Meridian Pacific Investments

HTC: Open Strategy

2009-12-19T16:00:00.001-08:00

In 2006, HTC changed from being another anonymous phone manufacturer to promoting their phones under their own brand, and expensive proposition that dramatically changed the structure of their business.

Like many other companies, HTC has chosen to get in line to try to beat Apple at their own game. This strategy has no hope of success. No other manufacturer can hope to beat the iPhone’s level of integration between hardware, software, and services. Despite their proven success in design and manufacturing, their direct assault on the market is doomed from the start. They need a different approach.

Here are 3 strategies HTC should consider instead:

Alternative Strategy #1: HTC Inside

das antiga by vcheregati

In the early days of PCs, Intel faced a similar challenge to HTC: How can an anonymous component manufacturer build a consumer brand? Their solution was Intel Inside: Give PC manufacturers a discount to co-brand products, which resulted in Intel becoming one of the most recognized brands in the world. Instead of direct advertising, HTC could do the same thing to promote their reputation as a world-class device design firm.

Alternative Strategy #2: Focus on Accessories

What's in my gadget bag by Neil T

HTC could leverage their expertise in hardware and firmware engineering to expand the connectivity of their phones. They could define a common docking standard (like the iPhone has), and a suite of high-quality accessories. This will allow them to establish a reputation for design and quality in a market they are able to dominate, then leverage that for the assault on phones.

Alternative Strategy #3: Focus on road-warriors

Marchard d'abat-jour, rue Lepic by George Eastman House

While everyone is busy trying to copy all aspects of the iPhone, from the touch interface to the App Store, millions of business customers are being ignored. Even RIM has caught iPhone envy and have taken their eyes off the corporate suite spot: Road warriors. For people whose livelihoods depend on high mobility, all-day working battery life, and real-time productivity, there are plenty of opportunities to improve over what the iPhone delivers. Real phone security would be a nice start. Tethering without hacks is another.

While virtually all road warriors depend on both a phone and a notebook PC today, they will be able to do more with just the phone in the future. Today, email is a basic feature, but it’s still difficult to access other corporate data from your phone; That’s slowly improving. Productivity will always be limited on small form factors, but there are opportunities to re-think how we can do more with less. For example, micro projectors allow you to present directly from your phone. What would it take to run a whole meeting with just your phone, with remote participants, notes, and slides? Wouldn’t that be a killer feature?

Taking advantage of iPhone tunnel vision

With everyone overly fixated on Apple, now’s the chance for an agile and innovative company to capture the corporate market. HTC has that opportunity, if they realize it in time.

The Black (Red?) Hole Where Sales Used to Be

2009-10-17T19:20:00.001-07:00

According to the S&P, S&P 500 sales are expected to decline by over $1.5 Trillion in Q3 from a year ago. Let’s take a closer look.

A Review of Q2 Revenues

First, how bad was Q2? In a word: Very. The overall revenue shortfall in Q2 according to the S&P is close to 20%. The worst in recent history.

Here are the top 10 companies with the greatest revenue declines in Q2 2009:

Most of them are oil and US auto companies (GM would have been on this list too, but doesn’t exist as a public company anymore). Over half of the S&P 500 posted double-digit revenue declines.

Double-Digit Revenue Growth during the Recession?

An interesting question is which companies actually grew revenues during this recession? Quite a number it turns out. Over 1/5 of the S&P companies reported positive revenue growth in Q2 2009. Some (i.e. the banks) were due to a rebound from 2009 lows. Here are the top 10 companies by revenue that posted both double-digit Q2 2009 and annual 2008 revenue growth:

It’s a surprisingly large list (with 31 companies in all).

A Peek at Q3 Revenues

S&P predicts a revenue Q3 shortfall of over 14%. The actual Q3 reports are just starting to come in. Only 11 reports are available so far:

All 11 companies report a shortfall, averaging an 11% decline (based on total revenue). It doesn’t look like the numbers will be far off from the prediction.

What To Do?

Since revenues are going to be bad in Q3 (if only less bad than Q2),

a quick and sustainable market recovery is unlikely. However, the numbers show that are are many companies that appear immune to the recession. Any company able to sustain revenue growth should in theory benefit from lower costs. Those are the companies worth investigating further.

Corporate Bond Yield Update: Warning – Sell now!

2009-10-11T17:51:00.001-07:00

Here’s an update since the last time we looked at earnings yields vs. corporate bond rates.

Since March 2009, the S&P has made a stunning 57% rise from the bottom. Just look at the sharp v-shape in the long-term graph:

However, this isn’t supported by a similar growth in earnings:

This should be enough cause for concern. When we look at corporate bond yields, the situation starts to look a little scarier.

The good news is that corporate bond spreads have narrowed significantly in the last 6 months. BAA bond yields are back to historically low levels (similar to the 2003-2007 period):

This would indicate that there should be an earning yield ceiling of around 6% (which translates to a P/E floor of 16.7). Recall that corporate bond yields were the major driving factor in market prices over the 2003-2007 bull-run, and since there’s absolutely no other positive force in the market today (if anything, everything is much worse), there’s no rational reason for prices to be higher than this floor other than speculation.

The problem is that P/E ratios are currently off-the-charts because earnings have not yet recovered. Trailing 12-months P/E is 138, but that includes the Q4’08 (AIG -$23.25 EPS) quarter. To work around that, I plotted the projected earnings yield above (which uses current quarter EPS x 4). That gives a projected P/E of around 27.

No matter how you slice it, the current P/E is way above the 16.7 floor. By these calculations, the market has room to easily drop by at least 40% at the first whiff of bad news.

More bad news: Look at Sales

Even worse is that sales are still down. According to the S&P:

In case you missed it, that’s a $1.5 Trillion drop in sales. To put that number in perspective, that’s a $5,000 shortfall for every man, woman, and child in the U.S.

As the S&P analyst puts it:

You can only cut so long - eventually you need to increase the top line in order to increase the bottom line
The $1.52T estimated sales decline is almost as much as the Stimulus ($787B) and proposed Health Care ($829B) COMBINED

The bottom line is that the market is acting as if earnings are going to magically double in a short amount of time. This is nothing short of insanity! There is no real hope that this is going to happen. Even if everything goes perfectly, it will be months before a true economic bottom is reached. The short-term danger is that the fed will be forced to continue raising rates to combat the falling dollar. The moment that fully sinks in, the market will experience a sharp crash.

On the bright side, the crazy market has thrown us all an unexpected life-line. If you were underwater 6 months ago, you have probably recovered a lot of your retirement and investment accounts by now. Here’s your golden opportunity to lock that recovery in.

A Lesson from History

Here’s a final data point to think about. This is the Dow Jones Index over the 1929 crash:

Sure, it was a different time with a different set of circumstances, but notice just how sharp that first jump off the bottom in November 1929 was. The market rose from the bottom of 200 in Nov 1929 to 294 in April 1930 (an almost 50% jump). Boy were people optimistic. That over-optimism lasted all of 6 months, before reality finally set in. It would be 25 years before the index recovered to the post-crash peak again.

Full disclosure: I plan to continue exiting out of US equity positions, and buy strategic puts.

An Update on Unemployment

2009-10-11T14:11:00.001-07:00

Since we last looked at the unemployment numbers 10 months ago, things have gotten dramatically worse. According to the official numbers, we are now at a record 9.8% unemployment:

This makes this “recession” the absolute worse in modern history, with an almost 5% swing in unemployment over 2 years. Clearly, not only are millions of people being displaced, but whole industries are dying and being reformed.

The graph of “civilians unemployed 27 weeks or longer” shows that over 5 million people have been out of work for over half a year:

However, there’s hope. A look at the graph for people unemployed for less than 5 weeks shows a sharp drop off in the recently unemployed:

If this trend continues, it’s the best indicator that we might be pulling out of this recession in early 2010.

What jobs do people do?

2009-04-05T00:26:00.001-07:00

All the recent talk on employment numbers got me curious as to what exactly people are employed in. A quick visit to the U.S. Census Bureau and some Excel magic reveals this graph:

So much for the myth of being a nation of lawyers, baristas and burger flippers!

If you add up the obvious service industries (excluding health), they add up to less than 14%.

If you add up all the professional and white-collar jobs to this, that comes to 45% of the work force. This includes core I.T. jobs, which is only around 2% of the work force! Legal occupations are only around 1%.

Construction and manufacturing workers make up 23%.

Health-related workers come to around 7%.

Education is 6%.

If you are curious as to what each occupation category means, check out The Standard Occupational Classification.

Here's a more interesting way of looking at it: If the U.S. were a deserted island with 10 people on it:

Gilligan is a salesperson
Russell is a doctor
Mary Ann is a secretary, who teaches part time
Sue is a call center representative
Ed is an accountant, who dabbles in law and computer programming on weekends
Marge is a cook
Jonas is a carpenter
His friend Al is a metal worker
Harry is an aspiring actor, who "daylights" as a policeman,firefighter, farmer, and physical therapist.
And Thurston is the manager of the other 9 :)

AIG and S&P's First Negative Earnings Quarter, Ever

2009-03-19T23:09:00.001-07:00

For those of you who don't know, S&P publishes a free and constantly updated earnings forecast here. Essential reading for every investor. In addition to reporting the numbers, you get an 8-quarter forecast of earnings as well as unvarnished commentary from their house analyst.

Here's a snapshot of the current (3/18) report:

The S&P as a whole lost money in Q4 2008. In their commentary, S&P points out:

AIGs record setting Q4,'08 As Reported loss of $-61.7B; -$22.95 per AIG share, $-7.10 index impact (first negative quarter for index ever)
28%, 138 of the 486 As Reported EPS are negative; index lost more this quarter than it ever made
49 issues with mega-$billon losses
AIG Operating loss of $-28.2B (record); $-10.49 per AIG share, $-3.24 index impact (first negative quarter for index ever)
20%, 99 of 494 Operating EPS are negative
18 issues with mega-$billon losses
$-5.2B loss for the quarter, with $-101.3B from the Financials; Non-Financials therefore positive
Sales (based on reported current membership) are down -8.78%; 42% higher Y/Y (avg +6.64%), 58% lower (avg -18.12%)
Massive charges warp P/Es (field H33), forward numbers more important - but many investors have a lack of trust in the estimates
Cash flow now high priority, dividend cuts to 'preserve cash', ride out the storm->companies are worried (so am I)
No major shift in estimates yet as stimulus/ TARP/ housing/ budget details come out

All I can say is 'Wow".

Corporate Bond Yields Update

2009-02-01T18:54:00.001-08:00

We recently looked at the role of corporate bond yields as a price floor. Here's an updated bond yield chart:

Notice that bond yields have started to creep back up, and so has the earnings yield. The good news is that this indicates prices have begun to stabilize back on the bond floor. The bad news is that floor may be falling.

Note: The S&P earnings yield used here is calculated by dividing the current S&P 500 index ($825.88) by 4 times the current Dec. 2008 EPS estimate ($8.73) to yield 4.2%. This is to be consistent with the previous data used in the chart. However, if you use the forecasted 12 month EPS, the earnings yield is actually higher (4.8%) and pretty close to the current AAA bond yield.

S&P Earnings Forecasts

2009-02-01T18:34:00.001-08:00

Standard & Poor's regularly publishes the earnings report on the S&P 500 here. This includes a forecast of upcoming quarterly earnings. Here's a chart of the current (1/22/2009) forecasts:

First, note that during the last recession (.com bubble), it took 3 full years for earnings to recover to the previous peak.

Right now, earnings are at 1999 levels, a 55% drop from the peak in mid-2007. The current forecasts go through the end of 2010, and predict a modest gain, but not a recovery.

Forecasts are, of course, largely backwards looking, and are revised constantly. However, this probably captures as best as anything the prevailing thinking on the economy: i.e. that it's going to be a long hard road for a while.

So, When's The Bottom This Time?

2009-01-03T00:52:00.001-08:00

Phew! First the dot-com then the housing bubble. It's been quite a decade, and there is still a whole year left to go!

Take a look at the S&P 500 index since 1990:

Looks like two eerily similar boom and bust periods doesn't it? However, if we dig a little deeper, we'll see that things aren't at all the same, and the market was actually behaving much more rationally for the second bull run compared to during the dot-com bubble. This gives us some useful clues on figuring out when the bottom of this crash will occur.

Let's first consider what happened with earnings over that time. Here is the same index overlaid with aggregate S&P 500 quarterly earnings data:

Notice how price growth in general follows earnings growth. There are distinct periods of earnings growth (1994-2000 and 2003-2007), followed by very abrupt drops (2000-to-2003, and 2007-to-who knows when). Also notice how stock prices grew much faster than earnings from 1997-2000 compared to the 2003-2007 bull run. This shows that investors were much more speculative (or exuberant) in the late 90's than more recently.

We can make the difference easier to see by plotting the earnings data over the extrapolated P/E ratio:

The extrapolated P/E is computed by dividing the closing price for that quarter over 4 times the quarterly EPS. It's a crude and noisy measure, but a simple gauge of what buyer expectations are at that moment.

You'll notice that there are 4 distinct periods of fairly constant P/E ratios (marked by black bars in the chart above). In the earlier dot-com bull run, P/Es hovered around 18 from 1996-1997, then shot up to the 28 range from 1998-2000.

In contrast, P/Es were around 20 in 2003, and went down to below 17 from 2005-2007.

This indicates that buyer sentiment was far more bearish during the most recent bull run. How much more bearish? Well, a P/E of 28 is 65% higher than a P/E of 17, which indicates that investors were expecting at least 65% greater returns from future earnings in the dot-com days.

Earnings Yield

Let's look at this from another perspective. If we invert the P/E, we get earnings/price, or the earnings yield. Think of it this way: If you were to buy an entire company outright, the return in profit for your investment that you would get after tax at the end of the year would be the earnings yield.

Here's the same chart as above, but showing earning yields instead of P/E:

The data is the same, but this view is easier for us to relate to. For example, during the 1998-2000 period, the earnings yield of the S&P 500 was around 3.6% (100/28). To put that number in perspective, you could have instead put your money in a CD for a guaranteed 5.5% return during that time. So on average, investors were choosing to lose money by buying stocks, in anticipation that future earnings growth (and further speculation) would drive prices up.

In contrast, the average (extrapolated) earnings yield of the S&P 500 was between 5% and 6% during 2003-2007. This was also during a time when saving interest rates were at record lows (under 3% until 2005, then under 5.5% through 2007).

This shows that, in contrast to the dot-com boom which was fueled by speculation, the recent bull run was actually largely governed by fundamentals - meaning that stock market investors behaved fairly soberly and rationally (well, it could be that all the irrationally exuberant speculators just shifted their attention to the housing boom during that time!).

The Bond Floor

Looking at corporate bond yields gives us another strong indication that the stock market has largely returned to fundamental valuation.

First some quick background:

There are two main ways large corporations can raise large sums of money: by selling stocks or selling bonds. A bond is pretty much an IOU to pay a certain interest rate over a period of time followed by returning your money for the bond. It's like the company taking a loan from the public market, at a fixed interest rate that's determined by the market.

Now, think about the relationship of earnings yield to bond yields for a moment: If you are the CEO and need to raise money for expansion, you can either sell stocks (which is selling a share of all future profits) or sell bonds (which has a fixed interest rate). Everything else being equal, you would rationally sell whichever has the lower yield.

Moreover, if bond yields drop below earnings yields (or earnings yields rise sufficiently), companies can (and do) borrow money to by back stock - thus lowering the earnings yield until the two equalize. This effect causes bond yields to be a ceiling on earnings yields - and a floor on P/Es.

Just like individuals, companies have credit ratings. Companies such as Moody's and Standard and Poors (S&P) rate the bond issues of companies from AAA (the best, or "prime") all the way down to D ("in default"). A BAA rating is the lowest "investment grade" rating. So the range of yields for companies rated AAA to BAA should generally represent the yields companies in the S&P 500 would have to pay to raise money through bonds.

If we plot the S&P 500 earnings yield chart over a chart of corporate bond yields, this is what it looks like:

Notice that the earnings yield has been below bond yields all the way up to 2003 (in fact, they have been below AAA bond yields since the early 1980s). This means that during that period, other factors (such as speculation) were the primary factors that drove stock prices. However, starting in 2003 and before the crash in 2007, the average S&P 500 earning yield has hovered around the comparative bond yields.

Let's zoom in on that 2004-2008 period to make it more clear:

In effect, bond yields provided a solid floor for stock prices during that time, and were what pushed prices up (or kept them from dropping).

We can also look directly at the stock buyback levels during that time to see the magnitude of their effect. Between 2004 and mid-2007, buybacks increased four-fold, only dropping off after earning yields declined:

Between April 2003 and September 2007 (which was before the market peak), S&P 500 companies bought back a total of $1.5 trillion of stock. Over that same period, the total market cap of the S&P 500 grew by $5.6 trillion, so the buy-backs contributed (very) roughly 28% to the total gain in price over that time. Without them, prices would have been roughly 28% lower (and earnings yields 28% higher) than they were.

Here's a visual of what the index performance would have looked like if we were to remove the investments due to buybacks:

This great article from S&P goes into more depth on buybacks. Of course, there were many other factors at play during this time, but this clearly shows the powerful effect of bond yields on the market.

Money Exit Stage Left: Enter The Credit Crisis

With this in mind, it's easier to understand what's happening during the credit crunch and what the Fed is fundamentally worried about. Look at what happened to bond yields since September 2008:

When the credit crisis hit, there was a sudden shortage of money available to lend and so borrowers, particularly the relatively less credit-worthy, were forced to pay higher rates. The effect on the stock market was that the floor was suddenly dropped from under it, causing prices to crash.

This is primarily why the Fed took such drastic action, including dropping short-term treasury rates down to zero (yes, they are essentially lending money for free) in order to lower downstream lending rates. This is what caused the subsequent drop in bond yields, although you will note that they are still 1-1.5% higher than where they were at the beginning of the year.

So What Does This All Mean?

While there are plenty of other factors at play (a changing U.S. political administration, a continuing global recession, and ever-present global uncertainty), this is what I interpret this data to mean:

A lot of speculation had been "wrung" out of the market from the dot.com crash, which shows that overall investor sentiment has been neutral-to-negative on stocks since 2003, which unlikely to improve in the near term.
The Fed is aggressively doing everything they can to pull down interest rates, and eventually they will, causing bond yields to fall back to where they were.
When that happens, stock earning yields will equalize with bond yields again, and will rise as earnings rise out of the recession.

If you use S&P's current estimate for Q4 2009 earnings, the average earnings yield at today's prices will be 4.4%. This is already close to the AAA bond yield of 4.75%, but still a long way from the BAA yield of 8.12%. Assuming the Fed's actions manage to bring the BAA yield back down to 6.5% where it was before the recession, by S&P's own estimates, prices could still have a ways to drop (to get the earnings yield to go from 4.4% to 6.5% with constant earnings will require a price drop of 32%).

The thing to keep in mind though is that we have been talking about averages - using a single number to represent the entire market. In reality of course, there is a very wide band of earnings yields across all the companies in the S&P 500. For strong (AAA rated) companies with earnings yields above 4.75% (below a P/E of 21), they should already be at their floor price now. Likewise, BAA rated companies below a P/E of 12.3 should be close to their floor.

Ok, So What Should A Savvy Investor Do?

Keep a close eye on corporate bond yields over the next few months. If they keep their current levels or continue to go down, then it means the Fed is doing their job and credit is flowing back into the markets. That's a sign that the bottom is near (assuming earnings stay on track or better).

Even easier, keep an eye on this blog for updates on how all this plays out.

Happy New Year 2009!

A Look at Unemployment

2009-01-01T16:12:00.001-08:00

Here's a chart of the historical unemployment rate from FRED (the Federal Reserve Economic Data service):

Two observations:

First, the absolute best time to be entering the labor force in the last 40 years was right before 2000, when the unemployment rate hit a low of 3.8% in April of that year.

Second, the unemployment rate increased between 2 to 4 percent during each of the recession periods in the graph, with the current increase at already 2.3% since March of 2007.

FDIC Data

2008-12-27T17:47:00.001-08:00

The FDIC website is a treasure-trove of information on how the banking industry, and by extension the economy, is doing.

Here are some charts from right before the October market meltdown.

This one shows the credit-card loss and personal bankruptcy rates:

Notice the huge spike leading up to and subsequent fall off from the more stringent bankruptcy laws passed in 2005.

This chart shows the non-current (i.e. late-payment) rate on real-estate development loans since 1990:

Yes, that rate is climbing, but wow was it bad in 1990!

Here's a similar chart on the rise of non-current loans on private residence mortgages since 2005:

Yikes, over 5% of home mortgages are late!

Finally, here's a chart showing a corresponding fall-off in new mortgages:

These charts only show data up to September 2008. The next set due out next month will show what happened in the next 3 months.

A Tale of 3 Computer Makers

2008-12-27T15:32:00.001-08:00

Numbers can tell you a lot.

These are the recent annual earning statements for Dell and HP, plotted as a chart. Each value is shown as a percentage of revenues for that year:

Dell's COGS are a higher percentage of revenue (81% in 2008) compared to HP (76%). This is a big deal when net margin is near 5%. Dell's direct model may be more efficient than traditional retail channels, but that doesn't translate to higher margins for Dell. HP's higher overall margins means that they can leverage earnings from their server and printer products to subsidize their battle for greater PC and notebook market share.

Two other things are striking: First, HP has been pretty aggressive in getting their SG&A spending down in line with Dell's (11% vs. Dell's 12% in 2008). However, HP spends 3 times as much as Dell on R&D percentage-wise. That's 6 times as much in absolute numbers ($3.8B vs $610M in 2008). Their efficiency, coupled with a greater investment in R&D, positions HP to do better against Dell in the future.

Now, compare both of them to Apple's numbers:

SG&A spend is at similar levels (around 12% of revenue in 2008), so is R&D (3%), but there's a big difference in their COGS ratios. Apple started the decade looking very similar to Dell & HP, with COGS at 77% in 2001. However, by 2007 it is only 66%, translating to an over 10% increase in net margin, which was 14.9% in 2008, over double HP's. This was a result of Apple changing the game by entering the higher-margin music-player and smart phone business, and that has put Apple in a whole different league.

What's more astounding is that Apple accomplished this transformation with very similar R&D budgets to Dell and HP. However, there was a significant jump only recently in 2008 where Apple increased R&D spending by 40% to $1.1B at a time when HP trimmed their's by 2%. One can only imagine what that $300M extra is working towards after the development of the iPhone.

(Note: Dell's Fiscal Year 08 ended in February 08, while Apple and HP's fiscal years ended in Sept and Oct respectively).

Computer Science Graduate Statistics

2008-10-25T15:31:00.001-07:00

I really like the idea of tracking key stats as part of our investment club activities. Following our discussion last Monday, I took a quick look at graduating CS degree numbers. They tell a vivid, if unsurprising, story.

Here's the big picture from NSF and CRA (Computing Research Association) numbers:

(From http://www.cra.org/info/education/us/index.html)

There are huge peaks around 1986 and 2003, coinciding with 4 years after the birth of the PC and the .com boom respectively. Presumably, entering freshman decide their majors based on current economic and technological events. Unfortunately, the picture may be different 4 years later.

The CRA also surveys the number of incoming CS majors, which of course is a leading indicator for how many graduates there will be 4 years later:

(From http://www.cra.org/CRN/articles/may08/taulbee.html)

These are absolute totals from a subset of schools, but they do show a corresponding huge 2x drop in enrolments in 2005-2007. This means that we can expect a low in the number of graduating CS engineers starting in 2009.

Since the swings are so huge (2x), it's tempting to make broad generalizations, such as the need to relax immigration limits or face increased outsourcing of engineering work. Presumably, it will also lead to increased price premiums for domestic talent, which is good for those already in the profession. :)

2008-02-04T18:46:00.001-08:00

I'm not a huge football fan, but I am from New England so I've grown up with a certain ingrained loyalty. I heard this Friday on Marketplace and thought we were doomed based on the patriots record.

It says that if a team from the old American Football League wins the Super Bowl, the market will drop. If the winner comes from the original National Football League -- like my New York Giants -- the market's in for a rally. It's actually been right 85 percent of the time.

But it looks like now we have another chance!

2007-11-30T14:28:00.000-08:00

Our latest radio interview is now on the NPR Marketplace website.

Excerpt:
Tess Vigeland: It's time for a final 2007 update in our investment club series. All year, we've been following three clubs, one in Seattle, another in San Jose and a third in Fairfax, Virginia, as they figure out which stocks to buy, sell and hold throughout the year.

Our last visit to Seattle was back at the end of July, just as the credit crunch and mortgage mess were taking a serious toll on Wall Street. This time around was no better as club members Nathan Buggia and Sandy Phadke digested the day's rumors of potential bankruptcy at the online brokerage E*Trade....

2007-11-12T19:02:00.000-08:00

The upcoming IACI split

This is expected in the "2nd or 3rd quarter 2008" and the 5 companies post split will be:
IAC
- Media & Advertising: Ask.com, Bloglines, Citysearch, CursorMania, IAC Advertising Solutions, Evite, Excite, InsiderPages, iWon, My Fun Cards, My Way, Popular Screensavers, Smiley Central, Webfetti and Zwinky;
- Match.com, ServiceMagic, Shoebuy.com, Entertainment Publications and ReserveAmerica;
- Emerging Businesses: Black Web Enterprises, BustedTees, CollegeHumor, GarageGames, Gifts.com, Green.com, InstantAction, Primal Ventures, Pronto, Very Short List, Vimeo and 23/6; - Current investments in: Active.com, Brightcove, FiLife, Medem, MerchantCircle, OpenTable, Points.com and SHOP Channel.

HSN
- HSN TV, hsn.com, and the Cornerstone Brands, Inc. portfolio of catalogs, web sites
- Retail locations: Alsto’s, Ballard Designs, Frontgate, Garnet Hill, GrandinRoad, Improvements, Isabella Bird, Smith+Noble, The Territory Ahead and TravelSmith

Ticketmaster
- Admission.com, Biletix, Billetnet, BillettService, Cottonblend, Echomusic, Kartenhaus.de, Lippupalvelu, LiveDaily, TicketService, Tick Tack Ticket, TicketWeb and Ticnet.se
- Current investments in Frontline and iLike

Interval International
- CondoDirect, Resort Quest Hawaii and VacationSource.com

LendingTree - RealEstate.com, Domania, GetSmart, Home Loan Center and iNest

Other News - Google is the Sponsored listing provider for the next 5 years.

IACI pre-Split Financials
Market Cap: 8.3B
Trailing P/E: 36
Fwd. P/E (Dec 2008): 16
Revenue (ttm): $6.6B
Profit Margin: 3.7%
Current Ratio: 1.9
52 Week Range: $25.08 - $40.99
Revenue Growth: 2% (2007), 7% (2008, est.)
Earnings Growth: -5% (2007), 17% (2008, est.)

Summary

- IAC, particularly Ask.com is clearly the growth company, and the main reason for the split
- Emerging Businesses are tiny
- Ticketmaster may be a good investment as well
- 11% increase in worldwide ticket sales and 2% higher average revenue per ticket. Domestic revenue increased 5% primarily due to higher average revenue per ticket and increased ticket volume. International revenue grew 36%, or 28% excluding the effects of foreign exchange.

See my full presentation below:

2007-05-11T14:33:00.000-07:00

Check out our second NPR Marketplace interview online now.

"It's been three months since we visited Seattle investment club Meridian Pacific, and a lot has gone on in the stock market since then. Tess Vigeland catches up with the group..."

2007-05-07T14:12:00.000-07:00

Uploaded two research reports on Reliant Energy (RRI):

2007-04-30T19:29:00.000-07:00

DEFENSE COMPANIES & THE ANALYSTS WHO DEFEND THEM...

Perhaps in the back of your mind, you've been wondering if defense companies have done well over the past 5 years... here is the link to top defense companies on yahoo finance.

(clicking on the graph will expand it)

As you'd expect some defense companies have beaten the dow average by a hefty margin. The real question is, what is the earnings projections for these companies - and are they over valued in light of their strong performance. Also, what about the risk of lawsuits or chargebacks from the government?

RECENT HEADLINES SUGGEST STRONG GROWTH WILL CONTINUE...

	LMT	Lockheed Gets $23M Air Force Deal AP (Mon 6:05pm)
•	NOC	Northrop Gets $7.7M Navy Deal AP (Mon 5:59pm)
•	GD	General Dynamics Gets $244.5M Contract AP (Mon 5:47pm)
•	BA	Boeing CEO Sees 2006 As Turnaround Year AP (Mon 5:30pm)
•	GD	GD gets $244.5 mln of US Marines vehicle order at Reuters (Mon 5:04pm)
•	GD	General Dynamics unit gets $244.5 mln Marine work order

2007-04-23T21:14:00.000-07:00

After a quick analysis of PDS (Precision Drilling Trust), I decided not to pursue them further at this time given their Forward PE of 10.94 vs Current PE of 6.4.

Details:
Took a look at PDS (Precision Drilling Trust). As of December 31, 2006, Precision Drilling operated a fleet of 240 drilling rigs and 237 service rigs.

They caught my attention due to their low PE of 6.4 and the 12% price gain from the last time we looked at them.

Analysts estimates for earnings show a consistent downward trend for each of the past few quarters.

2007-02-02T14:31:00.000-08:00

Here's our first official radio interview by Tess Vigeland of NPR Marketplace.
Intro:
Our special series continues on investment clubs in America. Host Tess Vigeland takes us to a club meeting in Seattle. Meet a group of guys who eat, drink coffee and merrily beat the pants off the S&P 500...

2006-07-27T23:03:00.000-07:00

Archstone-Smith Trust (ASN)
(7/25/06)

· Summary:
○ ASN is an apartment REIT operating in high value areas (Over 60% in D.C. and SoCal)
○ Ameritron, a wholly owned subsidiary, focuses on developing apartment properties for sale.
○ A significant portion of ASN's earnings come from the sale, or reallocation, of properties. They are selling properties in non-core markets to buy new ones, and disburse some of the proceeds as dividends.

· Key stats:
○ Their occupancy rate is on average 96.4%
○ Market cap: $11.1B
○ Debt-to-Equity ratio of 1:1
○ Dividend Yield: 3.4% ($1.74 per share)
○ P/E: 16.0
○ Average 5-year revenue growth (to 2005) was 8.9%. It was 27.3% in 2005.
○ Average 5-year net-income growth (to 2005) was 19.4%. The only recent year where net income dropped was in 2001 (-1.3%). Net income growth in 2005 was 13.6%.
○ S&P opinion: Hold

· FY 2005 financials:
○ Revenue: $946M
○ Total operating expenses: $812M (
○ Net operating income: $163M (17% net operating margin)
○ Distribution from property sales: $453M
○ Total net income: $616M (65% net margin)
○ Total dividend distribution: $353.6M
○ Balance sheet:
- $11.5B in assets, of which $10.8B is in Real Estate.
□ They generate $946M on $10.8B of RE (8.76% return on assets)
- $6.48B in liabilities
- $4.98B of equity

· Recent financials (Q2 2006):
○ http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B47D4C5A0%2D36E5%2D42BD%2DB162%2D3E6DBEA2EF39%7D&source=blq%2Fyhoo&dist=yhoo&siteid=yhoo
○ Quarterly EPS was 77 cents.
○ Guidance for the year is $2.75-$3.05.
○ REITs must disburse 90% of earnings each year. 90% of $2.75 is $2.47, which is 42% above last years dividend of $1.74 (or it might result in a special dividend).

· From their 2005 10-K (Mar 2006)
· Since 2003, they have been selling "non-core" properties at an increasing rate. In 2005, the distributions from the sale of properties accounted for 73% of the net income.
· Their debt maturity periods are well spaced, with no more than $552M of debt maturing in any of the next 5 years (through 2010). That's no more than 5% of their market cap per year.
· Their dividends are paid quarterly, and have been steadily growing each year.
· They have $5.3 billion in total debt (12/31/2005), of which $2.4 billion was secured by real estate assets and $1.4 billion was subject to variable interest rates, including $394.6 million outstanding on short-term credit facilities.
- Debt is 49% of RE value

· My thoughts:
○ Here's a useful scaled analogy of their operations: ASN's performance is like a business that owns a $100K apartment with a $49K mortgage. They are able to lease it out for $8,760 a year ($730 a month). Total costs (sales + mortgage + taxes, etc.) are $5,874 a year plus $1,396 in depreciation, netting $1,489 of profit each year. This means that their true rental income is (net profit + depreciation) $2,885 a year, also known in REIT parlance as "funds from operations" or FFO (http://www.investorwords.com/1923/FFO.html). Note that this model does not include their income from the sale of properties.
○ Observations from this: A substantial portion of ASN's value is in the property they own (vs. just the rental cashflow its throwing off). The booked real-estate asset value may not be the actual market value of their properties. In the analogy above, it's like saying that an apartment that rents for $730 a month is only worth $100K. Most of their properties are in high-value areas (such as right across from Microsoft). Such an apartment that rents for $730 a month is likely to be worth at least 2-3 times that in today's market. This gives me confidence that the pure asset value of the properties is close to the market cap of ASN.

· SWOT:
○ Strengths:
§ The rental market is expected to increase in the short term as interest rates rise and home sales slow.
§ ASN's occupancy rates are very high, meaning that rental rates are set to go up.
§ Most of their debt was secured at low interest rates (< 6%).
§ They are able to take advantage of currently high property prices by selling existing properties, and through their Ameritron subsidiary, which exclusively builds apartments to sell.
§ A big dividend appears to be coming up, from the earnings numbers.
○ Weaknesses:
§ A lot of ASN's income is from sales (reallocation) of properties. A real-estate crash would drastically affect ASN's property prices and cut earnings.
§ A glut in new properties (the highest inventory in 9 years right now) many of them being converted into apartments, resulting in higher supply.
○ Opportunities:
§ They are reconsolidating their properties into core areas (i.e. selling off non core properties). This means that they could profit from buying cheaper real-estate and converting them into rental properties in core markets.
○ Threats:
§ ASN owns properties concentrated in D.C. and Southern California. Any sudden weaknesses in those markets (e.g. another terrorist attack) can drastically affect ASN.

· Other links:
○ Recent article in WSJ on apartment REITs: Apartment REITs Go to Head of Class, For Now, but Tougher Tests Lie Ahead (http://online.wsj.com/article/SB115379248492616131-email.html)
○ Big list of apartment REITs: http://www.dividenddetective.com/reit_directory_residential.htm

· Other REITs that might be worth looking at:
○ SUI - 8% dividend (!), currently losing money, but may be close to swinging into profitability
○ AVB - similar ratios to ASN, but more focused on luxury properties

· The bottom line:
○ Rental REITs look like a good buy at the moment, despite the fact that most of them have a hold or sell rating in S&P analyst reports. The upcoming dividend potential looks very promising. I am planning to go in looking for a near-term (< 1 year) jump in value. I've already picked up a few shares, and am looking to buy more (perhaps in other REITs). Longer term, a severe real-estate meltdown could hurt them.

○ Verdict: Buy (at $52, sell if above $60).

2005-11-27T21:01:00.000-08:00

Activision (ATVI)

Summary:
The game industry took a big hit in 2005 with two major console upgrades (Xbox 360 and PS3) coming out. Activision has posted a loss in the first half of FY 06, and unfortunately there doesn't seem to be any good news coming up. Analysts are expecting a year with zero income growth from FY 05, and initial sales of their top titles were lower than expected.

Buying the stock at this point is taking a big bet that ATVI will have a sleeper hit on the new consoles, which is a long stretch at best.

As of Q2 FY06 (Sep 30 2005) TTM:
- Revenue: $1.35B (up 13% YoY)
- Net income: $84M (down 30.6% YoY)
- Net margin: 6.2% (down from 10.2% 1 year ago)
- EPS: $0.30 (down 33% from 1 year ago)
- Current P/E: 48.71 (CY04 P/E range was 5.4 - 96.3)
- Current ratio: 6.1 (Q2 FY06)

FY06 projections:
- FY 06 Revenue growth of 7% (S&P)
- FY 06 EPS: $0.54 (Yahoo) (8% growth) - Note: Q3 (Dec 30) accounted for half the annual revenue in FY 05, and will account for virtually all the income in FY 06)

Danger signal:
Even if ATVI hits the $0.54 EPS projection, which represents a 54% increase over last year), their overall FY 06 EPS will still only be $0.49 (there were losses in the first half of FY 06). This is virtually flat from one year ago!

Valuation:
- Current P/E of 48.7 represents an expectation that ATVI can grow earnings by 2.4 times (over a nominal P/E of 20).
+ 2.4x growth means revenues of $3.4B and earnings of $337M (at a 9.8% margin)
- At a constant 13% annual growth, they will be able to do this in 7.3 years. Q2 FY 06 Revenue grew at 13% YoY.

SWOT:
- Strengths:
+ Good brand
+ Strong franchises: Tony Hawk’s Underground, Shrek, True Crime: Streets of L.A., and Spiderman

- Weaknesses:
+ Big losses in FY 06 so far.
+ Doom for Xbox 360 scored only 6.6 on Gamespot

- Opportunities:
+ New consoles this year (Xbox 360 in Nov 05 and PS3 in Mar 06)
+ Call of Duty 2 for Xbox 360 (Gamespot score: 8.8)

- Threats:
+ Hard to break $50 price point, even as development costs soar

Notes:
- Initial sales for Gun and True Crime were lower than expected - http://biz.yahoo.com/ap/051122/activision_mover.html?.v=1

Bottom line:
All indications point to a bad FY 06 for ATVI, with no growth from FY 05. Summer 06 may be a good time to re-evaluate ATVI's lineup for 2006.

Recommend: Stay Away

2005-11-08T22:38:00.000-08:00

Jamdat Mobile revenue doubles, shares jump

article

Hey guys. I listened to 1/4 of the conference call and took notes:

1 out of 3 mobiles games in the US are from jamdat. this is 4 times the market share of nearest competitor.

this quarter was difficult for the industry: significant upgrades to mobile carriers' platforms hurt sales throughout the mobiles games industry. resulted in outages.

4 reasons business will grow q4+
- us carriers have completed platform transition. mobile games market back on upswing. new platforms (t-mobile) help distribution.
- us market share at unprecedented levels validating competive positioning. european share increasing. as well as korea and japan -- especially with tetris and upcoming launch of doom rpq
- new products helping: doom rpg and socom. jamdat can consistently deliver hits.
- create significant leverage from new r&d. multiplayer games

R&D
- created swight (propertary technology) which lets one code base target multiple platforms
- hardware management platform (maintains specs of 3500 devices worldwide)
- sku manager helps distribute to many different channels (carriers and off deck)
- multiplayer engine (social networking, buddylists, community features, messaging)

drivers for industry
- worldwide 800 million cell phone units sold in 2005
- 850 million new cell phone units sold in 2006
- na carriers will add 20 million new subscribers in 2006
- european carriers will add 50 million new subscribers in 2006

2005-10-23T23:50:00.000-07:00

Apple Computer (AAPL)

Summary:
Apple had an awesome FY 05 that saw an almost 5-fold increase in net income from FY 04. Net income was over double their best year in the last 10 years (2000). iPods have taken the world by storm, and Macs are slowly making a comeback. They've also managed to bust out one innovative product after another year over year, and don't seem to be slowing down.
The key question is can they keep this up? And will Christmas 05 be as good or better than Christmas 04? I believe that as long as Jobs is CEO, innovation won't slow down, and with the iPod nano and video iPods out, this will be another bumper shopping season for Apple.

FY05:
- Revenue: $13.9B (up 68% YoY)
- Net income: $1.3B (up 384% YoY)
- Net margin: 9.6% (up from 3.3% in FY04)
- EPS: $1.44
- Current P/E: 36.3 (FY05 P/E range was 23 - 63.1)
- Current ratio: 3.0 (Q3 FY05)

FY06 projections:
- FY Revenue growth of 35% (S&P)
- EPS: $1.77 (Yahoo) (23% growth)
- Q1 FY06 revenue guidance: $4.7B (34% YoY growth) (http://www.macobserver.com/article/2005/10/11.15.shtml)

Valuation:
- Current P/E of 36.3 represents an expectation that AAPL can grow earnings by another 80% (over a nominal P/E of 20).
+ 80% growth means revenues of $25.2B and earnings of $2.4B
- At a constant 23% annual growth, they will be able to do this in less than 3 years.

SWOT:
- Strengths:
+ Awesome brand
+ Awesome product line
+ Awesome engineering and product execution engine
+ Great distribution network for iPods (pretty much any electronics store)
+ Mp3 player market is red-hot, and Apple still has room to grow.
+ They've locked in a leading position with the Samsung deal (for 40% of Samsung's flash memory production at a 40% discount)

- Weaknesses:
+ Narrow product line (iPods and Macs)
+ Declining margins as iPods go downmarket

- Opportunities:
+ Video downloads
+ The "real" iPhone
+ Resurgence of the Mac
+ Making the Mac platform a consumer entertainment hub
+ Further leveraging online assets

- Threats:
+ Declining consumer confidence can hit iPod sales
+ Windows Vista launch
+ Performance is highly dependent on Steve Jobs (age 50)

Notes:
Macs switching from PowerPC to Intel chips in mid-2006
124 retail stored at the end of FY 05 (from 86 in FY 04)
Mac OS has 3% market share (by units sold)
iTunes has 85% of the legal music download market
IDC projects mp3 player sales to reach $145B (945.5M units) in '09 up from $47B (225M units) in '04.
iPods account for over 30% of revenue, Macs account for 44%
6.45M iPods sold in Q4 FY05
iPods have est. 50% gross margin (vs. 44% for Mac)

Bottom line:
I believe this will be a strong holiday season for Apple. They have great long term potential, with the proven ability to design, develop, and ship innovative products ahead of the curve. It doesn't look like they will be slowing down anytime soon.

Buy price: $55 (P/E of 31 with $1.77 est. FY06 EPS)
High Sell price: $106 (P/E of 60 with $1.77 est. FY06 EPS)

2005-10-20T22:32:00.000-07:00

Sirius Satellite Radio (SIRI)

Notes:
- Negative surprises last two quarters resulted in price slumps after the results following a surge before
- 400K as of May 11 2004. Was 260K subscribers as of Dec 31 2003. Much, much less than XMSR
- Over 110 Channels, including a deal with NFL
- Distribution deals with Daimler Chrysler, Ford, BMW, Nissan, VW, and Hertz
- Daimler Chrysler and Ford have special stock purchase deals after X cars with radios are made (see 10-K). Warrants to purchase 4M shares each at $3.00 a share
- Similar stock deal to Penske (trucking co. and auto dealership) to exclusively order Sirius radios in purchased vehicles. Warrant to purchase 38M shares at $2.39 a share!
- They have 3 satellites in orbit and 1 spare, each has a useful life of 15 years
- Studio based in NY
- XMSR and Sirius have agreed to use the same radio standards (all radios can be used for both)
- Current deficit of $1.2B since start of operations
- They estimate they need 2M subscribers to achieve cashflow breakeven. Looks like they need 6-10M subscribers to turn a profit
- Class action lawsuit filed against them about inflated expectations (their stock tanked in 2001)

SWOT analysis:
- Strengths:
+ Looks like a good set of deals with automakers
+ Income statement seems to show a leaner company than XMSR (with 1/6 the subscribers, they are losing about the same amount of money)

- Weaknesses:
+ Really falling behind XMSR in terms of subscribers
+ Subscriber Acquisition cost (SAC) is $293 (vs. $75 for XMSR)

- Opportunities:
+ They could be snapped up by a media company (e.g. Time Warner)
+ Could go the other way too (e.g. recent deal with Dish networks)
+ No reason why they couldn't catch up and surpass XMSR, they are doing very similar things

- Threats:
+ May just get steamrolled by XMSR
+ Technology may pass them by (e.g. Internet radio)

Questions:
- How long will it take for 10M Americans to buy Satellite radio (if ever)?
- Does SIRI have enough cash to last that long?
- Why has SIRI fallen so far behind XMSR in terms of subscribers- Can they
catch up?

Recommendation: Stay away.

2005-10-20T21:54:00.000-07:00

XM Satellite Radio (XMSR)

Notes:
- 1.5 M subscribers as of Feb 2004, from 1.3M in Dec 31 2003, and 350K in Dec 31 2002
- Estimated 2.8 M subscribers by the end of 2004
- What's the vehicle vs. non-vehicle subscription base-
- GM is an 8% owner, and XMSR has an exclusive (until 2013) factory installation deal with them
- Installed in 20,000 Avis rental cars
- How much does installation cost- XM-Roady by Delphi is $120 online (http://www.xm-radio-satellite.com/index.asp-PageAction=VIEWCATS&Category=289)
- How much is subscription- $9.99 a month (Playboy radio is $2.99 extra a month). Multiyear discounts are available.
- Have 2 satellites in orbit now. Launching a third in late 2004 and a forth in 2007. How much does each launch cost-
- 10-K claims to have enough money to cover operations without further financing
- Deal with Jetblue and AirTrans offering inflight service starting Fall 2004. How much will XMSR get- No money apparently, just free advertising

SWOT Analysis:
- Strengths
+ Growth is impressive. Will be at least 96% YOY in 2004
+ Sirius holds the only other US Satellite Radio license.
+ Economies of Scale. Only cost is of acquiring subscriber

- Weaknesses
+ They need to grow their subscriber base to at least 8.5 M before they become profitable (given fixed costs)
+ Is it really that compelling a service- Would you pay $10 / mo. for radio-

- Opportunities
+ They can get creative about services (e.g. weather service, traffic, etc.)

- Threats
+ Outstanding claim to their insurers that solar arrays on satellites are degrading faster than expected. Insurers are rejecting those claims.

Bottom line:
There is significant downside to this industry and to this company. It is a tough fight to get to even a breakeven point. They are a long way away, and don't have too much time to get there.

Recommend: Stay away.

2005-10-19T20:04:00.000-07:00

Thanks for stopping by. This is the blog for Meridian Pacific Investments, an active investment club. Our philosophy is to critically analyze and understand the factors that drive the market and the growth of individual companies.

We love reading through company reports, debating the pros and cons for each investment, and gaining an edge over the market. We'll be posting our condensed findings on companies and industries to this blog. We hope you, our guests, will find them interesting, enlightening, and eventually profitable. Feel free to comment liberally, and let us know what you think.

Happy investing.