Thursday, 25 November 2010

The Best of Breed Analysts

These analyst have a nack for getting it completely wrong. Its actually not too bad to follow them as if you do the opposite you are likely to make stacks of money.

Sasa Zorovic & Mike Abramsky

"Given the stock's valuation, there is greater downside risk than upside potential to," wrote Goldman Sachs analyst Sasa Zorovic. He reiterated his sell rating and $53 price target. 05/22/08 - Sales Force is now $145 on 17th Nov 2010

Janney Montgomery Scott equity analyst Sasa Zorovic reiterated a buy rating and $40 fair value estimate on shares of Adobe Systems (ADBE) - June 18th 2010. Stock Price then was $33.12. Price as at $28.40 on 17th Nov 2010. The market has climed some 20% as well !

RBC Capital analyst Mike Abramsky says he is cutting Apple (AAPL) to underperform from sector perform and his $125 price target to $70 on reduced growth expectations, visibility and near-term leadership uncertainty. He sees a revaluation in the stock toward a market multiple. (15th Jan 2009 - Bloomberg Business Week). Price is now $314.80 on 17th November 2010.

If you know another great analyst with consistent nack for making the wrong calls, then let me know. Its great to keep a watch on these guys as doing the opposite your returns will be better than the Sage of Omaha.

Monday, 22 November 2010

Foot Locker Looking Overvalued ?

“At the end of the third quarter, we operated 3,474 owned stores. Year-to-date, we have opened 35 new stores and closed 61 existing stores”. - Q3 (October) 2010 Results – Earnings Call Transcript

The problem with foot locker (FL) is that this may become a Barnes and Nobel or Borders Group of the future. The same way that CD and book sales have moved from high streets to the internet, footwear is probably one of the retail areas that will follow suit.

The reason is that footwear is very standardized, unlike other clothing apparel.

A pair of Nike AIR JORDAN FORCE 4 AJF 4 are the same, look the same feel the same and are the same, whether it is in Amazon or Foot locker. The only difference is that Amazon price is $99.99 whereas foot lockers price is $149.99 a difference of a third. In the days of austerity $50 makes a huge difference.

Investment in Foot Locker cannot be compared to a company like Nike (NKE).

Table : Nike Annual Sales











Cost of Sales





Gross Operating Profit





Gross Margin





Nike has shown an increase in revenues of around 16.5% over the prior 4 years, the same cannot be said for Foot Locker. Gross Margins for Nike have improved by 2%.

Table : Foot Locker Annual Sales











Cost of Sales





Gross Operating Profit









Foot locker sales have decreased over the prior 4 year period to 84% of what they were 4 years ago. Margins have also been under pressure reducing by a full 3%, whilst Nike have increased their margins by a full 2%.

Management obviously have a challenge on their hands. The continuous store closures, although will not impact underlying earnings will increase impairment costs and ultimately cash flow. SG&A will be under pressure with reducing gross operating profit.

Approximately 68% of the merchandise came from Nike in 2009. With Nikes margins showing increases over the last 4 years, this can only mean reducing margins for Foot Locker.

As Foot Lockers turnover reduces, its ability to negotiate and retain historic discount rates will be significantly impaired. This is likely to have additional margin pressures as goods will be purchased at a significantly higher price.

Foot locker has very little experience in terms of significant international expansion into the major retail markets of BRIC. A quick search of Brazil, India, China and Russia on the 10k demonstrates this.


The 16-25’s in Europe have been significantly impacted by the employment situation which continues to deteriorate. This age group has not benefited from the lower mortgage interest rates as it is not their expenditure that is impacted, but their source of earnings.

UK consumers in that age group are not only very price sensitive, but also internet savvy. UK retail sales for high street footwear stores has seen considerable decline with bankruptcy of a number of key players.

The UK also has a oligopoly situation with JJB and Sports Direct colluding to capture the sales. JJB also continues to face significant pressure on cash reserves due to reducing sales and margins.

Table : Revenue Per Square Foot





Number of stores at year end





Total selling square footage at year end (in millions)





Total gross square footage at year end (in millions)





Revenue Per Square Foot





There has been significant reduction in revenues per square foot over the past 4 years.

Revenues have gone from $658 per annum per square foot in 2006/7 to $627 per annum per square foot in 2010/9


The last quarter is likely to have been positively impacted by exchange rates, particularly in relation to propping up gross margins. The US dollar against other currencies will have reduced the cost of goods purchased. Over the next quarter these benefits are likely to unwind and put pressure on margins. It is quite surprising to see that inventory valuation was not lower at $1,202m – October 2010 compared to $1,228 – October 2009, given what should have been significantly lower purchase costs. It would appear that for the quarter ended October 2010 the margins have been propped up with higher inventory valuations. i.e. inventory values have been held up higher to reduce the impact on cost of sales.


Barnes and Nobel with $7bn of revenues is worth a mere $1bn. The sales however are decreasing much rapidly than Foot Locker. Foot Lockers valuation is $2.86bn on sales of $4.85b feels a bit rich.

Foot Locker has also repeatedly continued to prop up underlying earnings with exceptional items. The use of exceptional items, particular provisions, can be used to ensure that on-going underlying earnings for the future are protected.

There is probably no surprise that Foot Locker will require some more exceptional charges in the very near future to continue to prop up its underlying earnings


Due to the higher pricing nature and standardization of Foot Lockers products, they are more susceptible to be purchased through the internet. This is going to have a significant impact on future sales and margins.

Furthermore 2007 and some of 2008 saw an economic boom that was exceptional fuelled by rising asset prices together with cheap money. Currently it appears as if Foot Locker’s valuation is based considerably on historic sales with a view to achieving these sales and margins at some point in the future. In fact with the increasing store closure increasing internet purchases, it is unlikely that Foot Locker will ever achieve these historic sales or margins again.

The current underlying profits and gross margins have been propped up through one-time re-organization costs and other provisions that are being used to “magik” the underlying earnings.

Other things I don’t like about foot locker is their presentation of the profit and loss account in the SEC Form 10k. There are no subtotals for gross profit. The lack of detail around cash flow in the press release and the lack of information on gross profit margins in the press release. This is poorly presented and displays complete disregard for their equity investors.


On a current valuation basis Net Income Year to Date is $112m. If I assume sales of $1,400m for the final quarter and a gross profit margin of 27% would yield around $378m. Take off this $314m for SG&A and depreciation leaves around $64m. Take off taxes and net income is around say $50m This would take total net income to be $162m for the year. On current valuation this would give a PE ratio of around 17.0

Given the lack of certainty around the growth and other companies in the same sector, the likely pressure from larger brand names, the continuing US unemployment situation, the valuation for Foot Locker seems a little sky high.

Monday, 8 November 2010

Rumour Mill Yahoo and AOL

Some rumours going on about a merger between Yahoo and AOL or some form of takeover.

Probably spread as someone wants to either offload shares in AOL or Yahoo without tanking the market.

Just look at the spread on Market Cap of each company. It would be like Microsoft  going off to buy Palm - what would be the point ?

Does this deal make sense ? Aside from Blodget who believes the deal makes sense, I doubt management of Yahoo do.

Why would Yahoo want to purchase a stream of dying revenue at a premium price ? If they had the money they may as well go to AIG and purchase an annuity, it would return higher and be less hassle.

AOL's turnover is decreasing rapidly. Current market valuation is way too high and and any premium above this is ridiculous. Consider all the effort to rationalise both organisations and it will detract Yahoo management even longer so the competitors can get even further ahead.

I haven't been a great fan of yahoo, but this merger would be detrimental to Yahoo. The last company that got into bed with AOL incurred a $16billion loss.

So what could Yahoo do ? Well they need to be a bit further on the ball. Yahoo and hotmail have had mail services a lot longer than google...yet google came in and have taken market share. Why ? Yahoo dont even test their email system on linux machines !! How pathetic is that ? Promoting open source OS should be the first thing on their mind when it comes to hurting their competition.

Yahoo's site for feedback is pathetic. There has been some recent improvements but it was an effort to actually send feedback to yahoo. They made it as difficult as possible. Yahoo finance is very good but the lack of quality updates to this destroys the quality and reliability of the data.

If these things I have listed are common across the entire organisation it is no wonder they are experiencing reducing turnover.

An example slow yahoo is ? Where is yahoo's urls shortner ?

Wednesday, 3 November 2010

Quote of the Year - AAPL (Apple)

This has got to be the quote of the year.

RBC Capital analyst Mike Abramsky says he is cutting Apple (AAPL) to underperform from sector perform and his $125 price target to $70 on reduced growth expectations, visibility and near-term leadership uncertainty. He sees a revaluation in the stock toward a market multiple. (15th Jan 2009 - Bloomberg Business Week).

If anyone know where this analyst is now working or whether he has any further tips, let me know. Just do the opposite and you will be sure to make money.

Shorting PLT (Plantronics)

Current Market Capitalisation is $1,800bn. Sales for next quarter estimated to be around $180m. Annual sales say $1,000bn. That is still $800m more than market capitalisation of the company.

Quarterly cash generation "“We generated approximately $25 million in cash flow from operations in the current quarter" from earnings report Plantronics Announces Second Quarter Fiscal 2011 Results.

That is $100m a year. Market Cap is 18x free cash flow. No debt though.

Logitech, Motorola, Jabra all competitors where the items sell for around 50% of the price.

Short Strategy.

40% Shorted now at $37.82 (4000 shares)

Further Positions

20% Shorted at $40.00 (if it gets that far !) So another 2000 shares.
50% Shorted at $42.00 (if it gets that far!) So another 5000 Shares
20% Shorted at $35.00 ( if it falls that far) So another 2000 Shares

Below $34.00 start taking off the short positions at 10% for each 50c below $34.00

So today I have shorted 3000 shares at $37.81.

I have not hedged this against the market, as I feel the market is very high right now. If the market falls another 5% over the next week, I will then go long on the market by the same amount.

About Me

I try and work a broadly market neutral strategy and based purely on fundamentals and my gut feel.