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Jeremy Johnson, CFA

 
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  • Will Tesla Disrupt? [View article]
    There was zero chance you were going to get equal bang for buck from a global luxury car manufacturer with 10s of billions of invested capital and Tesla. That's just not a balanced fight.

    My guess is current Tesla investors will have it rough, but in 15-20 years an electric luxury car will be de facto. Tesla will pay to develop the market and BMW et al will reap the benefits.

    It isn't that Tesla will make a car that is not good enough, or even "the best" all things considered, but rather that the capital costs will always be too great for the company to internally fund its development at a fast enough pace.
    Nov 21, 2012. 08:29 PM | 13 Likes Like |Link to Comment
  • A Grand Bargain: 8 Factors That Could Drive A Surprise On The Deficit [View article]
    I don't think so, instead we will have another 5 to 10 years of currency financed deficit spending in the 5-10% of GDP range (depending on the state of the business cycle). Any legislation that gets passed will tinker around the edges of the one-year forward cash budget in terms of total fiscal impulse. Depending on who is in power, money may shift from one category to another, as it always has.

    Currency finance is the easiest tax game in town right now. No one thinks it really effects them personally, whereas even a 1% tax increase creates very strong emotional reactions.
    Nov 8, 2012. 12:51 PM | 7 Likes Like |Link to Comment
  • Can Nokia Pull Out Of Its Death Spiral? [View article]
    Samsung has steadily been playing catch up with Apple and now is nearly on par. With the GS3, they are in fact ahead of the iPhone 4s by a mile, but the iPhone 5 will see Apple take the lead again. However, Samsung will probably release a totally new Galaxy in a year while Apple will merely do a refresh -- a 5s, if you will. At this time their devices will synchronize in terms of feature sets and you will have two class A competitors in the market with nearly indistinguishable products in terms of real world usefulness. Samsung will also accept lower total returns on capital than Apple which will allow them to offer two or three premier devices, such as a Galaxy Note 2 at the same time as the flagship phone, which will encroach on Apple's position. Eventually Apple will follow suit for competitive reasons, but will be dragged kicking if not screaming.

    Nokia's problem here is that it will have to play catch up with two competitors that have mountains of cash flow to throw at new devices. Microsoft's backing appears weaker than it did even six months ago and Nokia's already perilous position seems to be getting worse. But it would be wise for Microsoft to not tip its hand and in fact lead the market away from thinking it will step in soon.

    Microsoft's main problem is that it absolutely doesn't want to buy NSN. It's a business with no strategic value to Microsoft and a ton of employees that would be expensive to release. It can't buy Nokia until that business has been spun-off or sold. There are few buyers in the industry because its not a great industry -- or in other words, it hasn't tended to generate a lot of cash flow over the last decade so the competitors are weak. I have no idea what is driving the operating profit at NSN, but I would be very curious to know if they are gutting marketing and R&D to generate current cash flow and earnings to make the business look good. If it is the case, I would expect a spin-off. If it is genuinely turning around, perhaps Siemens will take out the vast majority of Nokia's share, perhaps with a note.

    From there, Nokia D&S will need some type of crisis -- a very bad quarter or two, to pave the the way for a Microsoft bid, because after a spin off the market will get very excited about a buyout and probably get pretty aggressive in bidding up Nokia's shares. This would be a good moment for Microsoft to release its own phone. So, when Microsoft releases its own phone, it may be time to buy Nokia, but only if an NSN transaction has been accomplished in the intervening period. The timeline seems pretty short though, if this takes a year to accomplish, it could be too late.
    Jul 20, 2012. 09:07 PM | 7 Likes Like |Link to Comment
  • The Fed Is Not Pushing Stock Prices Higher [View article]
    The interest rate markets are so heavily controlled by the authorities it is really hard to say what the price of credit would be without them. If indeed the private markets would set the rate at 2% on the 10yr without the Fed, then why do they feel compelled to purchase $1 trillion of securities per year?
    Apr 3, 2013. 01:46 PM | 5 Likes Like |Link to Comment
  • More from the Fed: The FOMC has adopted economic thresholds for when it would commence tighter policy. The fed funds rate will remain at exceptionally low levels as long as unemployment remains above 6.5% and inflation is expected to be no more than 50 basis points above the 2% target rate. [View news story]
    The Fed will buy bonds as long as the government is running ~10% budget deficits. The government will run ~10% budget deficits as long as they feel it is necessary to keep GDP growth above 2.5%. Even if inflation goes to 4%, the Fed will merely raise the short-term rate a percent or two in order to make the rate less negative than it otherwise would be.

    Unless there is a political storm (on the order of a third party gaining material amounts of votes) due to US Treasuries outstanding / GDP reaching some significant milestone, 150%, 200%, etc., this strategy will not change.

    However there will still be huge amounts of debate in Washington about where the money gets spent, everyone will want there piece. Fiscal cliff is really about who gets what, not how bug what is.
    Dec 12, 2012. 02:28 PM | 5 Likes Like |Link to Comment
  • Though analysts have come to its defense this morning, Apple (AAPL -1.9%) can't catch a break - shares now trade at 8.2x FY13E EPS (exc. cash). The decline comes as signs emerge Apple is taking new steps to vertically integrate: Digitimes reports Apple is now directly placing orders with material suppliers, who traditionally interact with manufacturers, and Horace Dediu theorizes Apple may have invested ~$2B in Sharp's display production. He also notes Apple's off-balance-sheet manufacturing/component purchase commitments have risen to $21.1B[View news story]
    Just because a company makes "the best" product doesn't mean the company will make money (or in this case either make a lot, or a ton), or the stock is a good investment.

    In addition, no one argues that Apple's stock is expensive, based on today or next twelve months earnings. Throw out all the multiple analysis: 8x, 10x, 12x, it doesn't matter.

    The question with a company like Apple (a consumer discretionary company) is what will sales and earnings be 5 or 10 years from now. Is this a stable business? Will they be making $50 EPS (or more) in 2016?

    To that point you have two headwinds facing the company:

    1) A number of its suppliers are in very weak positions. Operating profits have been inflated at Apple because their suppliers have charged less than it costs for them to run their businesses and are now on the edge of insolvency (Sharp). Now Apple has to step up and directly invest in their businesses (or the capital equipment to run them).

    In reality, these investments should be amortized backwards into historical operating results to get a real economic picture of profitability. This is a common game played with suppliers where they undercharge for the good they supply, inflating profits at the buyer, the buyer then makes a loan or equity investment, writes it off in one quarter down the road as a "one-time" item and their business looks more profitable than it is. If you go up and down the supply chain at Apple, it is probably billions per year that they underpaid compared to where they needed to be, in order to keep those businesses viable. The quick fix is to replace the depreciation line with capex + invesments, for 2012 this would boost the PE by nearly 2 points.

    2) Apple's products are near parity with competitors. It is senseless to continue arguing this point by looking at technical details, plastic versus aluminum, this map provider versus that, etc. All you end up with is a big list of pros and cons and every individual picks 2 or 3 they think are personally important and declare a winner. Instead, just look at the sales: flagship Samsung phones = iPhones (within 10-20%). Are the 50 million+ people that have bought flagship Samsung phones over the past year all complete idiots? I don't think so. You buy the phone with a total feature set that works best for you, within your personal time constraints and interest level to research such a purchase. This means you have a company that went from owning a market, to sharing a market and this makes the future different from the past which also means taking a multiple on past earnings is an incomplete guide, at best.

    Finally, Apple is both an investment and a trading vehicle -- if you are think about what Apple's share price will be 30 days or 90 days for now, throw out everything written above, it doesn't matter in the least. Stock could pop 10% or go down 10% more with nothing changing about its fundamentals, it is purely at this point about perceptions.
    Nov 8, 2012. 01:24 PM | 5 Likes Like |Link to Comment
  • The Real Natural Gas Production Decline [View article]
    With a 64% annual decline rate (your numbers) you would have a hard time fooling people as to the amortization rate. Rewrite your article to state SWN is a fraud if that is what you really want to say, instead of beating around the bush.

    If you want to look at cash flow you will get the same answer. Plug in $8 realizations to the first six months of this fiscal year, SWN would generate a ton of cash.

    Income statements are not as complex as you make them seem, you just need to understand the drivers of each line item. Your thesis rests on increasing amortization rates an extreme amount. And yet, the correctness of decline rate assumptions for these type of assets are so easily falsifiable that you can do it from one table on an investor presentation with no specialized industry knowledge.
    Sep 18, 2012. 12:26 PM | 5 Likes Like |Link to Comment
  • Why Corporate Earnings Could Drop More Than 50% [View article]
    Thanks for your article, this is the type of macro discussion people should be having, regardless of where you think the cards will fall in the future in terms of reversion to the mean or continued expansion.
    Aug 1, 2012. 08:10 PM | 5 Likes Like |Link to Comment
  • Apple (AAPL) might be forecasting a major drop in iPhone 4S sales ahead of the next iPhone's launch. Topeka Capital's "Apple Monitor," which tracks the sales of Taiwanese firms who (on average) derive 50%-60% of their revenue from Apple, witnessed a 13% M/M sales decline in June. That compares with a 1% average increase over the last 7 years, and suggests a large decline in component orders. Nonetheless, analyst Brian White is maintaining his $1,111 PT on Apple. (previous)  [View news story]
    4s is outdated now, people would be pretty dumb to buy one at $200.

    As always, everything depends on the actual device: will the 5 be a good phone? Because competition is increasing. The Galaxy 3S and ONE X are both terrific phones, the former especially has been good enough to get some 3-4 generation iPhone users to switch. The reviews for the phone are generally fantastic with the complaints being centered on only a few mostly inconsequential items. The fact the phone is back ordered at many carriers speaks to its popularity, not to mention the delays in beginning selling the phone to accommodate pre-orders.

    Luckily for Apple, I think there is plenty of room to improve the current device and get people interested enough to extend their contract (I know some iPhone junkies have 3-4+ year contracts because they have upgraded so much and just kept tacking on years -- this is part the credit cycle at work in this industry). The bigger screen will be a huge differentiator -- the current phone is at the point where people make fun of your screen size, so this will be most helpful. iOS 6 is also important because the OS has lost ground to Android. Hopefully they will focus on allowing more customization and also make all the polish improvement we have come to expect. Finally, I am sure they have something else up their sleeve -- gimmick or not, that could help. Siri, which 85% of people don't use according to one poll I saw, still helped sell phones -- people need to be able to rationalize their purchase, so adding up these check boxes is essential.
    Jul 9, 2012. 10:13 PM | 5 Likes Like |Link to Comment
  • National Bank of Greece Appears Undervalued [View article]
    This isn't how you value a distressed bank. The only thing you should be looking at is the balance sheet. What are the assets, what are their values, and what are the claims on the bank -- market value of debt, equity, etc; all under various scenarios. Given the current market value of Greek government debt, I *suspect* the bank is technically insolvent although that could change depending on government backstops.

    Greece only has three options, restructuring government debts while maintaining the Euro, leaving the Eurozone and defaulting on euro-currency debts, or having it's debts guaranteed by a federal Eurozone entity for at least 5 years and more likely a decade or more. There is no chance of Greece raising private money when interest rates are ~15%. In either the 1st or 2nd case, your NBG equity is probably worthless in dollar terms, although it's been about a year since I closely inspected the balance sheet. So really you have an event driven play here based on Eurozone policy response to Greece.

    I would probably look harder at the Greek telecom company, since your operating assets should stay more stable in Euro terms.
    Jun 21, 2011. 04:23 PM | 5 Likes Like |Link to Comment
  • Senior Housing: The Importance Of Depreciation In Assessing The Dividend [View article]
    I am only trying to make one point in this article, that depreciation should be treated as a real expense. If you pay out the cash associated with depreciation, you have to get cash elsewhere to pay maintenance capital expenditures. SNH has raised dilutive equity and issued debt to do so (in addition to using these capital raisings to buy new property).

    I think SNH's financial statements are little cloudy in identifying capital expenditures on existing properties, but this is a secondary point and it certainly DOES NOT rise to the level of any sort of fraud. Not even close.
    Apr 27, 2012. 12:11 PM | 4 Likes Like |Link to Comment
  • It's Time To Buy Medtronic [View article]
    If your income projections turn out to be true, the stock is clearly undervalued. What we are worried about are the negative sales trends in the mature parts of the product portfolio(eg pacing) and the difficulty in getting new products to market -- either because of slow FDA approval or just lack of innovation. Credit delinquencies in Greece, Spain and Portugal are a transitory but important factor as well. Nevertheless STJ and MDT seem to represent decent risk versus reward characteristics, although I think STJ has a more promising pipeline.
    Mar 9, 2012. 10:11 PM | 4 Likes Like |Link to Comment
  • Why I'm Picking Up This 7% Yielder Now [View article]
    It's very simple, lending rates are coming down as the existing portfolio of loans reprices (refinances) which shrinks the net interest margin. This doesn't take any guesswork, the NIM has come down versus last year and last quarter, and I imagine every quarter in between. The trend will continue as people refinance their loans. Reported earnings are even better than run-rate because the bank is receiving prepayment penalties from people refinancing their loans (likely on multi-family since single family rarely have such penalties). I don't know if the stock is fair/under/over-valued, but that is earnings outlook.
    Jan 26, 2012. 02:39 PM | 4 Likes Like |Link to Comment
  • Apple: The Most Undervalued Large-Cap Stock In America [View article]
    Nokia revolutionized mobile phones. It was AAPL before AAPL was, if you turn the clock back to 1998. Yes, you look at those phones today and you may laugh but they did it better than anyone else and they became the dominant mobile phone company in the world.
    Nov 28, 2011. 03:06 PM | 4 Likes Like |Link to Comment
  • The timing of the release of 60M barrels of oil is a puzzle: The war in Libya, the purported cause of the move, has been raging for months, and prices had already fallen ~10% since April. So why the release now? This isn't really about oil; it's the economy, stupid. Some see it as "a sign of desperation" with prices recovering after a few months.  [View news story]
    The only practical purpose the SPR serves is as a deterrent to an oil embargo -- it was in fact the reason it was created. It's also useful when there are temporary supply disruptions.

    It cannot even remotely handle a sustained decline in production, and it is not especially useful as a wartime reserve since the government would have first call on U.S. based production and would be loathe to dip into at that juncture irreplaceable reserves of very finite quantity.

    Taking that as a given, it may be a reminder to OPEC that the developed world does have tools available to make their lives uncomfortable in the short-term and it certainly helps that there is a real supply disruption in the case of Libya, the cumulative effect of which grows larger every day.
    Jun 23, 2011. 06:58 PM | 4 Likes Like |Link to Comment
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