RSP Annual Review Part I
After much deliberation, I've decided on a format where I can address each company in the portfolio in the context of three things I like (Hits) and something that is worth keeping an eye on (Miss). This seems to offer the most efficient way to get the relevant info across while also opening the forum up for any additional ideas or points that I most certainly have missed. It seems like the best way to do this is to tackle four at a time. It should spread nicely across the rest of the month.
I am still thinking about trying out a video format where I try to nail each one in about a minute take so it's not too brutal for the viewer. But I'll have to see if I can really get that down. For now, I present part one of my annual review.
Activision Blizzard (Nasdaq: ATVI)
• By far and away the worldwide leader in video games. Franchises in Call of Duty and World of Warcraft continue to grow followings and I believe they have abnormal life spans due to the superior nature of the content and lack of compelling substitutes.
• I’m also excited about going beyond the gaming dynamic. Management has said on more than one occasion that a movie experience was in the works for World of Warcraft; something with potential 3D or IMAX dynamics involved. I think we are looking at an entertainment company.
• The continued move to digital distribution is huge. Improves the company’s cost structure, offers better margins, makes them more profitable, less dependent on retailers, and opens up to gamers who might not have access otherwise.
• They will need to focus on new content in order to grow and maintain subscriber base. World of Warcraft subscribers have been flat to down recently which is concerning. The potential of Call of Duty to MMORPG will be huge. Skylanders Spyro Adventure is a new game out for the holiday that is receiving excellent reviews.
Ameris Bancorp (Nasdaq: ABCB)
• The bank continues to maintain healthy capital ratios in a time where big banks can’t stay out of the headlines. Net interest margin is improving which means the bank is becoming more profitable. Tangible book value at the end of 2010 was $9.32; today it’s $10.35.
• They have completed eight FDIC-assisted transactions (acquisitions) incorporating seized banks into their operations. I consider this a strong signal that the FDIC sees Ameris as a part of the solution, not part of the problem.
• The balance sheet continues to improve. Total assets now stand at $3 billion versus $2.4 billion when I added it to the portfolio. Total deposits now at $2.63 billion versus $2.1 billion at the same time.
• On a macro level banking is still having a tough go of it. It will be especially interesting to see the long-term effects of the Dodd Frank legislation on smaller banks. It could certainly drive the cost of doing business up. I am still hoping to see them reinstate the dividend, but understand why they are exercising caution.
Houston Wire and Cable Co. (Nasdaq: HWCC)
• Numbers continue to improve; record revenue, margins are up, net income is up and they continue to pay a modest dividend.
• The company continues to gain market share with their exceptional national distribution network. They added 70 new customers during the most recent quarter, bringing the total to over 200 new relationships during the first nine months of 2011.
• The target markets still remain intact. Infrastructure, utilities and industrials offer more than $250 billion in opportunity over the coming years with the majority of that falling in the broader industrials.
• Management recognizes that current end markets look less "robust" than they initially were hoping for. No doubt this is due in part to general economic conditions. They also noted that they’re facing a difficult stretch of comparables from project business, so we may be looking at some quarters coming up that don't look as great on a comparables basis.
GulfMark Offshore (NYSE: GLF)
• I really like how their fleet is so mobile. A good example can be seen in when activity in the Gulf of Mexico stopped they have still been able to get vessels down to areas like Trinidad and Suriname for shorter term jobs. True, these jobs are typically not as profitable. But the upside is that it's work and it puts them in a position to relocate quickly if and when they need to.
• Activity in the Gulf is picking up slowly but surely. This is a positive that will contribute to healthier numbers. But the diversity in three segments including the Americas, North Sea and Southeast Asia gives a tremendous amount of global exposure for this small cap company as well.
• We also know where management’s head is at when it comes to the fleet. They are keeping ahead of the curve where technology is concerned making sure they upgrade the fleet appropriately. Also the total average sales price as a percentage of the original cost of the ships is 128%. What this means is that they are selling ships from their fleet for more than they paid for them. A good sign that they take care of their equipment.
• Operating costs have been on the rise, truly tough to predict in this line of work as management has stated. Oil services is a capital intensive business which will always be subject to operating costs and higher operating leverage which can be very good and very bad depending on the circumstance. Either way, I was able to add this one at a very good price which adds to the margin of safety in this case.
I think it goes without saying but I'll say it anyway: I am very happy with these four companies in the portfolio and have no intention of selling any of them in the near future.
Jason (long ATVI and ABCB)