David Tsao

David Tsao
Contributor since: 2008
Company: Ten Grand Chicago
This has been a concernce since late last year. It wasn't until 2010 rolled around did the Bank of Canada take action. You're starting to see the results in the numbers now.
Toronto should continue to soften, but Vancouver is somewhat of an anomaly. The average selling price of a home in Vancouver will not depreciate that much. It has geographic advantages similar to San Francisco and NYC. There simply isn't any land.
In any case, I exited EWC for this very reason as housing is one of the key underpinnings of stability. www.tengrandchicago.co...
Douglas,
Thanks for the analysis. Do you know what was up with their Q4 adjustment in tax reserves, the "valuation allowance" that was released? Their effective income tax rate jumped to a whopping 48% this past quarter which I believe had to do with goodwill/intangible assets. I'm trying to figure out if this is just a one time occurrence. Their latest quarterly filing also mentioned about federal/state tax issues that still haven't been resolved... somewhat concerning.
(Disclosure: I own JOEZ)
Great comparison. What is your take on Jim Flaherty's recent moves to settle the housing market down? Some of the problems that hurt the US system are starting to show up in Canadian housing.
"In a Re/Max Market Trends survey of 16 markets in Canada, fears about rising interest rates and new lending rules have lured new homebuyers out earlier than usual." -- This is a short term boost. You need to look at the correction that will occur in real estate after the rules kick in. The debt/income ratio is now approaching that of US consumers right before the crisis hit. The Canadian banking system has more checks/balances in place, but they aren't immune to a weakening consumer.
Another post by the Globe and Mail. www.theglobeandmail.co.../
I don't know if this is insightful as I have not done extensive research. Hence I don't know what the premium should be. I've lived in both Toronto, Chicago, and New York... and although I'm not a real estate guru, I know from personal experience what a typical home should go for in these major metro areas relative to the industry/job/local economic prospects within a city and schools within the area. I was just up in Toronto for the holidays and took a look at some of the listings for homes in the norther suburbs (Richmond Hill, Scarborough) and out west (Mississauga) and some of the asking prices for a typical 4 bedroom detached were well over 500K... some homes priced at $750k. That is not sustainable considering the wider economic factors. Canada, from it's currency and economic growth is driven by its commodity strength. The housing market is going gang busters assuming that global demand for commodities and defensive plays against the USD will continue forever.
If the Government of Canada takes action, there will be a correction. If they don't, the market will self-correct itself b/c you can not continue price people out of housing market forever. It comes down to basic economics which is why I exited my EWC position today.
To say that the analysts have no clue is a bit aggressive don't you think? The company has done exceptionally well on the earnings side, and only good things to come if this tablet is everything the hype says it is going to be. However, all good things level off. Incumbents don't stay in place forever (just ask Microsoft). I've owned Apple stock for a few years now, but the rapid rise in valuation and media hype is making me nervous, not to mention my lack of confidence is Tim Cook's visionary capabilities. He isn't Steve Jobs, and while there is a growing ecosystem in Apple's products, the visionary thinking rests solely on Steve Jobs. That in my opinion is the biggest risk for the company's future growth prospects. There isn't much attention these days around the company's succession planning efforts. It's all around the Tablet.
Long: AAPL
Nice Analysis Jacob,
The trailing 5 year margin averages won't last unless Garmin comes out with new products, not just updated models of current devices. You have to assume margin erosion considering the competition and innovation these technology companies will bring to hand held devices. Google Maps splashing entry onto the next generation of Droid phones won't help either. Although mobile isn't Google's moat, the marginal cost of distribution for Google to push their maps service to Droid phones is extremely low. Google Maps deployment to mobile devices is not meant to generate returns from that program alone. They are setting the stage to collect geo-location data of mobile users to help further their AdWords cash cow. Give these services away for free to generate revenue somewhere else. Watch out for Google's developments after their recent AdMob acquisition. With tight integration into the mobile ad market and geo-location data collection, you have a brand new potent mix for advertisers to buy keywords.
Given that, your analysis is still very intriguing that I'm going to dig into GRMN a little deeper. I just wouldn't dismiss Google's efforts so quickly. They are a serious threat to GRMN and Tom Tom.
I've been dabbling with the Android OS recently and I have to say it is promising. But GSlusher is right. The biggest hurdle is the fact there is a risk of a splintering effect that development teams will have to manage for Android OS 1.5, 1.6, 2.0, etc. Throw in multiple hardware configurations and the law that bugs happen, and you have a problematic situation. The Android framework is supposed to abstract these differences to make it easier. The jury is still out. The two companies that should be worried are Microsoft and Research in Motion.
Apple has it's own mojo going and will be leaders for quite some time.
I've been dabbling with the Android OS recently and I have to say it is promising. But GSlusher is right. The biggest hurdle is the fact there is a risk of a splintering effect that development teams will have to manage for Android OS 1.5, 1.6, 2.0, etc. Throw in multiple hardware configurations and the law that bugs happen, and you have a problematic situation. The Android framework is supposed to abstract these differences to make it easier. The jury is still out. The two companies that should be worried are Microsoft and Research in Motion.
Apple has it's own mojo going and will be leaders for quite some time.
They definitely reaped the benefits, Q3 was pretty strong. I'm going to be taking a look at this company more closely with respect to operational factors and try to take forex out of the equation to see how this company is doing. Will post to seekingalpha in a few weeks.
Great write up, thanks for posting.
Calling out STRA and APOL on this analysis is a bit of a stretch. For profit education companies serve a specific need in the education market. If you're going to talk education, stick with the fundamentals surrounding these companies, FFEL and Title IV loans, enrollments, the future of auction rate securities that back a substantial portion of these loans, and tuition rates, and the needs these companies serve compared against community colleges, universities, and trade schools.
What Mr.Salomon is eluding too is a possible shift and serious consideration for what was once the trade school circuit (The DeVry's, ITT, and Corinthian's of the world). If the value/price conscious parent/student continues to remain after an economic recovery, these outfits may continue to see strong enrollments... At last check most of these companies are fully valued and have discounted the strength of this sector for the remainder of this year and next.
They will increase market share and revenues. However, their margin picture won't change any time soon. The analysts will continue to focus on revenue growth and their digital strategy. No one can break out how much their digital strategy is bringing in to the bottom line except for the people that work at Amazon.
Margin growth is the only thing that should be propping up their current share price, and that growth isn't going to happen for a while.
Thanks SwingTimer,
I don't trust the 30 second blips powering some of the major financial networks, so I end up digging for data myself. Reading 10K's, print, and books helps take the emotion out of the analysis. That slow cycle prevents me from doing stupid things in the market.
I agree with you BuffetMaster ... DeVry's fundamentals are good, and the S&P inclusion will only help
It will be interesting to see what Apple comes out at their big confab. Rumors aside, if they are developing some new product they'll have it under a tight lid so as to not cannibalize their current iphone / macbook sales. If there is anything material, it will suck away some of the hype from the recent Kindle DX. Margins not there yet.
You have to be careful following Mark Mahaney. He had a price target of $119/share back in Jan/2008 and was throwing out unfounded Kindle sales projections drawing analogies to iTunes business model recently.
A quote from Mark back in Jan/2008
"Margin Expansion alone could drive double-digit EPS Growth"
3-months later in Apr.2008 his research comments for AMZN,
"The margin outlook is disappointing"
Amazon continues to operate with low margins. They've had impressive top line growth in this environment, but until margins expand to justify the valuation, I'm staying away. You'd be wise not to digest too much of Mark Mahaney's analysis.
The Kindle program isn't broken out on their quarterly reports. Basically no one has any idea what if anything of material effect this is having on margins. I give kudos to AMZN for breaking new ground with Kindle and their AWS program, but until they reach economies of scale their margins will continue to run thin. As an investor it is still to early to tell.
You need to pay attention to the quality of the students for these for-profit programs. I'm not saying that University of Phoenix students are of bad quality, but making a reference to the majority of students are coming from. Are they coming from high school, which I would categorize as representing larger risk for defaulting on payment (higher allowance for doubtful accounts), or from employer sponsored tuition or transfers out of 2-year diploma programs (stronger credit and financial backing).
Method of payment also make a huge difference whether the school demands payment up front (like Strayer). I honestly don't know the payment details for Apollo's programs, nor do I have student demographics off the top of my head, but it's best to dig into that before diving in.
The issue is now is that many others have caught on to this and have priced many of these assumptions in, and to a large extent pushed them towards rather lofty valuations. I'm about to exit my DeVry position for this very reason.
Regarding the unfreezing of securitization markets, that was something that was pushed in the previous administration. It obviously helped, but it's still hard to see to what degree on companies like APOL and ESI which had a relatively large exposure to private lending compared to STRA and DV.
I'd be a bit cautious about this sector, as everyone has or will continue to pile on to this boat.
To add to Hamilton's comments, the company may not recover if they have a growing employee defection problem. Regarding Andrew's original post, you don't know what the increased scrutiny will reveal with respect to other business dealings outside Satyam.
There is enough ammunition for some customers take this incident, along with the the rash of terrorist incidents last year and look at other BPO vendors in other countries as Analysis Caution points out. Hence, best not to pull a quick trigger on WIT or INFY just yet.
It's still to early to tell what's going on with Amazon. Whether its visits/month, comscore readings, or Oprah pumping up Kindle, you need to focus on the company's operating margins which have been historically low. The company has done very well with respect to increasing the value perception with Amazon Prime/free shipping amongst its customer base. It works well in these times. However they've done so well that they can not remove this program without taking a massive order volume hit. Their shipping programs cost the company roughly 2.5% of Net Sales over the trailing 6 quarters. It's been creeping up quarter to quarter and nibbling away some bits from their operating margins.
It's an upward trend. They will have to up their revenues to keep their margins, or face interesting choices:
- Jack up the Amazon Prime membership
- Reduce free shipping coverage on specific product categories
- Drop the program all together (this would hurt them pretty bad, doubt they would do this but you never know)
What would do in Bezos' shoes?
Instead of watching the Indian IT Majors, watch what Satyam's global customers will be doing. If they start to move, other clients from WiPro to Infosys will want assurances that they're doing business with a company that has solid governance. IBM Global Services may want to seize this opportunity to take market share.
PWC isn't looking good here.
What do you make of Greenblatt's system? I read his book last year but decided to tweak it a bit by using his simple approach to just get me the first screen, then apply some DCF to the companies that I thought had competitive advantages, high barriers, for undervalued plays.
Are you doing something similar along those lines? I couldn't jump straight in blindly and use his system. The back testing research he did shows good results, but I'm not sure if he ran his back test across every possible permutation of stock sets over the same period.
Although Herman Miller is not in a favorable spot right now ($1600 Embody won't fly off shelves right now), it is not easy to start up an office design company. Try to develop an independent dealer network to distribute your wares at Herman Miller's scale.
The company does have an R&D expense, but it averages at a low 2.4% over the past 10 years. I wouldn't worry so much about their secured notes due in 2011. The company has available to them a $250mm line of credit, and recently announced job cuts to keep operating costs in check. These are tough times for any company, but as long as they can survive with their core talent in check and keep their continued focus on managing operating costs, they will come out ok. Brian Walker has done a good job managing the companies costs through their HMPS initiative (Herman Miller Production System)... basically lean manufacturing. The results show. During 2008 as commodity prices went through the roof, the company managed to fight through to protect operating margins. The effects of the high commodity costs were to show up in the last quarter, but they didn't.
The only misstep they made was jacking up the prices on their products to combat high raw materials cost. I hope that they didn't open up too many hedging contracts for steel back when prices were high.
They fought the commodity cost battle well... their next challenge where I do agree with you, is overall demand for office furniture. It won't pick up any time soon.
This is a well managed company, worth keeping an eye on.
Discloure: I own shares of MLHR.
If you look into the ISM Manufacturing Report on Business and scroll all the way down to the Employment Index, you'll see that purchasing managers had a really negative outlook on employment last month (index fell to 29.9 from 34.2 the previous month. We are only a few days into the new year. Layoffs require time to plan and execute.
At the heart of any economic stability is employment. We won't see stabilization until we go through massive layoffs (which have not occured yet).
People have been covering AMZN's top line a bit much. The company's operating margins are razor thin and always have been. In this environment, there isn't much buffer for mistakes.
DC Housing Bear,
Do you remember Mark Mahaney's call on AMZN back at the start of the year? It was in the 100's. He also predicted increasing operating margins for 2008.
I was thinking about checking out the time frames around 1929, but there was one specific reason why I didn't. Many of the instruments available to governments, banks, and other institutions were not available back then.
The recent interventions aren't saying much to tame the market's wild rides... but over time the newly injected capital should drive a wedge into the fundamental economic situation and hopefully bottom out.
As for timing this, that depends on your frame of reference.
With respect to HOG, can you break down by geographic region? I'm just curious to see if HOG saw strength/weakness when compared to regions experiencing the the most pains with respect to subprime mortgages/foreclosures...