Michael B. Krause

Medium-term horizon, macro, long/short equity, short-term horizon
Michael B. Krause
Medium-term horizon, macro, long/short equity, short-term horizon
Contributor since: 2007
Company: Counterpoint Asset Management
Turn those revenue growth #s to 20%/yr first year, 15%/yr 3 years out. Just like I don't care about HD or another few megapixels for my digital camera purchase (haven't updated in years .. am happy with an inferior but more portable cell phone), I don't think it's a strong argument that a 4 gen product is going to pack all of this latent revenue growth.
Just tweaking that assumption alone tells a more realistic story of value. The margins are another one -- competition will come in.
With a $3 increase and the resulting ~15 PE, you could practically slam the brakes on the rapid subscriber growth expectation and still easily justify the valuation. So implicitly, such a scenario does factor in near term subscriber losses. Given that estimates for total market size are much higher than the current user base, there's generous room near term attrition. Granted, a 30 multiple will be out of the question in the case demand is elastic as you suggest. I'd venture to guess there's not a significant difference between $8 and $10 as you suggest in a world where people spend as much for 2 days at Starbucks.
I like the attitude of the article, but it needs some work.
Errors: 2.5X debt to EBITDA ratio is "junk"; 3.8X is the number right?
Those bonds http://bit.ly/VJzB4h have a yield around 7% right now, something like 530bp over treasuries. Square in the slightly less risky end of junk, but still junk/HY.
Lastly on your final conclusion, the markets are great at permanent extrapolation. Your last chart showing the estimation of slightly above 2.60 earnings unfortunately means something like this to the market: 2.20 for 2013, 1.70 to 2014, 1.10 to 2015, etc. (not modeling this, but just giving you an idea of what sentiment does) You quickly get the idea. Its still an earner.
I agree though relative to other stores out there, the markets are good at seeing only the past will continue. And I'm not convinced either --- what is behind us (Amazon competitive erosion) is behind us, and not necessarily in front of us to the same extent. Why? Sales tax advantage will disappear, #1. Why else? Look at amazon's competitiveness on electronics as of late? I haven't ordered in months, as they aren't as great as they were even in beginning of 2012. Why else? Amazon was pushing rev growth with near breakeven price sales --- look at their profit margins for proof. This isn't sustainable. Their bet is on secular change of buying habit, which has certainly eroded near-term bestbuy estimates. But BB still has quite a margin to work with, and I think AMZN management is already responding to the street's balking at low GPMs by not being as competitive on price.
So where does that leave us? There's a place for both in the retailing sphere. While showrooming is true, it always has been. I went to a bestbuy yesterday and saw tons of people walking out with purchases, a full parking lot, etc. I see a company converting inventory to cash. And ultimately surprising for next Q.
Furthermore, look carefully at the 10-Q of recent. No mention of Hurricane Sandy's impact on last week of sales for that Q. And it most certainly did. Cut a % or 2 off on top of this sentiment, and you see how even the small impact from that could marginally affect sentiment if improperly extrapolated...
Plenty of retailers have high PE multiples with similar debt to equity structures, only because sentiment is different. Once sentiment stabilizes away from the decline state, you'll see expansion back to 10-15. The bears will argue that will happen around .70 of earnings. I argue it'll happen closer to $2.00-$2.50 and say the worst is behind.
I think the management and board know this as well, and in no way could take an offer from Schulze yesterday without fear of backlash after announcing sales that they already know a bit about. Not when the stock is at many year lows on improper extrapolation the last Q. This decision by the board is the right one. By mid-Jan, the results will be out to the street and the share price will dictate something closer to longer term fair value. Let's say we have scenario one: I wouldn't be surprised if we rebounded to $15-17 by mid-January off of what you see from these results, and see consensus realization that these absurd $9 estimations were just the result of robotic analyst extrapolation without critical consideration that this game is a bit more dynamic than that.
And if I'm wrong about that, and the results are bad -- still a good decision by the board, because it gives them justification to sign on the dotted line on a lower offer (than $24+). This makes it less riskier for the board themselves.
I would point out that, yes, google search is just one sample of the population just like the Alexa data is one sample. This is what statistics are: we take samples and make inferences about a population.
This has been since updated to factor in today's news of no $60M penalty on the Pringles deal as well as some scenario analysis, at: http://seekingalpha.co...
Thanks a lot!
Thanks a lot.
Great analysis.
By the way, what are the barriers in this business preventing new entrants (besides capex at $1k/ton)? How much ready-to-go idled plants are there, vs. shut-down plants from the early '00s that offer feasible gas supplies?
I look at the nat gas prices here and can't help but think the heyday in nitrogen fertilizers where be one where high prices are quickly corrected by competition. There's plenty of profit margin in UAN/ammonia nitrogen fertilizers to allow that.
70k tons here of expansion, something comparable in scale at CVR, (and I haven't looked at TNH's expansion plans) is all nothiing compared to the 7.5 million ton production shortfall in the US.
Even 3-4 million tons of capacity would probably still allow a decent margin to producers. We're only talking about several billion dollars of capex here. Some articles I've read forecast no new plants in the works for 2012; it just doesn't make sense (with the information I am aware of). Ideas?
Love your articles.
Just started researching this sector, and can you tell me with such huge margins over natural gas, why are there few entrants and meaningful production capacity expansions in the nitrogen fertilizer space?
Looking at these 45%+ margins, it doesn't seem like this cashcow can justifiably last more than a few years.
What's the lead time and regulatory red tape necessary to build a new ammonia/UAN plant? And how practical is it to restart or overhaul a shut down or idled plant? What type of costs.
The Autonomy purchase was a bad move and reveals Apotheker doesn't have a strong finance background. Too much financial leverage and too high a price for future growth. Apotheker just made an acquisition move that raised the stock's discount rate by a percent or two without an offsetting increase of earnings (since at best it'll run breakeven to 10 yr debt costs in the next few yearrs)...
Cutting Palm and divesting PCs wasn't a bad move.
But for 10B, he could've just poached talent and done it organically..
5-10% is just one figure ... It all adds up in the end. My assumptions are of course based off of more substantial moves.

Buy low and be patient? This is short term trading vehicle with serious contango effects. If you believe in high nat gas prices, buy a producer.
On Aug 13 08:48 AM Steve20423 wrote:
> Classic buy low and be patient. I keep buying as much UNG as I can
> below 13. It's reaaly easy for many oil burners to convert to Gas.
> If you expect to make a quick buck day trading this probably won"t
> work so well unless of course we have one good storm. Last time
> I checked we're in Hurricane season.
Contrarian to himself.... Probably will work, just because it is the opposite of what makes sense to him.
Feb10 gas is already 5.71. If front month did nothing, UNG would still be in the mid-12s as gas prices had recovered more than 50%. Strong contango is hard to fight. The bright side: if storage fills up and price can't go any lower even after producers are forced to shut in production, maybe that'll catalyze a big move up? Maybe, maybe not. Flip a coin.
The bright side to this is that this is one group that does not already have mortgages to pay (generally).
On Jun 05 10:54 AM frosty wrote:
> Many of this year's 2MM college graduates have hit the street looking
> and immediately joined the 9.4%. The rest will hit the street over
> the next 4 months. Even if fewer and fewer jobs are uncreated, more
> and more people will be seeking alpha (bad pun isn't it?). This is
> not good news, it's a tragedy.
A weak dollar would create an export driven economy. It is not an export driven economy right now because the dollar has been historically so strong. Send the dollar to 3.00/euro and I guarantee you there would be plenty of demand for everything manufactured in the US.
This isn't an 'enthusiastic endorsement'. I am merely stating the facts that if the Fed is to advocate the current capital holders retain their power position, then inflation is the way to do it. To enable creative destruction (ie Fisher's WSJ interview this weekend) as an alternative, then there will be a power shift within society. Nothing the Fed nor treasury has done supports Fisher's view.
Furthermore, the impact of doing no monetary stimulus on real output is disastrous as well. We will see layoffs and unemployment of epic proportions if we do not both monetarily and fiscally stimulate. Look to early Great Depression for evidence.
On May 23 09:28 PM altaman wrote:
> Your enthusiastic endorsement of quantitative easing and high inflation
> shows your total lack of concern for the disasterous effects these
> insidious policies will have on millions of innocent americans of
> all ages and wealth levels. Have you no shame sir?
Everyone likes to be clever and say US treasury yields are going to the sky (and thus the US government is headed towards bankruptcy). Thus the massive interest in this piece.
Any article saying to buy treasury bonds right now is uninteresting, unjustified, and generally doesn't have much popular appeal.
Remember the credit-created portion of money supply is not made of available credit, it is used credit. The whole crux of the measurement problem is that the effective credit multiplier has dropped, and conventional metrics can't really tell you how far it has fallen. It is clear if you look at M2 money that the destruction of credit money does not show through these aggregates, otherwise you would see a sharp negative spike down (I believe it is still approximately positive y/y, even if you factor out monetary base growth).
If the Fed's knew how much money had been precisely destroyed, this whole problem could be easily solved by printing and filling in the hole directly (capitalizing the banks). Instead, they are creating programs that are the equivalent of a blind man stumbling around in a china shop. Eventually, they will get it right (and even go past). Since these financial markets have self-reinforcing mechanisms, I imagine that once the trend reverses, it will reverse euphorically, and we will get large one time moves in inflation rates. Those won't be sustainable - we may get 10-20% annual inflation rates for a year or three, but eventually the move will subside. Rate of money creation is just important as actual amount created. If they achieve their goal, they can just subside the rate. The difficulty here is the lag time between all of these behaviors.
Remember, if the Fed achieves an upward revaluation of houses by altering the fundamentals (by changing the long term cost of capital), banks presently insolvent are sitting on a gold mine.
All I can say is this: imagine the credit multiplier is not 10x right now, but 5x. Simultaneously the money base doubled (and will soon have tripled). At the moment, the short run (1 year), we're barely keeping our head above water preventing deflation. In the long run (2 years out), as the supply of liquidated homes clears, we are left with the same monetary base and the fed unable to mop a majority of that liquidity up (since it primarily made up of long term MBS, treasuries, and CDOs traded for treasuries in early Fed programs). The new money base will be 3-4T while the multiplier will recover from 5x to 10x, lets say. Suddenly real aggregate money supply has the means to double once credit starts moving. By the time the recovery starts, it will probably be a lot more difficult to position.
Or the flip side: At this rate, you won't be able to buy a box of saltines at .50 because your stocks will continue depreciating, tax revenues will collapse resulting in a repeal of any government income you might consider yourself entitled, and your pension will be worthless because all of the corporate debt it invested in went bad.
The 9.5m ounces sold at under or near production cost are an obvious penalty, but you have to realize ABX has hedged crude buying (big input cost) at $90 for this year. It would make them no sense to deliver those hedges right now. I think Aaron is buying time for when he can get production cost closer to the value of the hedges (and take advantage of crude at $40) ... maybe 2 years out? Then it makes sense to deliver.
The company has 125m ounces of reserves, and this hedge basically penalizes under 10% of the reserve as a wash with 0% profit possibility. With respect to the other 90%, they can capitalize on spot gold.
Since the market has known about this forward for a long time, it is not an issue and has already been well priced into the stock. (basically, with the hedge we're talking about 500-600m in forgone revenues per year for the next 10 years assuming gold were to average 900/oz over that period). But if gold went to $2k/oz, ABX's revenues on the unhedged portfolio would still more than double. Holding all other input costs constant (unrealistic), gross profit would move from $3b/yr to $12+ b/yr.. Quadruple in earnings, quadruple in stock price.
You get the idea why people like miners.
Take a look at this link. I propose a "national refinance bank" to refi -everything-.
We're all thinking along the same lines.
Good points. The availability of credit is a key input to price level, particularly of larger capital assets (real estate being one of them). The better the Fed reflates the credit sensitive sectors' assets, the more precisely the problem is solved.
Here I outline some ways to do it.
For a hedge against variable rate debt. I stand to benefit much more if rates fall.
Look up breeder reactors. Very little actual waste. Also, look up vitrification. Waste is not an issue.
Actually, y/y natural gas production and consumption is relatively unchanged. Demand is down a little bit, but it appears producers have shut in a bit of production to compensate for what could potentially be in the market.
Natural gas' cost of production does not enable it to be anywhere as efficient as nuclear power.
Like I always say, the solution is simple: We need to build 100-200 nuclear power plants, spend 500B to subsidize all/most new cars purchased as electric or plugin hybrid cars (and give trade-in incentives to move the fleet over). These nuclear plants need to be breeder reactors that can make best use of fuel. We can use all of the to-be unemployed troops now positioned in Iraq to set up property security around this new infrastructure.
This would stop the status quo and get us into the new paradigm effectively. If you like this idea, write a letter to Obama and suggest it. This is the only way to affect change.
I actually read the report today. His methodology isn't exactly what I'd consider bullet proof. He outlines the put/call ratio and MACD as his technical support, then makes the leap of faith between lower electrical consumption being abnormal resulting in government anarchy and rapid yuan devaluation. This guy's analysis is crackpot. I'm wondering how he holds his job.
These analysts all missed the boat when the S&P was at 1500. Why should they be any more credible when the S&P is nearly half that?
There is no obvious visibility for a while, but that's where opportunity comes. The illusion of visibility is always precisely that in markets. Crude oil at 147, inflation, and record commodities demand were the offering of 'visibility' early-mid 2008. How deceiving was that...? Take a look at my latest article. It addresses the character of these frequent(ly wrong) paradigm shifts.
I agree TBT will eventually be a good long (and I am holding some), but lets get real - 30 yr is only up around 20% from the baseline its recently found. That isn't exactly a bubble in comparison to the 300-600% gains in your other charts. I want to buy more TBT going forward ... I will be buying at 25, then 15.... When TBT hits 15-25, then I think we can all agree it is a bubble by all definitions.
Regardless, a great inflation hedge to buy the TBT!
You can procure it from some Jewelry stores as a powder or you can obtain a position in it from Kitco via their pool accounts.
The baby boomers leave the young generation no choice but to (hyper)inflate. By reducing the boomers' debts in real terms, problem solved, banks suddenly are solvent. Unfortunately, the poor retirees who weren't in on the ponzi scheme will be kicking and screaming as their buying power goes to nothing. How sad.
While on the margin we are good on natural gas supplies, you conveniently leave out of the detail that the recent surplus in natural gas is caused by wells that have extremely rapid decline rates (shale) and only satiate our need for the near term (5 years). Rapidly, the marginal cost of production on nat gas will skyrocket and make natural gas an untenable long term *primary* alternate transportation fuel.
You can't build a long term fuel infrastructure based on that model, considering we already so heavily depend on it for industrial uses that tend to like fossil inputs, and home heating which is much the same.
Natural gas looks good because it is cheap now, but unlike crude, we actually can run out of it in interim periods. In the winter we already consume a ton more than we pull out. If nat gas is to be viable as a primary alternative transport fuel, we probably need to double storage capacity, otherwise if poorly managed people may be freezing in their homes in the winter.
Additionally nat gas has pipeline and flow constraint issues. Did you know spot new york nat gas has seen $50+/mmbtu (maybe $90? I forget) price tags in recent winters due to demand in record chills? We're talking about massive infrastructure investment in a commodity that will ultimately dwindle just as quickly as oil wells if used en masse like this.
The only tenable long term solution (besides just driving less and accepting less economic activity as a fact of life) is nuclear power and electric cars. If Bush can give nuclear power to UAE, I don't see why we can't do it here and just solve the problem altogether. Next step is to build a few hundred power plant and use reprocessing internally in the design infrastructure (so waste never moves away from the plants, and we have no short supply of uranium or thorium ore). Even if we decided not to use a breeder reactor model, the vitrification methods (glass pelletizing of nuclear waste) work and are indeed relatively safe. It is time to end the fear over nuclear.