So I read this article today that set me back just a bit, and I don’t mean in a good way. First here’s the link:
I suppose that everyone has their own perspective on things like this and I completely respect that. But for the most part I’m not a union kinda guy. Sure, I get why they exist and understand the battle for workers’ rights. But I also believe big-time in the risk-takers who are behind the businesses. I’m not saying they’re all angels, don’t get me wrong. But I get the feeling that the popular sentiment among many is that CEOs are way overpaid and theirs is an easy job that anyone can do. I am not one of those people. Being that I work for a founder-led company and know what the Gardner brothers have been through to get The Motley Fool to where it is today, I tend to side more with the folks who are making it happen.
The crunch that Detroit’s Big Three felt over the past few years was a long time coming. Incentives were way off kilter and there was no real pay for performance structure that is now being dealt (I’m referring to recently-signed UAW/GM agreement here). I’m not saying I’m glad it happened (the crunch that is), so don’t think I’m some hardass Republican who can’t sympathize with the working man. In case it matters to anyone I’m a true independent voter who leans more towards fiscal conservatism and couldn’t care less if gay people want to get married. That is to say that when it comes to social issues I prefer to let people live their own lives and I'm not a terribly religious man. I have voted for Democrats, Republicans and Libertarians and if you don’t like it then I suppose it’s your right to disagree with me and not read what I write.
So then I see this passage: “The average hourly worker at Ford made $109,020 in 2010, including wages, benefits and overtime, up 17 percent from 1999. But the average salaried factory supervisor made $99,760 in wages and benefits, up just 2 percent in the same period, the records show.”
If this is even anywhere close to accurate then I cannot fathom what in the world the problem is. Are the workers not happy with the money they’re making at Ford? Or is it the rest of the UAW that is upset because the workers at Ford get paid better? Either way I say suck it up and deal with it. Sounds like a pretty sweet check to me. And seriously? You have a problem with Mulally’s compensation? Lemme tell you from my experience meeting the guy firsthand at the auto show in Detroit this past January and walking around with him on the floor: If what I saw is any indicator then I think he does pretty amazing job and is a key reason Ford is in the position it is in today. The guy gets pulled in 500 different directions at once to appease seemingly every auto industry exec and slimy politician in the country, so forgive me if I believe that his compensation is quite fair. The fact that the overwhelming majority of it is tied to the company’s performance should tell you where his priorities are and when I even hear the word “strike” muttered among the UAW I want to puke.
Of course their leaders say they wouldn’t consider a strike unless such-and-such. But the fact that they even mention the word strike and qualify it leads me to believe that they would consider it or at least use it as leverage of some kind. That’s cool…I get it. But just remember that the sword cuts both ways here. Unemployment is still brutal and there are a lot of Americans still in need of work. I'd say the point has been proven beyond a doubt that if they fall back into the trap of demanding more based on historical precedents, well the historical precedents have already shown us where that leads and I don’t think the government would be too quick to bail the automakers out a second time. Not that they had to bail out Ford in the first place.
As of market close September 22nd the Motley portfolio is up 2.35% and Mr. Market is down 3.66%. For those keeping score the Motley portfolio is beating market by 6.01% since inception.
Straight from the Onion
The headline is funny, but what’s funnier is that I could see this happening one day: http://www.theonion.com/articles/california-to-allow-prisoners-to-serve-sentences-o,26173/ [more]
Here's the list hot of the press: [more]
Here's another one I've had on the watchlist for a while. Zebra Technologies (Nasdaq: ZBRA) hit my radar back in March of this year. I don't even think I've ever mentioned on this board (at least not that I can recall), but the price has been creeping down a bit since it first caught my eye at around $38 per share. I felt then that it was very fairly priced if not a little enthusiastic. But now at $32 it has really got my interest level up there.
Zebra designs, manufactures and sells specialty printing devices that print variable information on demand at the point of issuance. So what are the purposes or uses of this technology? These devices are used for automatic identification, data collection and personal identification in applications that improve productivity, deliver better customer service and provide more effective security. The business is broken down into two main segments: Zebra Specialty Printing; and Zebra Enterprise Solutions.
Zebra Specialty Printing
• High-quality labels, tickets, receipts, and plastic cards; barcodes and personal ID products, passive RFID used for routing and tracking, patient safety, transaction processing, and identification and authentication.
• They also offer printer supplies including thermal labels, wristbands, plastic cards, laminates and ribbons. While parts don’t necessarily have to be genuine, it is obviously encouraged.
• Printer-related software for use with Zebra systems to maximize potential and efficiency.
Zebra Enterprise Solutions
• Proprietary asset tracking and management solutions to optimize the flow of goods within the supply chain
• RTLS (real time locating systems) and GPS (global positioning systems), active RFID
• Customers for ZES include airport operations, distribution operations, personnel safety and security and manufacturing operations.
What are they selling?
Direct thermal and thermal transfer label and receipt printers, passive radio frequency identification (RFID) printer/encoders and dye sublimation card printers as well as a range of specialty supplies consisting of self-adhesive labels, thermal transfer ribbons, thermal printheads, batteries and other accessories, including software for label design and printer network management.
As of 12/31/2010 Zebra offered 54 thermal printer models with numerous variations. All Zebra printers use thermal printing technology in the form of direct thermal printing, thermal transfer printing or dye-sublimation printing.
Who are they selling to?
Customers include manufacturers, service and retail and governments. Geographic segments include: North America, EMEA, Latin America, and Asia. In 2010 revenues broke down, respectively 43%, 35%, 9%, and 13%. There are a number of channels of sales, via distributors, value-added resalers (VARs) and OEMs. Internet and telesales for media and consumables.
Zebra has sold more than 9,400,000 thermal printers to customers as of 12/31/2010. ScanSource is the company’s most significant customer with a percentage of net sales at 18.5% (2010); 16.1% (2009); and 15.4% (2008). It is worth noting that ScanSource is a global distributor and no other customer accounted for more than 10% of net sales during these years.
Competition and Risks
There are many tangential competitors in this line of work, but many only compete with one particular product or line, so there aren't many pure play competitors which gives Zebra a healthy share of this overall market thanks to the diversity of their entire business. Other risks include:
• Zebra now outsources the assembly of their printers to Jabil; intellectual property risk, risk of fabrication delay, quality;
• Significant global exposure, risks inherent with this;
• Part of growth strategy is through potential acquisitions;
• ZES and its performance; this is difficult work and if they don’t pull it off it could affect the rest of the business.
What is this thing worth?
When I first started looking at Zebra the stock was trading for about 20 times trailing earnings and an EV/EBITDA of 10.5. Today those numbers are 15.5 and 7.6 respectively. Average numbers over the last ten years have those numbers at 26 and 13 respectively. So from that perspective it could be historically cheap if there's a reason for business to continue to grow at the 7% CAGR or better we've seen over the last decade.
On a discounted cash flow basis if I grow top line revenue at an average of just under 5% for the next 10 years with a 2.5% terminal rate and an 11% hurdle rate I could see shares being reasonably worth about $38. This also assumes incremental operating margin improvement over time along with the $4.75 in cash per share on the balance sheet.
Who’s Managing This Company?
Anders Gustafsson has held the CEO position since 9/2007. He replaced co-founder Edward Kaplan who was CEO for 37 years until he retired in 2006. Though Mr. Kaplan no longer has any affiliation with the company, its other co-founder, Gerhard Cless still owns 3.7% of the shares outstanding and serves as the executive vice president and director. Cless and Kaplan founded the company back in 1969.
Today, Gustaffson serves with CFO Michael Smiley (2008) as well as a board of 7 (2 internal/5 external; Gustaffson and Cless the 2 internal). The compensation committee is made up of all externals. In total, insiders hold just over 4.5% of shares outstanding.
What are some arguments for investing in this company?
• Having such a large installed base of printers and equipment the company will continue to benefit from recurring sales.
• Geographic diversity gives some protection from tough economic conditions; significant growth expected in emerging economies over the coming years.
• The entire RFID market is projected to be $12.7 billion in 2015, up from $5.6 billion in 2010, Zebra will get their share.
Is there a bottom line here?
The company has strategic alliances with IBM, Motorola, Oracle and SAP among others. In fact they work with about 90% of all global Fortune 500 companies, so they are a known name and already integrated into many systems. While switching costs may not necessarily be high for companies, it could be troublesome enough for them to want to avoid doing it, especially if they already have an established relationship with a company like Zebra.
To date the company has sold more than 9 million printers. This is important as they benefit substantially from the recurring sales of the higher margin printing supplies to the tune of about 20% of total revenue. While ZES is yet to be profitable, the expectation is that it will as it becomes more established. Operating margins over the past four years have suffered mainly due to getting ZES up and running. While management doesn’t expect 2011 to be the breakeven year for ZES, they do expect it to come around. [more]
Here's a pretty interesting interactive map showing the billions in unemployment paid in error: [more]
Picking up where we left off last week, here is tendency #25 in Charlie Munger’s take on the psychology of human misjudgment from Poor Charlie’s Almanack. This concludes the series. I hope you’ve gotten as much out of it as I have.
Tendency #25 – Lollapalooza Tendency
Munger’s simple description here is “The tendency to get extreme consequences from confluences of psychological tendencies acting in favor of a particular outcome.” So when we have multiple factors, biases or tendencies working together toward the same end, those results tend to be huge.
The flight of the airplane is a good example of the lollapalooza effect. Many things have to come together for an airplane to take flight. It’s not just the propeller or jet engine turning. Remember Bernoulli’s principle? The design of the plane along with many other factors needs to come together for a plane to take flight. No doubt the Wright brothers witnessed the power of lollapalooza effects that fateful day at Kitty Hawk.
What’s an example of a lollapalooza effect in the investing world? The many forces that worked together to drag our financial system into the greatest crisis since the Great Depression maybe? Big banks became oblivious to the junk they held on their balance sheets and by the time they realized that what they had wasn’t worth what they thought it was it was too late. They were forced to take dramatic write-downs on their balance sheets, cut dividends and raise more capital from investors all in the hope that they could stay afloat. Consequently many banks are no longer with us. And while many actually passed the federally mandated stress tests to determine what they could withstand in the event of another economic crisis (I think they had a little help there), now banks with $50 billion in total assets or more like Bank of America, Wells Fargo and Citigroup to name a few are being required to develop “living wills” in order to show how they could be liquidated in a timely fashion so as not to present a greater risk to our country’s (and to an extent the world’s) financial system.
Google is another good example. As search began to take hold in our Internet age, it was the founders of Google who came up with a superior algorithm designed to yield large quantities of quality information and fast. But it didn’t stop there. This search technology led the company to later go public which enabled them to expand their offerings and develop new products and technologies. Today Google has a hand seemingly in almost everything we do and there’s no sign it’s slowing down either. From advertising to productivity tools and enterprise products Google continues to innovate and grow more relevant each and every day.
As investors it’s a good idea to keep an eye out for companies that have a hold on something special. Heck it’s also worth paying attention when something just doesn’t seem right either. I remember my days as a mortgage loan officer back in 2001-2002 and thinking that giving this money away was just too easy; something just didn’t add up. I guess I was on to something there.
Check out my latest addition to the portfolio; it’s sure to get the blood pumping: http://bit.ly/ra07Jh
This is why Munger thinks hate creates opportunity: http://bit.ly/pUTWxZ
Well it was another ass-kicker of a week, but the Motley portfolio is still hanging in there. As of market close 9/8/2011 the Motley portfolio's returns stood at 4.04% versus Mr. Market's 1.09% for a spread of 2.95% which is a little better than the 2.8% from a week ago.
We'll just keep on keepin' on.
Straight from the Onion
The headline just made me laugh: http://onion.com/rcZTV9
As an added bonus, this one really does seem like it would be straight out of the Onion, but it’s apparently the real deal. Guess he really was hungry: http://cbsloc.al/pPeXwl [more]
You can check it out here: [more]
Picking up where we left off last week, here is tendency #24 in Charlie Munger’s take on the psychology of human misjudgment from Poor Charlie’s Almanack.
Tendency #24 – Reason-Respecting Tendency
The desire to learn is in our blood. Sure it may be stronger in some than in others, but I think we are born with that hardwired curiosity that grows as we do. Think about children for example. One of the first words they learn to use and communicate with their parents is “Why?” To be sure this seems to be the only word they know for some time as they ask it in regard to everything.
A critical component of this tendency is to lay out the reasons for doing something. Instead of just asking (or telling) someone to do something, there needs to be an understanding of what needs to be done and why it needs to be done. There can be no doubt that the effective communication of why things need to be done can teach both parties involved in the transaction, but particularly the recipient of the orders being given.
Munger refers to a designer of oil refineries and his rule of telling who was to do what, where, when and why in his work. The obvious goal here was effective communication. What’s better is when recipients receive this kind of reasoning, they learn more effectively about what it is they’re doing.
But remember that this sword cuts both ways and while mindless communication of meaningless and/or incorrect reasoning can increase compliance with one’s orders or requests, it won’t generate the same kind of learning and ultimately results in more questions and sub-optimal performance.
As an investor I want management that communicates effectively. Whether it’s an earnings call, a press release or an interview I want to be able to wrap my head around what they’re saying without having to jump over the moon to do it. I also want to invest in businesses I understand and want to follow. If we can check these two boxes on the hunt for great investments, the chances for success are bound to improve. And I can respect that.
This should all look familiar; I am giving the tendencies some context by throwing in some companies. Here are the first two:
Tendency 1: http://bit.ly/qPSdJn
Tendency 2: http://bit.ly/qNN8nR
Another week and another report. Looks like Thursday was a bit of a kicker, but the Motley portfolio is still looking down on the market. As of market close on 9/1/2011 it has returned 5.51% versus the market's mean comeback of 2.71% which means that we are still beating the market by 2.8%. So last week was up 3.89% on the market and this week up 2.8%; a loss of over a full point, but no worries. We've got some great companies in the portfolio and I have a few more ready to go soon.
The market's losses will be my gains.
St. Jude Medical
St. Jude gets the nod for their migraine device in Europe. While the FDA wants more data for approval here, this certainly doesn’t hurt the cause. Especially considering it’s a potential $1 billion market opportunity: http://reut.rs/p5YUZi
Straight from the Onion
Has it come to this?: http://onion.com/oG8Odq [more]
Here's the link to uneployment rates for each state for July 2011: [more]