04 October, 2007

WC Investing Q&A: Session I

Well its time to introduce something new to the WC Investment Blog. The best way to offer feedback I think is through Q&A Sessions. So here we are with the first one, of hopefully many more.

I've been fortunate enough to have generated a level of interest in my Investment Writings and because of this I've been asked a variety of questions on an amalgam of stock topics. So I thought instead of burying some of my responses in commentary and outside sources I would bring them to the forefront here, officially. Just so there's no confusion, this isn't a lightning round by any stretch, (I'm pretty sure Jim Cramer's got that trademarked) but I will try to keep responses relatively brief.

So let's get started.

1) Talked before about Diageo (DEO) as an Alcohol play, is there anything riskier and more obscure out there?

One company is Central European Distribution (CEDC) and what they do is distribution of, you guessed it, alcohol into and throughout Central Europe. They also produce and sell vodka throughout Poland and distribute an overwhelming number of other brands through the region. One year chart looks beautiful here and I first mentioned this play when shares ran from $18 to $39. I thought then part of the boat had sailed but the company is still worth a look. Forward P/E of 19-low-20s and a Price to Earnings Growth ratio estimate at about 1.40-1.5. If speculative plays in the alcohol space is the name of the game this is one of the only games in town.

2) Akamai and its upcoming Competition?

Akamai's (AKAM) a solid tech company. I like it and own Call options in it. It got really crushed when it reported its previous quarter numbers and now its earnings season again for this company. While it's had a pullback, I think AKAM remains stronger positions than its competitors in the Internet back-end bandwidth game. Major League Baseball is seeing a resurgence of traffic now as the playoff races finished up and the post season has begun and AKAM's sure to benefit. Limelight Networks (LLNW) seemed to be up and coming but it faltered heavily over the late summer months. There are concerns over margin contraction due to competition , but I still think AKAM it is the best company in this space.

3) VMWare IPO and beyond?

I talked about my thoughts on VMWare (VMW) and its IPO here (Link). I was weary of overpaying if VMWare jumped to $60 on its first day. I thought EMC (EMC) was the better play since they still hold 89% of VMWare all to themselves. VMWare has got it going though and as it breaks $90 and heads for $100 its even scarier. But the business that its in will be a big one in corporate circles and it is the only game in town right now when it comes to virtualization. On any pullbacks I would like to own it, but till then EMC still gives you great VMWare exposure with less risk.

4) How does Ebay go about increasing listings? And How is Ebay affected by Macroeconomics

Ebay's (EBAY) most important business is the core auctions business. They are seemingly the only one and as such have major control over pricing. Ebay was losing its core business to its own stores/Amazon's personal stores and other such merchants online. This was due to Ebay increasing prices too much. This drove down listings. When Ebay earlier this year reshuffled their pricing schemes it seems to regulate the business back and hence led to an increase in listings. So that's one way, a second is advertising. Ebay does a lot of it, but to further increase listings they need to do more. Ebay ran a pretty successful I think "It" campaign through TV and print ads but I havn't seen anything like that in quite a while from the company. Third, Ebay needs to further expand into more worldwide markets. They've made some strides in Europe but there's still a lot of room for growth there. The East markets are tougher for American companies to crack since they have traditionally had a hard time understanding the consumer and cooperating with regulations.

As for Ebay's macroeconomic issues, it like all technology stocks is susceptible to factors like inflation, interest rates, employment, consumer confidence etc. Interest rates, while not seemingly a factor in terms of core business for Ebay do have a big effect on general market trends. When the Fed cut rates earlier the market rallied in relief that the sub prime crisis could be further averted. Had rates not been cut Ebay would've tanked hard with the rest of the market. The employment issue is also a broad market issue, but Ebay feels the effects. Sellers of merchandise on Ebay will have a hard time getting rid of their things if the people who were just buying have suddenly lost jobs. The same goes for consumer confidence. People will only feel free to use their loose cash if they feel their economic situation warrants it. Hence they need to feel confident that they have enough to get by regardless of some casual spending.
The biggest issue for Ebay and other highly valued technology companies is that macroeconomic factors have a direct correlation to P/E ratios. When the economy is strong and macro-economic data points to growth and continued strength the leaders in the markets enjoy P/E premiums, so a company like Ebay can be valued fairly at 40-50 times trailing earnings. When these macro-economic indicators start to shift negatively and fears of a recession in the economy loom its very easy for those P/E premiums to contract sharply, and even though Ebay's growth could be consistent the company would trade at 25-30 times earnings rather than 40-50 times.

5) Altria and the Philip Morris International spin-off, what to do now?

I've liked Altria (MO) in the past and its done well. I liked it going into the run up to the Kraft split and now also before the PMI announcement was finalized.
I think PMI is much better to own as a pure smoking play that actually has some growth.
Smoking in North America is all but dead in the growth department. That's the main reason why I'd be hesitant with Altria. I do think owning it is a good idea for the PMI spin. I think people will jump into that when it becomes fully PMI. Only way to do that initially will be to own MO. I can see MO coming into the $75-77 range at the end of the year from its current $69 range.

6) Fund Holding Performance through the last quarter?

I'm working on something that should be up very soon.
I intend to publish the fund's largest holding, gainers, losers and trades that were closed during the September quarter.

1 comment:

Fletch said...

Excellent write up on Ebay, WC.


Thank you very much