Wednesday, June 29, 2005

Why I like Getty Images (GYI)

I first found out about Getty about 3 years ago from Value Line but I've never held a position here. I find the Getty situation exciting for many reasons, but first let's start with a profile from Yahoo Finance:
Getty Images, Inc. provides imagery and related services to businesses worldwide. The company offers a range of visual content, including creative or stock imagery that include still and moving images; editorial photography, which comprises news, sports, entertainment, and archival imagery; illustrations; and related services. It also provides assignment services, such as photographing executives for an annual report, producing product shots for a brochure, and documenting a news event. The company serves various customers, including creative customers, such as advertising and design agencies; editorial customers that include publishing and media companies; corporate customers, such as in-house advertising groups and corporate marketing departments; and film customers, including film and broadcast production companies in approximately 100 counties. Getty Images provides products through its Website, company-operated offices, and a network of delegates. The company was founded by Mark Getty and Jonathan Klein in 1995, and is headquartered in Seattle, Washington. Getty Images, Inc. acquired Digital Vision Limited in April 2005.

Getty trades around $74, had 2004 revenues of $622 million and EPS of $1.74. Market cap is about $4.5B.

What I like:

Advertising $ moving toward images--especially on the Internet

GYI is top player with only a few competitors (Corbis, private and about 1/4 GYI's size plus JUPM on the low end)

The "off the shelf" stock images that GYI provides are less expensive for an advertiser (or ad agency) to purchase than just shooting the images themselves.

Right now, GYI is a USA and W Europe operator. Co. just made an acq. to expand presence in Japan. Other Asian countries will be penetrated over next several years.

Operating margins are fat and getting fatter--2004 at 27% and 2005 should cross 30%. GM's around 80% in quick growing Royalty Free (acquirer of image can use it as much as he wants) and Editorial Imagery segments. Biggest segment for GYI right now is Rights Managed (can use image with restrictions) with less favorable margins. However, GM and OM should skew higher for entire co. as Royalty Free and Editorial grow over the med. term in low teens and Rights Managed grows at upper single digits.

GYI is involved in selling moving images online. Topline here could grow 20% + over next few years.

FCF in 2005 should be about 130% of 2005 Net Income. That makes the steep PE a little easier to digest.

GYI is working hard to make site easier to use -- drives increased traffic, increased spend/visit--operating expense savings here.

GYI acquired a co. called ImageNet that manages digital assets. Idea is that co's that already have GYI images in their library could use GYI software for management of these images. Might be a way to better lock a customer into Getty offerings.

Co. expects to put 1-3% in price increases each year.

The bigger GYI becomes (co. adds thousands and thousands of images to site), the more indispensible they become to their existing base plus they're able to tap into new markets.

Very low capex requirements--GYI should spend ~$40M or so in 2005 on $700M+ revs.

All in all, over the medium term, I think GYI is a low teens grower (maybe 11% volumes, 3% pricing) with substantial operating leverage. Assuming GYI can get to $3 FCF/share in 2006, I'd be willing to pay 20x that number, or around $60/share. We'll see if we get there.

Risks:
US, W European ad markets could slow substantially

Corbis makes inroads, Jupiter Media steals share on the low-end

GYI is expensive. Any miss and they'd be punished severely

Integration risk that comes with number of acquisitions

Tuesday, June 28, 2005

digging into Sears Holding (SHLD)

(Disclosure: I am short SHLD)

Of all the research that I'm able to access, I think the highest quality comes from Bear Stearns. That's why I was particularly interested in their recent initiation of SHLD at outperform (TP $169). Though I disagree with their conclusions, they've done an excellent job at bringing up key issues and data points that longs and shorts need to consider. I'll refer to several of these issues in this post and will also touch on some of the points made by Morgan Stanley (initiated at underperform).

BS brings up the issue of "Expanding Distribution Points of Key Hardlines Brands." The idea here is that Sears brands like Kenmore, Die Hard and Craftsman will be sold in K-Mart stores and Sears Essentials/Grand stores (off-mall formats). Sears has been getting hit hard in hardlines in recent years particularly from HD and LOW. Maybe if these key brands are off-mall, SHLD can recapture some share. The main problem with this is cannabilization. Suppose I am in the market for some Craftsman tools. Also suppose that a brand new Sears Essentials store opened a mile from my house and a Sears mall-based location is 3 miles from my house. Hooray! I can cut down on my drive and pick up my tool set at Sears Essentials (and not Sears mall). But I'm not going to buy an additional tool set from Sears at the mall anytime soon. I think this cannabilization effect could be very harmful to SHLD.

BS mentions that Sears and KMart systems are lousy. Inventory management, merchandise planning, logistics, supply chain systems all need to be improved. These systems at Sears and KMart are nowhere near as sophisticated as TGT or WMT. It seems that SHLD will more or less live with these problems (and continue to lose ground to comp.) and go on with 2 sep. groups of systems as opposed to the massive, costly, complicated systems upgrade and integration project.

One issue that I found very interesting is the fact that pricing on consummables (e.g. detergent, paper towels, cereal) at KMart is up to 20% more expensive (on the same item) vs. WMT or TGT. This is significant in that consummables will be ~15% of Sears Essentials merch. Will an increasingly savvy consumer stand for this or will she pick up some tp with her treadmill? SHLD is really trying to pick up some GM here, but if they hold the line on pricing, they will put their store traffic numbers at risk.

MS feels that SHLD could sell maybe 30 S mall stores each year at an avg. price around $55/sq ft. BS also feels that SHLD divestitures of S mall stores would take time (200-300 at once would flood the market with supply and crush pricing) but they lean more towards $100/sq. ft. Regardless of which number you wish to use, the question is "Who will buy these S mall stores?" BS thinks WMT, TGT and COST are candidates (esp. TGT) but these are all primarily off-mall retailers. BBY, BBBY, HD, LOW and LIN are seen as maybes but I see the probability here as low.

Some stats from BS on real-estate overlap (pot. for closures, re-formats)
KMART has 50% of stores within 5 mi of S and 87% within 10 mi
S has 57% of stores within 5 mi of Kmart and 83% within 10 mi

Both MS and BS see the $500 million cost synergy number as conservative ($1B is a possiblity)

BS paid a visit to a re-designed KMart store (pre-merger) and came away extremely impressed (better lighting, organization, signage) but these redesigns cost money -- money that Chairman Eddie does not want to spend. The op. margin expansion story does make sense to me (fire a bunch of people and cut back advertising expense) but I don't think the sales impact to issues like poorly org. stores, little adv., loss of people talent, outdated systems, reduced capex get enough attention. BS is looking for between 0.3% and 0.8% total sales growth in the next 3 yrs. at SHLD. I really don't know how that can happen.

the latest from Mr. Roach and Mr. Gross

Sunday, June 26, 2005

Legg Mason comments on IGT partnership (Intelligent Table System)

Under the terms of the agreement, SHFL will provide its automatic card shufflers, intelligent card reading shoes plus chip sorters and verifiers. Progressive Gaming will contribute its RFID technology in bet recognition, gaming tracking and payoff recognition and IGT will provide the back-end table management system consisting of player tracking, loyalty and rewards.

IGT will acquire 50% of SHFL RFID patents for $10.5 million now and $4.9 million more in 2007. IGT considering investment into Progressive.

Legg Mason mentions that the co's think this ITS will rival ticket-in-ticket-out technology in terms of its impact on the casino floor.

LM also feels Progressive might be an IGT target down the road.

I always like to find out when I'm being lied to

Lie #1 is particularly interesting. Japan's holdings of US Treasuries have fallen in recent months and Chinese holdings have only edged higher.

a new storm watch update

is available from Jim Puplava called "The Core Rate"

Paul Kasriel discusses

Gold price strength in euros and dollars

Stephen Roach takes on the housing bubble

See From Bubble to Bubble

"The US is very much in control of its own destiny insofar as coping with the excesses in asset markets. In that important respect, America’s equity and property bubbles have one key ingredient in common: The principal blame for both bubbles, in my view, lies with the Federal Reserve."

we'll be back right after these words

You might have noticed that I've started to put some ads up on this site. These should all be off to the right and hopefully unobtrusive. Basically, if you click on any of these ads and buy something from any of these companies, I get a cut of the proceeds. I have had positive experiences with all of these companies (ex-NILE) and I'll give you a quick rundown here.

Value Line has a couple of different services but the one's that I'm familiar with are the Value Line Timeliness rankings and Special Situations. VL has a pretty enviable long-term track record and I've come up with a few good stock ideas from their services.

Netflix is the online DVD movie rental company. I've been a subscriber for maybe six months. I love it. I find Netflix especially strong in older obscure movies, independents, documentaries, tv series, and foreign films. The website is easy to use and the turnaround time on movies is quick.

Two family members have Bose Wave Radios and I'm pretty impressed with the sound that comes out of the little box. The headphones that I have listed would also be a perfect way to get lost in "Fake Plastic Trees," for example.

I use 123 inkjets to replace the ink cartridges in my HP deskjet printer. I pay about half for the generic HP cartridge compared to what I've seen at Office Max/Depot. The co. offers free shipping and plenty of promotions. As far as quality of the printed page, I would say that 123's printed page is 90% as good as an HP produced page. I think the number of pages per cartridge stat is pretty similar between HP and the generic I get from 123.

I haven't bought anything from Blue Nile but I think their value propositon is so strong that if you are in the market for a jewelry purchase, it makes sense to visit the site to have a look around.

Thursday, June 23, 2005

Jeff Matthews

runs a hedge fund and has a blog over at jeffmatthewsisnotmakingthisup. It's pretty entertaining. I especially like how he tears into the king of overpromising and underdelivering, CEO Patrick Byrne of overstock.com.

Firefox vs. Internet Explorer

I just noticed that my blog kind of looks like crap in IE. I built this site with Firefox as my browser and that's what I use when I cruise around the net. Not just for my blog, but you should check out what Firefox has to offer.

today's action

Good to see some of my short's gettin' beat up a bit today (OATS and MSO especially). SHLD was also off a bit today despite another strong broker initiation (outperform at CSFB). Thestreet.com put out a 3 page piece on this move today. Note that arrogant boob, Jim Cramer, who is associated with thestreet.com, has been touting SHLD for the past couple of weeks. So I'm not surprised to see a bullish piece there. Where's my 3 page piece covering Morgan Stanley's underperform initiation?

taking Danone off the radar screen

The Minorities portion of the business is too big a black hole for me to move confidently into this name (Groupe Danone (DA)). Still hoping for a sub-60 Wrigley, though.

Matt Simmons is all over the web

Here's an excerpt from his book, "Twilight in the Desert."

new post from TSS

Mark Rostenko is always worth your 5 minutes.

"Energy isn't a discretionary expenditure. You buy it or you learn to enjoy your new home under the viaduct."

Paul Kasriel tries to explain

what our flattening yield curve indicates.

Tuesday, June 21, 2005

2 moves today

I guess if it's overpriced at $10 and $11, it's also overpriced at $12. I decided to add to my short position in OATS today right around $12. I also picked up a few more Dec '05 MSO puts as MSO stock briefly touched $30.

Speaking of OATS, I read a note from Adams Harkness about their store-within-a-store concept that they are testing with Stop & Shop. OATS basically operates a small section of natural foods and nutritional supplements within a larger conventional grocery store. But Stop and Shop hasn't given up anything in this deal in terms of overlapping merchandise. AH points out, for example, that a $12 multivitamin is located in its typical isle in Stop and Shop and a $20 OATS multivitamin is offered in the special OATS section. I think that most people, with both price points available, will opt to save the $8. AH thinks that much needs to be done to make this concept work.

couple of IGT items

It's been a long time, but IGT is back above $30.

Positive developments out of Broward County (FL)

I have to look at this more carefully, but the analysts seem to like this partnership between IGT, Shuffle Master and Progressive.

The AP reports on slot growth in Macau.

Monday, June 20, 2005

background on Groupe Danone (DA)

(Much of the data below is taken directly from DA's 2004 annual report)

From my brief review of Danone, I like what I've discovered. DA is a French food giant that operates primarily in 3 segments: Dairy (51% of sales), Beverages (25%) and Biscuits & Cereal(22%). By region, sales are divided into Europe (68%), Asia (15%) and ROW (17%). The biscuits business has been a bit of a laggard, but I think the co. has ample opportunities to push DA dairy and beverages in the developing world (Asia, Middle East, Africa, Central and E Europe, Lat Am). Here are some highlights:

Like-to-like sales growth has ranged from 5-8% over the past 6 years. Not bad for a 13.7B euro co.

Operating margins have expanded for 10 consecutive years (12.4% in 2004). This is impressive due to weak performance of late in France plus having to deal with general commodity cost pressures (oil-PET).

Beverages (+7% like to like) and Dairy (+10.5% LTL) are growing quickly and have op. margins above the corp. avg.

Within Dairy, Danone cites Latin America (sales up 22%) and central Europe (+25%). Admittedly, this is off a small base, but it's still encouraging. DA also mentions an organic yogurt co. they bought called Stonyfield in 2003 to satisfy the discerning American consumer.

In Beverages, sales to Asia were up 14% (strength in China, Indonesia). France has been weak and PET costs/exchange rates have been worries here. 80% of beverages is Still Water.

Biscuits has been struggling. Co. takes a decentralized approach due to different customs/likes in the countries where it operates.

DA is a low beta, defensive type name (0.3 beta, 1.9% div yield) that isn't terribly expensive (about 16x '05 ests.)

DA is trying to focus on its 3 core areas. Just today, DA announced the sale of a sauces division to Heinz. The co. is also not afraid to go into JV's or partnerships with co.'s that don't want to or can't sell outright to DA (usually in emerging markets). DA does hope to consolidate many of these partnersips over time, but these minority interests do present a bit of a chore to evaluate.

Here are a few market opportunity data points to consider:

Per capita consumption of fresh dairy products in kg/yr:
W Europe 25
E Europe 5
NA 15
LatAm 4
Asia 2
MidEast 1

Per capita consumption of bottled water in l/yr
W Europe 101
E Europe 22
NA 69
Lat Am 52 (many Mexicans don't trust the tap)
Asia 9
MidEast 10

Per capita consumption of biscuits and cereal products (kg/yr)
W Europe 6
E Europe 3
NA 9
Lat Am 4
Asia 0.8
MidEast 0.4

Pretty interesting stats, eh?

One last point before I go. DA's payout ratio has pretty much been at 37% over the past 5 years. This could be a source of some supplemental return.

Saturday, June 18, 2005

another interview from Matt Simmons

if you're interested.

Plus, here is an article from someone bearish on energy, Andy Xie of Morgan Stanley. I read Andy's stuff frequently and find him to be an insightful Asian analyst. Plus I think he's right when he says that Chinese demand growth could slow. But I can't buy this:

"As energy producers step up production from alternative energy sources...oil prices could stay depressed for many years when the current economic cycle turns down," he said.

Mr. Roach

on the challenges facing China's policy makers.

VITA gets a takeover offer

I had already profiled Orthovita (VITA) as a small-cap ortho name that I would like to get into in the $2.70 range. Shares were then around $3. Guess that's not going to happen. ANPI, which owns 11%+ of VITA shares offered $4.50/share in May and the VITA board said "no way." Shares have promtly rallied to about $4. This offer (and subsequent rejection) is obviously a huge factor to consider in setting an entry price. This is something I'll have to think about because I like the story so much. Maybe the $3.70's?

another AP article on Sears Holdings

discusses the Sears Essentials format.

Prudential recently met with XTO management

Here are some highlights:

Pru feels XTO should be able to grow production 10-12% over the next 3-4 years.

Oil service and equipment costs are up 10-15% in 2005 for E&P industry. XTO is able to weather this better than most due to low-cost structure.

East Texas/Freestone is most important operational area for co. 49% of 2005 drilling budget allocated there. Will drill 250-300 wells here this year. Inventory of 1100-1300 drilling locations in the region.

some keys to strong FCF generation for XTO:
  • decline rate of portfolio of fields is slow
  • large inventory of promising projects
  • low F&D costs

Exactly

S&P on Martha Stewart (MSO):

Martha Stewart Living : Reiterates 2 STARS (sell) Analyst: Gary McDaniel

Martha Stewart Living shares have risen 43% since the current upswing began on May 5. Although the company has raised the advertising outlook for its flagship twice since that date, we note that even if company expectations for a 40% increase in ad pages are realized, they would still be down 25% from 2003's levels and 49% from 2002, before Stewart's legal problems began. In 2001, Martha Stewart's peak earnings performance, the company earned just 45 cents per share. Martha Stewart is now trading at 65 times that peak, 50 times our 2007 earnings per share estimate, and 7.2 times our 2006 revenue estimate. At current share price, we would sell Martha Stewart.

Thursday, June 16, 2005

Charlie Munger is Buffet's right hand man

Here is the transcript of a speech he gave to USC grads a few years ago.

(thanks to the Kirk Report)

a move, a couple more to think about

I closed out my position on Asta Funding today at $29.01. I think the risk/reward is much more balanced at this level. I'm happy with the return though. Went long here at $19.90ish a few months ago.

SHLD has bounced back a bit over the past few sessions. Today's move was largely driven by a positive initiation by Bear Stearns. From the AP report at least, not much new seems to be stated in relation to the bull case.

Also, Martha Stewart (MSO) has been on a roll of late. I'll likely go long some more Dec puts ($35 strike) if shares hit $30.

Tuesday, June 14, 2005

on oil and DA

I'm somewhat surprised to see oil checking in at $55/barrel. I had earlier hypothesized that we might see the low $40's over the next several months. Despite the fact that we're 27% above $40, I still think we can get down in that range by year end. I see this primarily as demand driven. I expect demand from the U.S. and Asia to slow in the 2H. I don't see any sudden glut of supply coming on line to push prices lower. But because I see this as a short-term possibility (the supply picture will only get worse over the next 5 years, demand increases from the developed world will continue at modest rates and at upper single digit to double digit rates in the developing world), I'm hoping that such a scenario plays out. Again my favorite E&P's are APA (currently long) and XTO and my favorite service names are BJS and BHI.

Wrigley continues to be one my favorite food name on my watch list, but to be long here, you certainly have to pay up. Jim Jubak at MSN profiled another food/beverage stock (ADR) that caught my eye last week--Groupe Danone. Here's what he had to say:

"Groupe Danone (DA, news, msgs) is projected to grow even faster than Nestle, 11% annually over the next five years, and it's almost as cheap with a price-to-earnings ratio of just 17.3 times projected 2005 earnings.

U.S. consumers know the company because of its yogurt brand, and the company's fresh dairy division makes up 47% of sales. But the real growth engine, and a reason that this company may be a buyout target not too far down the road, is its water business (27% of sales). In 2001, it became the global leader in bottled water sales, and the company is far and away the dominant bottled water company in its home market of France with a 60% market share.

But growth in 2004 and the future comes from Latin America and Asia. In 2004, the company's bottled water sales soared 30% in Mexico, for example, and climbed 14% in Asia, where the company's main markets are China and Indonesia. In the first quarter, a strong euro knocked about 1.2 percentage points off the company's 5.1% growth rate, according to management. A weak euro should turn subtraction into addition for the next quarter or two. Our StockScouter doesn't rate this stock."

I'll do some more digging here, but I like the LatAm, Asia opportunites and the water segment. DA is a low beta name and has a div. yield of about 2%. Here's a link to their most recent annual report (2004)

Marshall Aeurback's Int'l Perpective

This week he tackles "Endgame for Fiat Currencies?" Over the past few years, we've seen gold rally in the face of a weak dollar. I'm happy to see gold continuing to hang tough even as the dollar strengthens (vs. the euro).

Monday, June 13, 2005

the controversial Matt Simmons

gives an interview over here. I found this link at the Land of Black Gold site.

the last 2 essays from Mr. Roach at Morgan Stanley

the latest from Paul Kasriel

Despite some of the articles I've come across recently and despite what Greenspan has said, I've always believed one of the best predictors of recessions was an inverted yield curve. Here's Kasriel's take on the issue.

Also, in the NTRS Economic Outlook for June, Kasriel thinks it should be 1 (or maybe 2) and done for FFR hikes.

Thursday, June 09, 2005

exercising caution on RSTO

Restoration Hardware insider Glenn Krevlin has made some pretty decent sized purchases of RSTO stock lately at $7.10-$7.15. Despite my negative stance on the co., I'm not willing to bet against Glenn by going short at $8. I'll take a closer look in the $8.75-$9.00 range.

Tuesday, June 07, 2005

a few notes on RSTO

Roth Capital, who are some of the most bullish analysts around, had a few interesting things to say about RSTO (Roth is neutral on the shares). Basically, Roth talks about execution risk regarding plans for the rest of the year. I'm still looking to short in the 8's. The shares moved a lot today, getting into the 7.60's at one point so the 8's aren't too far off. Here are Roth's main points:

Remodeling and refixturing 90% of its store base over the next two months at a cost of $15 million

Co. is re-merchandising all of it's core categories

Systems overhaul. 1st system rolled out in mid FY06

Re-launch of the website and new look to the catalog

New Concept--Co. hired a SVP from WSM's West Elm concept

Clearly, the above speak to the challenges RSTO faces over the next year.

SHLD news

Sears Holding reported this morning and investors were apparently disappointed with what they read sending shares down over 13 points. I didn't pick up too much from the report. The co. performed about as poorly as I thought they would. Here are a few notes from the 10K:

  • Consolidated results for the Q include only 5 weeks of Sears' results and 9 days of Sears Canada results due to the timing of the merger
  • 1st quarter initiatives
    • launching new off-mall format called Sears Essentials--described as mid-size offering customers "best of both" (everyday needs and destination focused purchases)
    • 10 SE stores open now, 400 KMart's will be converted into SE format by 2007 year end.
    • launching Sears private label brands (Craftsman, Kenmore) into 8 KMart stores, continuing to evaluate putting KMart brands into Sears locations
  • Segment data--KMart
    • comp sales down 3.7%, total sales down 2.4% QoQ. GM's flat. SG&A up 30bp if you take out the $3 million employee term. charge
  • Sears had total sales up 0.5% and comps down 3.1% QoQ, GM up 130bp.
  • Sears Canada had total sales up 6.2% but this was due mostly to favorable foreign currency movements. 120bp decline in GM%.

Marshall Aeurback is always worth a look

Here he takes on Europe. I particularly like this section:

What to do in that sort of context? In the past we have described the problems of the US economy ad nauseum. We have also highlighted the problems of the yen and the structural problems inherent in the existing European Monetary Union. Although the euro zone as a whole suffers less from the debt disease prevalent in both the US and Japan, it has largely “earned” its spurs on the foreign exchange markets as a consequence of being the least bad major paper currency alternative. Its acceptance has, until recently, continued unabated, largely by virtue of not being the dollar, as opposed to any intrinsic merits.

article from another energy expert

Henry Groppe talks about his forecast here.

Monday, June 06, 2005

latest from the Mogambo and Roach

The Mogambo covers the usual subjects (sometimes humorously) and Mr. Roach discusses "global labor arbitrage", "global price arbitrage" and "global saving arbitrage" in his essay.

the AP put out an article on SHLD

discussing the integration of Sears and KMart brands. Also, apparently SHLD will get around to reporting this week.

Saturday, June 04, 2005

Roach discusses

the U.S. dollar and Andy Xie talks about U.S. protectionist folly.

Russian oil production

could stagnate according to this post which cites a WSJ article from Friday.

an online retailer worth a look--Blue Nile (NILE)

Blue Nile is a name that I've followed for about the past year. NILE is a leading online provider of high quality diamonds and jewelry. FY05 sales are estimated at about $210 million (+24% YOY). At Friday's close of $28.90, market cap=$510 million.

The Negatives, risk factors, things to watch out for:
  • offline jewelry retailers are well-established. Names like Tiffany and Zales come to mind. There are also thousands of small independent offline retailiers. And, though they target a different segment of the market, online players like amazon.com and overstock.com sell diamonds and jewelry online.
  • AOV's for NILE are over $1000. This requires a different level of comfort with the internet channel than, say, a purchase of a cd at Amazon.
  • Improvements in synthetic diamonds. If consumers opt for synthetics in a meaningful way, it would seriously disrupt the diamond industry.
  • Not exactly cheap, about 40X the 2005 consensus EPS number.
  • Economic weakness in the U.S., a slowdown in consumer spending.
The Positives:

First some background info. NILE has 3 main segments: diamond engagement rings & loose stones (~74% of sales), non-engagement diamond jewelry (~17%) and non-diamond jewelry and watches (~10%). The core diamond engagement market in the U.S. is a $4.5B opportunity, so NILE's penetration here is around 3%. The overall diamond jewelry market in the U.S. is about $23.5B (includes the $4.5B) and the overall jewelry market in the U.S. is at $53.5B (includes the 4.5B and 23.5B). So, in each of these 3 segments, NILE has plenty of room to steal some share.

  • Lower Pricing--Diamond engagement prices are typically 30-40% less than what you would find offline. Yes, this means GM% takes a hit but NILE has nowhere near the 30-40% SGA expense that offline jewelers have.
  • Selection-NILE has more than 60,000 certified diamonds on its site, something an offline retailer can't touch.
  • Eductaion--NILE wins when the customer becomes educated about what he/she is buying. Co. does a great job at giving customer the tools to make an informed decision.
  • Customization--NILE offers a very-user friendly and powerful customization option on its site.
  • Free Shipping and Unconditional 30 day return option.
  • Supplier relationships--This is huge. NILE has exclusive relationships with diamond suppliers through 2008-9 that allow the co. to display the thousands and thousands of diamonds on their site without actually holding the inventory. This is positive from a online users perspective (more to choose from) but also does wonders for NILE's FCF generation.
  • The non-diamond jewelry and watches segment is growing faster than the overall business. GM% is higher here and the market opportunity, as mentioned, is enormous.
  • International expansion--The co. is working to expand ops in Canada and the UK. We'll know more about these opportunities in late '05 and into 2006.
  • Diamond pricing could improve--Diamonds, like most hard assets, have been on a tear over the past couple of years. And, because of their model, NILE feels this pain immediately vs. the lag that offline retailers experience. Should diamond prices stabilize or decline, NILE would enjoy the benefits more quickly than offline retailers.
  • FCF machine--Because NILE does not hold much inventory (they still hold non-diamond jewelry, settings and some diamonds) and capex is light, FCF growth is strong. If you look at the co's most recent 10k, you can see what I mean. From '03 to '04, sales were up 31%, operating income was up 32% and FCF (OCF less Purchases of Prop & Equipment) was up 74%.
I obviously like the NILE story quite a bit and do believe they are capable of 20% annual topline growth over the next five years with even stronger FCF growth. I like buying quality cheap, though, so I'll wait for $23 or $24 (if we get there) to get more interested.

Thursday, June 02, 2005

Stephen Roach is a bond bull?

This post from Mr. Roach certainly came as a surprise. Also, check out Joachim Fels' article on what "no" votes will mean for Europe.