poor customer service, bad billing practices, and trouble with the technology itself. A number of the positive reviews you read appear to be fake; either left by anonymous users or using similar phrasing to the press releases put out by the company.

That of course, doesn’t make this a good short. Shitty products can exist for a long time. And most managements believe their products walk on water regardless of how good they really are.

What makes this a good short is the fact that this company has been piling up cash for several years now and have amassed a good cash hoard that should now be used to provide service to this declining user base. The service should be reliable, and they should be making sure that as sales dwindle, the customers they do have stay with them as long as possible and provide an annuity business. At the very least they should make sure they have enough cash on hand to provide the service the customers have signed up for.

Instead they are taking that cash and putting it into the stock market. Over the last few years cash and investments have fluctuated between $25 and $50mm, and at any given time more than half of that has been invested in a mix of equities, derivatives, and investment funds, as well as stocks that they have sold short. In fact, this investment scheme was so complicated that the CEO charged the company an advisory fee of over a million dollars one year. Also, judging by the returns on this investment, the holdings are highly volatile.

Company X began buying back shares on a massive scale this past year and has continued into 2012. And the CEO has been selling.

At some point, the company will need cash to create the next product, or to keep the lights on. And it won’t be there.

That is why this is a good short.

Jul 24

Being a Texan, I feel it’s my civic duty to point out that the Chuy’s IPO went well today.

Being a Texan, I feel it’s my civic duty to point out that the Chuy’s IPO went well today.

Jul 23

Spain Bans Short-Selling For Three Months -

It amazes me that regulators actually think this is a solution to their problems.