Alex Morris

Alex Morris
Contributor since: 2010
Adam,
You seem very focused on short term numbers, particularly analyst estimates for sales or current year EPS (which you used as a justification for shorting JCP), as opposed to the viability of this strategy long term; is it safe to say you are a trader and not an investor?
I say this for one reason - there's a lot more to this situation (long term) than the sales figures in the coming months, particular the value of the assets on the balance sheet (market value, not historical) in comparison to the liabilities and when they come due; the only other scenario I can think of is if you assume that whatever comes out for the first few weeks on the first few shops will indicate the long term success of this strategy when the entire store (roughly 100 individual shops) is complete... any thoughts?
"On Wednesday, Hannah stated that there would be no further shop roll-outs this year, and that while the company planned to add 30 next year (bringing the total of 40), that would be dependent on cash flow. In other words, if profits and cash flows fall short of targets (as I expect), the shop roll-out will slow down to limit capital expenditures. However, this could cause a vicious cycle where a slower shop roll-out depresses future earnings, which further slows down the shop roll-out, etc."
That is correct - and in addition, if it is better than expected, the roll-out could be accelerated, as was explicitly mentioned; would that cause a vicious cycle where a faster shop roll-out increases future earnings, which further speeds the roll-out, etc?
Obviously there are two sides to this - and considering their commentary since Aug 1 (unless you think they're lying), I find it curious that you point to the potential for the negative but don't even consider/address the positive...
"Given that the company plans to pay down $230 million of debt and invest well over $500 million in CapEx in the second half, this requires roughly $900 million of positive operating cash flow in the back half. It will be nearly impossible to meet this target."
What would you quantify as "nearly impossible", to use your term? 50-1? 100-1? Let's call it 25-1; let me know your address and we can draw up a contract if you're willing to make a wager on that (I won't sit by the mailbox waiting...)
Whatever your number is for year end cash on hand ($700M? $800?), they also have a $1.5B line of credit, with no covenants until it's 90% drawn; the weighted average maturity on their remaining debt is 23 years, with the closest maturity in 2015.
JCP also has non-strategic assets that can be monetized, like the Simon Properties stake (and maybe that land on the balance sheet at about $315M has appreciated over time?); while you may not be confident that the company can survive, the financials say otherwise...
As the first comment noted, it's nice to hear the other side of the story; with that being said, I think the author makes the short case with his article - increased competition and an absurd valuation will make long term value creation from this price very, very difficult indeed.
"I would disagree with your statement that JCP has plenty of cash. If the company needs to substantially increase its capital expenditures (likely) that will have to come from new borrowing or new stock."
Their average pretax income over the past four years is roughly $900 million, compared to a net debt position of roughly $2 billion. Over that same four year period, they have reduced LTD while simultaneously investing a disproportionately large amount on capital expenditures (on either a % of sales or % of operating CF basis) when compared to their competitors like Macy's.
I'm not sure what your definition of "substantial" is when talking about CapEx spend next year, so maybe that is part of our disconnect...
"Investors are therefore likely to become demoralized over the next few months as they realize that there is no quick fix to J.C. Penney."
The big holders of JCP stock aren't worried about what they are going to do next month; Ackman (via Pershing) and Roth (via Vornado) have more than a 35% combined economic interest in JCP and recently were added to the Board of Directors - they're not going anywhere for a while.
"Given the deterioration the business has seen in recent quarters, this suggests that he will have to dig out of a large hole."
What hole? JCP has plenty of cash, is solidly profitable, has an over-funded pension, and can dispose of real estate if necessary; there is no reason to suggest Ron Johnson and the JCP team will be under any sort of liquidity/solvency constraints when implementing their plan.
I can't tell you whether they will make an immediate impact on same store sales, but I question your thesis that this is what JCP investors are expecting; I can account for 35% of the outstanding shares that have clearly stated they aren't, and known plenty of individual investors who think the same way...
Disclosure: long JCP
Slightly misleading statement: the investment is almost certainly from Todd Combs (only $200M position).
Good article, thanks for bringing BRO to my attention.
What about pending litigation? Thanks!
Glen,
Thanks for writing it up, and looks interesting on the CF's. Obviously the big issue is tons of debt compared to no real assets (90% from intangibles and goodwill); what are the plans here? Going to have to read the filings and the links you posted, but wanted to get your thoughts on how this plays out over the next five years.
Here's what they say in the presentation:
"As a result of our strong and improving free cash flow, we reduced debt by $109 million in calendar 2010 and by more than $700 million, or 40%, since the acquisition of Pulitzer in 2005. Debt levels should continue to decline.
All of our debt is set to mature in April 2012. While our leverage is still higher than optimal given the changes in our business over the last few years, we believe the combination of our improving results, a growing economy and still strengthening credit markets will allow us to accomplish refinancing of our debt in a timely manner, and in a way that meets the collective best interests of stockholders, creditors and employees. And accomplishing that refinancing is one of our highest priorities."
Alex Morris
Thanks for your detailed analysis spa; besides calling him a con artist, if there are any points that you would like to make an argument on that have to do with the article, it would be much appreciated. Excited to hear what points he was wrong on (every one might be a long post, but very eager to hear that as well). Thanks.
You are assuming that those making these claims understand the basics of valuation; that is a big assumption.
Spot on Tom Young. Anybody who is more focused on the price change over the past ten years rather than the business developments will probably never understand value investing or feel comfortable buying cheap assets; no complaints about less competition in the markets.
Here are the seven mentioned:
1) Search - been around for two years, and taking share slowly but surely; luckily, MSFT is generating billions every quarter in FCF which finances that venture
2) Mobile - deal with Nokia worth mention? Guess not...
3) Tablet - PC sales in 2011? Gartner estimates double digit growth; tablet is killing the netbook, not so much everywhere else
3) Windows - Again, look at the numbers
4) PC applications - One more time, the numbers!
5) Cloud - MSFT is offering their service, which is more well known and well financed, at 1/2 to 1/3 of the price of Salesforce.com... which trades at 280x earnings; makes sense
6) Enterprise applications - Guess I lied: Take a look at those numbers!
7) Games - How about those Kinect numbers! Small percentage of business that is becoming a bigger piece with each blowout quarter.
Everybody thinks PC's are gone and can never envision a world where MSFT monetizes search, mobile, the cloud, or games (for some reason nobody thinks any of these will ever work)... I'm liking the contrarian view on this one.
Another strong Q from Travelers; kudos to the management team.
Sune,
Here is some work I've done on PEP:
www.gurufocus.com/news...
Great article Dividend Pig; here are some additional thoughts I've added to the discussion:
www.gurufocus.com/news...
Long JNJ
Oh, didn't catch that at first. Yeah, I'm interested in real estate, but no where near as much as equities.
poortorich,
Agreed 100%, and as the market has proven in the past, it can be very dumb at times. I originally started in building construction in college (my dads a plumber), but switched to Finance. I decided to minor in Real Estate as a way to expand my skill set, rather than settle with 2 easy semesters senior year. Are you interested in or work in the industry?
Be careful of listening to people who tell you a stock will go up under any scenario. This has nothing to do with their ability to value a business (which may very well be accurate), but rather their belief that they can predict price movements over a short period of time; that most certainly is not "Buffettology".
"Most interestingly, simulation suggests that Coca Cola can deliver gains even under the worst case scenario."
Only one response for that, courtesy of Warren Buffett:
"Beware of geeks bearing formulas."
Brad,
From the 10-K: "We lease 4,522 of our operating drugstore facilities under non-cancelable leases, many of which have original terms of 10 to 22 years... the remaining 258 drugstore facilities are owned."
Agreed on the second part: amazing beer!
CPT Dan,
I know plenty of college kids that drink Sam Adams and other craft beers, so not too sure on the truth in that statement...
"Thus, aggressive pricing to gain market share and drive traffic amid stiff competition, may depress sales and margins."
Aggressive pricing is management's choice; long term investors should applaud these measures, which are a testament to renewal rates near 90% for one of the best run companies in global business.
Good write up. With Eddie and Bruce holding around 70%, definitely makes it interesting.
bilton,
I did not mean that offensively in the least bit. There are certainly people on this site that think Apple will never have the risk of being taken down by competition; those are the one's I'm referring to. I'm sorry if it came across negatively. And it was said in a video; here is the link:
www.pcmag.com/article2...
Apple lovers:
Thoughts on iPad 2? All they did was add a camera? Guy from PC mag: "it's pretty hard to tell that there is anything different..." Chance for everybody else in tablet space?
Love to hear your thoughts on this...
"At the heart of those revisions include the following factors: (1) Costco's central philosophy to hold prices at a certain level for longer than peers as price increases are barreling in from manufacturers has negative margin implications; (2) the much ballyhooed membership price increase appears to be off the table for the foreseeable future; and (3) the prospect of further LIFO charges as merchandise inflation increases also has negative margin implications. There is no denying Costco's leadership position, but what I am having a hard time squaring is the present valuation on the stock as margin headwinds intensify."
Numbers one and two are sound business practice, and are a testament to the business model. Costco would not be the company they are today or as successful as they are today if they did either of the two things mentioned above.
In exchange for a short term dip in earnings/cash flow, I will accept the long term profitability and loyalty of the members; this is how you maintain the retention rate in the high 80's (and currently at 88.8%) during a recession (like Costco has).
Costco CFO Richard Galanti mentioned your article on the call today, pretty cool...
Dave,
I have had hands on experience with an iPad, and guess I haven't "seen the light" in its widespread use for corporations. As a cool consumer product,with some applicability to select businesses, yeah, I agree.
"A corporation wouldn't think of replacing PCs with iPads but they will adopt the tablet for employees who can benefit."
That is all I am saying; agree with that 100%, and the point I was partly trying to make.
"Eventually college and high school students will be able to replace all of their textbooks and notebooks with an iPad. No more lugging a backpack from class to class. They'll also be able to complete assignments and turn them in. They'll be able to use it for class schedules and communications. The web will always be available to them as they move around the campus."
Do you think that is what schools want? Have fun trying to make public high schools either pay for or make everyone purchase a tablet for a couple hundred bucks...
There were also advance orders in Mexico because of the change in legislation; not sure if that is applicable to the discussed growth, but thought I would add that on.