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Adam Levine-Weinberg  

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  • Will Hawaiian Holdings Fly Higher After Earnings? [View article]
    @upatnite2: I guess what I'm saying is that there is a difference between the stock price plummeting and the stock price plummeting for a reason. Based on the price action from the past few days (which was basically driven by the news that HA's margins will "only" expand by a few points this year rather than 8-10 points like many were hoping), I don't think anything terrible would have to happen to HA for the price to keep falling in the short term. (I don't expect it to keep falling, but ultimately I have no idea what will happen in the short run and don't really care.)

    If HA stock falls for no good reason in the short term, that benefits long-term shareholders insofar as the company uses the opportunity to retire convertible debt and/or warrants. Obviously, if something really bad happened to the company from a fundamental perspective, that would be a different story. Even that can be overstated, though.

    For example, a spike in oil prices might send airline stocks tumbling. But these companies have shown in the past couple of years that they can make plenty of money at high fuel prices. And oil has demonstrated in the past 6 months that any price move is temporary and could change on a dime depending on the supply-demand balance and market psychology.
    Feb 4, 2015. 08:40 AM | Likes Like |Link to Comment
  • Will Hawaiian Holdings Fly Higher After Earnings? [View article]
    @upatnite2: The dilution from the convertible notes and warrants increases as the stock rises. The convertible notes are hedged, although I confess that I don't quite understand what happens with those hedges (essentially call options on the stock) as HA starts to buy back convertible debt. One key point, though, is that the hedges offset the dilution from the convertible notes but that impact isn't included in the ongoing diluted share count. When everything settles next year, the hedges should at the very least offset the convertible notes.

    As for the warrants, the strike price is $10. So at $10, there's no dilution. At $15, with net share settlement, only 3.6 million shares get issued. But at $20, 5.5 million shares would be issued; at $30, 7.3 million shares get issued. So if the HA stock price trends lower, the diluted share count growth will reverse. Additionally, I am hoping that HA takes advantage of the lower share price to more aggressively repurchase convertible debt at favorable prices. For long-term shareholders, it actually might be a good thing for the stock to pull back in the short run.

    One other thing: HA does have some extra cash, but it would be dangerous to run the airline with less than $300-$400 million of cash given the volatility of the airline business and significant planned CapEx towards the end of the decade.
    Feb 2, 2015. 11:48 AM | 1 Like Like |Link to Comment
  • Will Hawaiian Holdings Fly Higher After Earnings? [View article]
    I think you all are too focused on the short-term. Hawaiian faced a similar situation in late 2012 with weakening foreign currencies (particularly the yen) and overcapacity to the West Coast -- and at that time it didn't have the benefit of cheaper fuel. The stock "plummeted" from $7 down to the low $5 range by April 2013. Then it quintupled in less than 2 years.

    In other words, this too shall pass. Airlines will re-adjust capacity if routes to Hawaii are performing significantly below the rest of their networks. And when Hawaiiian Airlines gets its A321neos starting in 2017, it will have more of an ability to tweak its own capacity to the West Coast based on demand. In the meantime, HA is still projecting earnings growth/margin expansion in 2015, and it now trades at just 12-13 times trailing earnings.

    Also, HA's fuel hedging losses really aren't that big. It's projected full-year fuel cost is only $0.20 higher than American Airlines' un-hedged projection. So it's probably capturing 80% or more of the drop in oil prices.

    @Dothemathman: You're right that HA is more leveraged than many of its competitors. But its leverage is really quite manageable, and with the company's projected free cash flow for 2015-2016, it should be able to significantly reduce its debt burden in the next 2 years.
    Jan 31, 2015. 03:27 PM | Likes Like |Link to Comment
  • Virgin America: How Not To Update The Market [View article]
    I live on the East Coast, so I can't say I've seen this first-hand, but it seems to me like Virgin America has a very devoted following in San Francisco, and to a lesser extent in LA. United is the only competitor there with real scale (maybe Southwest if you include all the Bay Area airports). Virgin America is much more tech savvy than either of those airlines, which is really important there -- United is still finishing up Wi-Fi installations this year. The first class hard product is also better than anything else offered in the U.S., outside the JFK-SFO/JFK-LAX routes.

    In terms of award redemption, Virgin America has partnerships with several other airlines, so you can use Elevate points to get to popular destinations like Hawaii, London, Australia, Tokyo, Hong Kong, etc. Still far from global, but you're not limited to the continental U.S.

    As for competition, I think Virgin America is being smart by focusing its energy on transcontinental routes and routes to slot/gate constrained airports. For the most part, it's avoiding the short/medium haul routes where competitors like Southwest and Spirit thrive. And the Virgin America amenities (extra space, better IFE, mood lighting, etc.) are more valuable on longer flights.
    Jan 25, 2015. 11:52 AM | Likes Like |Link to Comment
  • Virgin America: How Not To Update The Market [View article]
    @markcc: Virgin America is definitely planning for growth. As you probably know, there are 10 planes coming between the middle of this year and the middle of next year. That's already about 19% growth, assuming that utilization stays flat in the long run. Beyond that, the company plans to grow by leasing A320s (or possibly buying through a small incremental Airbus order) until its A320neos start arriving in 2020. With Airbus churning out 500+ A320 series planes a year, it won't be that hard to find 15-20 extra planes in the 2017-2019 timeframe if the business environment remains solid.

    I do agree that there is substantial buyout potential, and I think JetBlue is the main candidate. I don't expect a deal to happen for a few years, though -- both airlines have other fish to fry. A premium shouldn't be a problem, even if VA is fairly valued on a standalone basis. There would be huge merger synergies: on the revenue side you can bring in a lot of new business by combining a strong East Coast airline with a strong West Coast airline, and on the cost side you can eliminate a lot of overhead, consolidate airport operations, etc.

    Adam
    Jan 23, 2015. 10:30 PM | 2 Likes Like |Link to Comment
  • Virgin America: How Not To Update The Market [View article]
    I don't think the fuel price discrepancy should have been that much of a surprise to the market. In Q3, Virgin America's economic fuel expense was $3.13/gallon vs. $2.87/gallon for Delta, so the gap between the two is essentially unchanged. Delta had about 10-11 cents of benefit from refinery profits in Q4 which is obviously something that Virgin America didn't have. The rest of the difference is probably a combination of hedging philosophy (Virgin America will probably have bigger hedging losses in Q1/Q2 but then much less in the second half of the year) and some systematic differences in fuel costs based on the airports they serve.

    Obviously, it's a bummer that there will be big hedging losses in Q1, and to a lesser extent in Q2. Fortunately, that has no bearing on the long-term value of the company.

    I don't think there would have been much point in Virgin America guiding to Q3 and Q4 fuel costs. It totally depends on where oil prices will be then, and that's anybody's guess!

    Adam
    Jan 23, 2015. 05:24 PM | 2 Likes Like |Link to Comment
  • Amazon.com's (AMZN) Management On Q2 2014 Results - Earnings Call Transcript [View article]
    Amazon isn't generating free cash flow in any meaningful sense of the term. I think this is a mistake that many investors are making.

    Why do investors care about FCF? Because ultimately this is cold hard cash that can be used for acquisitions or returned to shareholders through dividends or share repurchases.

    But Amazon's FCF figure doesn't include non-cash stock compensation, which is currently running at around $1.5 billion a year and steadily increasing. If Amazon paid its incentive compensation in cash rather than in stock, it would have negative FCF.

    To put it another way, if Amazon "returned" all of its FCF to shareholders through buybacks, it would still be diluting shareholders over time. It isn't generating enough cash to cover the cost to shareholders of issuing stock to employees.
    Jul 30, 2014. 04:31 PM | 1 Like Like |Link to Comment
  • Chipotle Mexican Grill: Blurred Quarterly Results And Risks On The Horizon Suggest Overvaluation [View article]
    The flaw in your hypothesis is shown by Chipotle's performance since it went public. It had a very high valuation back then, which was more than borne out by its subsequent earnings growth. Chipotle has far more growth potential than most companies in growth industries.

    In my opinion, the worst case scenario for Chipotle's long-term global unit potential is around 10,000. (About 6 times the current size.) The best case scenario is much higher, comparable to the other top fast food companies like MCD.

    To the author: share repurchases had nothing to do with CMG's earnings beat. The share count was actually higher last quarter than in the year-ago quarter. Furthermore, Chipotle is on pace to produce about $500 million of FCF next year and has more than $1 billion in cash and investments sitting around. It could afford to buy back shares at a much faster rate, and it probably should.

    Additionally, a 2.5% average increase in menu prices for the quarter is not much different than inflation. That rate of menu price inflation is probably sustainable in the long run. In any case, when more than 80% of the comp sales growth came from "organic" growth as you call it, it seems bizarre to point to the price increase as some big red flag.

    FYI, I was very bearish on Chipotle not that long ago. I even shorted it and made some money in 2012. But the recent acceleration in comp sales growth completely changed my mind. I now think Chipotle is destined to be one of the few top fast food companies in the world, not just a niche burrito joint catering to yuppies.
    Jul 22, 2014. 03:15 PM | 2 Likes Like |Link to Comment
  • Netflix: $35 Billion In Revenue Is Attainable By 2024 [View article]
    How do you figure? Reed Hastings is so worried about customer backlash that he isn't willing to impose a 12.5% price increase on customers. Instead, they get at least 2 years at the same price, and then the opportunity to keep the same $7.99 price if they want by dropping down to 1-stream SD.

    It doesn't seem very likely at all after going to the trouble of grandfathering users for 2 years that Netflix will be raising prices again in 2016. And if it raises prices again in 2017 or 2018, ongoing users will probably be grandfathered again at $8.99 (and the current going price in int'l markets). At best, maybe ARPU will be $120 in 2018, so you'd need 150 million subscribers.

    Frankly, that's not a plausible number. 100 million seems very doable based on the recent sub growth pace, and 110 million seems possible but aggressive. Getting to 150 million by 2018 means adding more than 20 million int'l subs per year within a few years. There is nothing in Netflix's history to suggest that is possible.
    Jun 19, 2014. 05:46 PM | 1 Like Like |Link to Comment
  • How Will Apple's Stock Split Impact Its Shareholders? [View article]
    Thanks for the thoughts everybody. I may just roll my options into a strike price that is a multiple of 7 next month rather than deal with these potential liquidity issues.
    Apr 27, 2014. 08:09 AM | Likes Like |Link to Comment
  • How Will Apple's Stock Split Impact Its Shareholders? [View article]
    Anybody know what happens to existing options contracts? E.g. if you own a $500 call option today, would you have 7 $71.43 call options after the split? Would it even be possible to trade such things?
    Apr 26, 2014. 09:47 AM | Likes Like |Link to Comment
  • Amazon Is Wasting Its Time [View article]
    I agree that creating a set-top box doesn't make very much sense -- although perhaps Amazon Instant Video isn't available on every major smart TV?

    However, I don't know where you're getting your information about content. Amazon has been pouring a steadily increasing amount of money into Prime Instant Video. Both of the shows you reference (Downton Abbey and Suits) are still on Prime Instant Video.

    Perhaps you are only looking at the most recent season? Amazon makes new episodes available on a pay-per-view basis right after they air, but the Prime streaming rights generally start something like 6 months after the end of the season. I'm sure the latest season of Downton Abbey will be free for Prime subscribers sometime this summer.
    Apr 3, 2014. 10:05 AM | 1 Like Like |Link to Comment
  • Netflix Is Ready To Buy On Underestimated Market Power [View article]
    I completely agree with the premise that Netflix's ultimate value turns on its ability to raise prices. However, the way that you are running the analysis skews the results in a few ways.

    1) You are building in a full year of subscriber growth despite the price increase. Strong sub growth and a simultaneous price increase will obviously lead to massive margin expansion.

    However, if you agree that the net result of a price increase will be stable subscriber numbers, then you should use the prior year's subscriber total when calculating revenue. In the hypothetical scenario that Netflix had raised prices at the beginning of this year, the proper sub base would be at most 33.4 million (the total number of free and paid subscribers at 12/31/13).

    2) You are calculating revenue using the end of year subscriber total. However, that's just the number of paying subscribers on Dec. 31 -- in a 15% growth scenario, there are significantly fewer paying subscribers earlier in the year. This is inflating your revenue estimate by a few hundred million dollars. I also think Netflix's costs are growing faster than your model allows, but it's hard to know for sure.

    3) Lastly, Netflix's costs won't stop growing just because subscriber growth starts to flatten out. Like Apple, Netflix is likely to see margins surge to a peak and then drop back to a more sustainable level -- at least domestically. (This may be offset by ongoing margin improvement outside the U.S.) Content costs are rising dramatically, and so I think Netflix needs to plan on increasing domestic content spend by at least 15% annually for the foreseeable future just to maintain the current quality of the content library, let alone improving it.

    Best,
    Adam
    Mar 26, 2014. 10:59 AM | Likes Like |Link to Comment
  • American Airlines: Expanding Network In China And Modifying Its Fleets [View article]
    I didn't say it was a mistake. I said it was necessary to expand the network and win corporate travelers over time. However, it's very normal for new airline routes to take a year or two to reach profitability, and I don't think this one will be any different.

    American's unit cost (CASM) was a little over $0.13 last year, excluding special items. For a long-haul transpacific flight like Hong Kong, the unit cost would be lower: maybe $0.11. (Obviously, that's just an estimate, but I think it's a reasonable one.) This summer, flights are selling for around $1600 roundtrip: that's a little under $0.10 in PRASM. Move forward to September and the fare is around $1200 roundtrip: down to 7.5 cents.

    Obviously there are some people who buy refundable tickets, and some who will buy a business class or first class ticket. And there is some cargo revenue, but that's a small fraction of the total revenue for any flight. (Airline capacity between the U.S. and Asia has been rising rapidly in the last few years, which has pushed down cargo yields significantly. Just look at United's cargo revenue results in the last couple of years.) On the flip side, no route has a 100% load factor.

    The bottom line is that I don't think American is defining success on these routes as having a 15% profit margin in the first year. If they can make some money in the summer and not lose too much more in the winter, while gaining some market share for U.S.-Asia travel, I think Doug Parker and company will be happy. I think your Wal-Mart toothpaste analogy might be closer to the truth than you suspect!
    Mar 14, 2014. 03:25 PM | 1 Like Like |Link to Comment
  • American Airlines: Expanding Network In China And Modifying Its Fleets [View article]
    This idea that any Asian/US market will make money is completely false. It is incredibly expensive to operate these flights (Dallas to Hong Kong is more than 8,000 miles; this flight will likely use over $100K of fuel each way). US-China freight capacity has exploded in recent years and cargo yields have dropped significantly. Cargo is still a source of ancillary revenue, but these flights have to make their money with high yields.

    I see the new Hong Kong and Shanghai flights as network driven -- to win corporate accounts, American needs to have more flights to China. In that sense, they should hopefully contribute to long-term profitability. In the near term, both flights are likely to lose money.
    Mar 12, 2014. 04:12 PM | Likes Like |Link to Comment
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