31 August, 2009

Disney's Marvelous Bet on Superheroes

The Walt Disney Company (DIS) set its mouse ears on the biggest name in comic books in a purchase agreement that will bring all of Marvel Entertainment's (MVL) characters into the Disney fold. The $4Billion purchase agreement with Marvel is similar to Disney's previous $8Billion buy of animation powerhouse Pixar, which has already reaped dividends with film, toy and video sales of features Wall-E and this summer's hit Up.

Marvel, a newcomer in the movie production business, but with two self-financed films under its belt and another four in development is riding a high after the blockbuster success of Iron Man and the subsequent revenue tail that film has provided. With the eagerly anticipated sequel set to be an even bigger box-office draw, the opportunity was ripe and Disney went after it. Marvel's upcoming film slate looks like this:

=> Self-Financed films including 2010's Iron Man 2, 2011's Thor and Captain America films, and the 2012 team-up Avengers. But that's just the beginning, as a possible Incredible Hulk sequel, a S.H.I.E.L.D. or Nick Fury film and potential franchises from the core Avengers characters all lie in wait for initial movie-goer reaction.

=> Licensed films include Sony's 2011 Spiderman 4, upcoming Fox films Wolverine 2, Deadpool, X-Men First Class, and Origins Magneto, and there's talk in Hollywood circles about reboots to the Daredevil, Fantastic Four and Blade franchises.

The film slate at Marvel looks incredibly promising, so why sell out at $50/share? That's a question Marvel shareholders will get to ask as although both company boardrooms have approved the deal, the MVL shareholders must also give their permission. Given the profitability of the Iron Man movie franchise and the chance of a second hit with either Thor or Captain America, all moving towards the much-anticipated Avengers film, begs the question whether Marvel needed a big brother. Marvel finds itself in a very positive business cycle as its films generate interest in its comic books, which generate interest in more films and toys and videos, but I believe Marvel's thinking is growing ever-more global and it needs a partner to showcase its characters further around the world.

Disney theme parks with various Marvel characters and tailored rides, bigger opportunities in television for Marvel's growing animation team and the increased presence at the negotiating table for localized global expansion of movie, television and print properties give Marvel a cushion it didn't have before when it ventured on its own. But, most importantly, I think Marvel have watched and learned from the Pixar model, and as Pixar was embraced into the Disney fold, it has been allowed to run and create as it had before and even more so. Critically, the last two Pixar films have been labelled as the least commercial and least accessible, and still among its best to date. In the end creativity prevailed, and just as the Pixar model has taught Disney, Marvel knows that its love for its own characters and creative process will be left with the creators and not a corporate conglomerate.

Prior writings at WC Power Tech Fund about Marvel, here (Link), here (Link) and here (Link), with the premier of Iron Man and beyond, talked about how the strategy was very sound and the stock could easily double from its $2-3Billion market cap within the next few years as it pressed on with its film strategy. That was around the $30/share range and Marvel admirably was able to withstand the market's recession wrath better than most, eventually faltered with the market but was quickly embraced again by investors at close around $38 at the end of last week. Now while this deal makes a lot of sense in many ways, Marvel should've been worth significantly more than $50/share on its own as its Avengers assembled.

Disclosure: Author owns MVL, DIS

28 August, 2009

Apple-China deal struck: iPhones official

China Unicom (CHU) and Apple (AAPL), after months of negotiations and several false starts, have completed a deal that will flood the Chinese market with legitimate iPhones before the year is out. China Unicom is building out its 3G network that will be ready by the end of the September for most of its 140Million plus subscribers, which is the biggest cell market that Apple has ever rolled the iPhone out into.

The uncomfortable love triangle that Apple found itself within in China was one that it had to complete for the continued dominance of its ubiquitous handset. China Mobile (CHL), the biggest carrier in the country with almost 500Million subscribers, was also in the running but several public disagreements with Apple over revenue sharing and control of the AppStore, made a deal impossible for the Cupertino electronics & design company.

Apple had to make a phone specific to the marketplace in China, with a mandate that wi-fi be removed from the iPhone, but for a market that size the company was willing to make concessions. The deal with the second largest carrier, Unicom, will allow Apple a foothold into the vast, electronic friendly marketplace, where several estimates have placed "grey-market" iPhones already in the country at more than a million units. With the country getting an official retail and distribution channel for the popular device, it will be interesting to see how the consumer in China responds to pricing and rate plans.

Like most "exclusive" deals that Apple strikes, there are certainly levels of buying the carrier of choice will have to make. That part of Apple's iPhone deals have been reported in several other markets like Russia for example. Apple did not get any revenue sharing in this agreement and the phones will simply be sold by China Unicom with subsidies. Reports have been denied that already 5Million units were ordered, but speculators have suggested that this number is quite reasonable, and in some cases underwhelming as it accounts for less than 1% cellular market penetration.

Playing with shipment volumes aside, the iPhone coming to China is a huge deal for Apple and its earnings going forward. The market in China of cellphone users will bump Apple's global addressable market significantly and even if sell-through rates do not meet expectations due to the rampant "grey-market" the channel fill will certainly help Apple's unit shipments and Revenues substantially. In the last quarter, the iPhone 3GS was launched, selling 1Million units in a weekend, leading to 5Million units sold in the quarter, a quarter that was largely applauded by Wall St. So how many will Apple sell in this quarter and the next as iPhones get bought and paid for by the company's Chinese partner? The answer I would think is at least 5Million on top that had previously been reported and debunked, if not significantly more.

Disclosure: Author is long AAPL

20 August, 2009

Government owned General Motors bails out Dealers stalled by Government [Update]

This little gem of a news story is making the rounds recently as General Motors dealerships across America are on the verge of closing shop due to cash flow issues relating to the Cash For Clunkers program.

The program itself has been a huge success for the Automotive Industry, specifically the car makers, with not only General Motors, but American rival Ford (F) announcing increases in production to keep up with demand. So far reports indicate that about 450,000 vehicles have been sold in the US qualifying for the program, with recent statistics showing Toyota (TM) vehicles holding 3 of the top 5 spots. Nearly half a million vehicles is not an insignificant number in the fight to increase average American fuel economy but herein lies the rub. The wildly successful program has already run out of money once, gotten an infusion of cash to extend it, and still is so far behind the 8-ball on the administration side of things that dealers around the country may have to shut their doors. While this program is expected to bump vehicles sales past the 1 Million mark for the first time in longer than a year, the under-pinnings of and bureaucratic red-tape within this program still have a ways to go.

Cash For Clunkers, which gives up to $4500 in rebates to car purchasers, provided they buy fuel efficient vehicles and trade in gas guzzlers or old piles of road junk, is leaving dealers holding the bag when it comes to running operations. It is now reported just how far behind the Government is in issuing rebates to dealers, with 37% of rebates having been processed, but the percentage of payouts still unknown. The articles flying across the news wires lately have been full of quotable frustrations from dealers. One company is apparently looking out and stepping in to help.

General Motors is that company, 60% Government-owned General Motors following the structured bankruptcy that is. The company, err Government, is lending money to dealerships in an attempt to keep them operating until the Government can process their sales and send the appropriate rebate dollars. GM will take the money back from dealers within a month's time if the Department Of Transportation has issued funds to that specific dealer, so this plan is wildly considered an operational stop-gap measure. General Motors is on the right track here as in the market share game, it can't afford to have its dealership network crippled during the busiest car buying spree in over a year. The irony of it all, especially for Uncle Sam is something else entirely!

Update: Press updates regarding 37% of rebates process with unknown % having been paid out.

Disclosure: Author owns TM, holds no position in any other companies mentioned

17 August, 2009

Home Reno Sector still facing Economic Headwinds

Lowe's (LOW), the smaller competitor to housing renovation giant Home Depot (HD) found its stock slipping nearly 10% today on disappointing revenue and earnings numbers for its 2nd quarter. As money has been flowing this year into the more established names in anticipation of recovery, Lowe's had an opportunity to showcase its smaller and leaner business model, however the difficult economics have proved to be increasingly challenging. Year To Date now Lowe's sits 4% in the red, while Home Depot has been a 14% gainer, despite a nearly 4% tumble today.

Lowe's profit fell 19% year over year to $759Million or $0.51/share, which fell short of expectations of $0.54/share and on the top line Revenue fell to $13.8Billion, down from $14.5Billion a year ago.

But housing data is getting better right? Not everywhere and not consistently is the message from these numbers, while housing prices and housing starts are beginning to improve on a year over year basis, they are against comparisons coming from drastic lows that were reached during the meat of the global recession. With the jobs numbers being what they are, it's difficult to imagine the current economic environment being a hotbed for home renovations or substantial new developments. As North America begins to slowly drive itself out of the recession, Lowe's sees some leveling out of demand as it experienced growth in foot traffic in its stores throughout the quarter, however talk from management is mostly about expectations resetting and difficult consumer conditions, and with big ticket purchases (those over $500) falling 16% year over year it is easy to see why management would speak conservatively.

Top line profit forecasts were also trimmed at Lowe's for the year by $0.04, and the company is slowing its store building. It planned about 66 stores this year and now only has plans for 45 next year. But even with an American consumer getting more confident towards the end of the year, is there going to be enough bite for the big ticket items Lowe's and Home Depot rely on for profitability. If Cash For Clunkers showed anything, its that the consumer can be tempted with a good deal, albeit one sponsored by the government. However with hundreds of thousands of Americans having now just spent copious amounts of money on new cars, will they have anything left for their homes before the end of the year?

Disclosure: Author holds no position in the companies mentioned

11 August, 2009

GM makes Marketing Splash with Chevy Volt

The plug-in Electric Vehicle that's supposed to usher in a General Motors of the future has had a tumultuous lifespan thus far, but to its credit the company continues to plow ahead with the Chevrolet Volt the best way it can. By winning the marketing war early!

The Volt has been the focus of numerous stories since its unveiling and subsequent planned 2010 debut, but today's might just be the most fascinating. GM has come out to say that the Volt will be rated an astonishing 230MPG. Now if that number seems quite extraordinary, you'd be part of the perceptive crowd, because clearly there is more to the story.

There is no comparative standardized measure for electric-gasoline hybrid vehicles like the Volt and standard highway and city mpg fuel economy tests are 10 mile continuous drives. The Volt, on the other hand has a range of 40 Miles on a single charge, so technically the MPG figure would be infinite as for the first 40 Miles, as the car would be using no fuel at all.

That's where it gets a little bit complicated as the engine on the Volt provides an additional 260 Miles of range on a single tank and thus on a 100 mile cruise, 60 of which are powered by petrol, the MPG figure would drop to about 80 MPG, and continue to decline as the drive gets longer. The engine also provides power to charge internal systems, but a recharge of the battery is said to take about 10 kilowatt hours, which CEO Fritz Henderson has said would cost about 40 cents. There was no subsequent mention of just where in these American cities will there be public infrastructure to support these vehicles, but if there's one thing the Stimulus package should have money for, it ought to be this.

While the 230MPG claim may be just that, it does have some merit, and more importantly it puts GM ahead of the competition and in the driver's seat when it comes to America's automotive future. Advertising sells just about everything in this world, and seeing a number like that splashed across automotive publications and the Internet while swing the ball of goodwill into GM's corner.

And goodwill is one thing the company will need in spades if it continues with plans to launch an IPO on the year anniversary of its dealings with bankruptcy.

07 August, 2009

Jobs jobs jobs spark continued rally

American payroll numbers came in this morning and the results were as good as they could be given current economics. Predicted job losses averaged around 325,000 but initial numbers for July put losses at 247,000. Employers have certainly slowed their layoffs in June and July. Additionally the June number was revised downward from 467,000 to 443,000.

Now, that's a lot of numbers in one paragraph but the underlying message is this. Things are slowly moving forward in the job market, and stemming job losses, which in turn will turn into job creation is the only way towards full economic recovery. Now, some will say that the country is still losing jobs, and that the continuing number of losses in this recession stands at near 7Million, a record for post WWII. Both those facts are true, however an important metric, the unemployment rate, fell from 9.5% to 9.4%, despite expectations that it would rise another 10 basis points.

The jobs report, along with the first profitable quarter from AIG (AIG), up 9%, in almost 2 years sent stocks higher in morning trade, with the DOW climbing about 100 points.