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  • Amex: It's Time For Management To Get Aggressive [View article]
    "...people mention AXP leaving Costco because it wasn't profitable. I'm not sure it's going to be profitable for Visa, either - but that didn't stop Visa from taking a significant chunk of AXP's business."

    I have to disagree with that characterization. That chunk of revenue went away - it was not lost to a competitor. What was "won" by Visa/Citi was a deal to process an amount which was ~8% of AXP's revenue. That revenue was low margin, but profitable. The related Costco loan portfolio which AXP still owns (~20% of total loans) is unimpaired and can be sold or run-off. Some percentage of those customers will be retained.

    Obviously there is uncertainty about the particular sources of future ROIC for AXP going forward, and that has been true for quite a few years now. While the company has an incredibly valuable brand, it must change as the world and its customers change. Actually, the Costco deal was a demonstration of that kind of willingness to evolve, IMO. Anyway, here's a summary of this event as I see it:

    AXP originally signed a low profit processing deal with Costco based on the expectation that the loan portfolio captured would render the decision worthwhile. Even if there were pre-existing Amex cards used, there would be a fee paid to process transactions, and there were no cash back requirements on those non-partner cards. They turned out to be right, and whatever the stand-alone metrics were, the rolled up ROE result over the time frame was stellar. Recently, AXP declined to take a lower or no margin deal for the payment processing, but the benefits of their original decision still aren't over, since the loan portfolio will remain as an earnings contributor, or sold to redeploy the capital elsewhere.

    Visa/Citi has signed a possible zero profit processing deal with Costco based on the expectation that the loan portfolio captured will render the decision worthwhile. Since there is very likely to be a significant amount of non-partner Visa cards which could be used, there will be a fee paid by Costco to process those transactions which will need to be reimbursed. I don't know the possibility, but there could potentially be negative cash flow on the payment processing. Only time will tell if the loan portfolio earnings will justify the deal.

    Based on the foregoing, I sure would rather be invested in AXP than C. I don't think Visa suffers in any event, but they may be the one to required refund out of partner network reimbursements. As a final comment, I agree with User8152's observation about the difficulty of comps here. While I sympathize with those who may have bought AXP at higher prices, this has nothing to do with how management should operate the business.
    Apr 24, 2015. 01:56 PM | Likes Like |Link to Comment
  • Dril-Quip: Despite Positives, Stay On The Sidelines [View article]
    Greets Batman. I agree the order cancellation rate is very likely to be low for DRQ because - on balance - their equipment is more weighted toward the backend of well development where the equipment is required to complete in-process work. During the 2008-2009 price environment revenues and EPS flattened rather than dropped. IDK what happened to backlog, but then I never attach too much value to backlog unless it's contractual (i.e. there are penalties for order cancellation).

    It looks like analysts are usually fairly accurate with DRQ I'd call DRQ a very low risk way to play a 2-3 year commodity price rebound, with a bonus take-out possibility.
    Apr 23, 2015. 02:15 PM | Likes Like |Link to Comment
  • Gilead Buying Vertex? What's The Use? [View article]
    giofls, it's already too big for any but JNJ, NVS, or RHBBY. I don't think the PE ecosystem exists to help finance a take over in this kind of asset light space.

    A buy out by JNJ would be a bad outcome, but Roche/Gilead would be great. I don't know NVS very well.
    Apr 22, 2015. 03:28 PM | Likes Like |Link to Comment
  • Gilead Buying Vertex? What's The Use? [View article]
    I am not behind a Vertex buy for any apparent reason (admittedly I don't intimately know their pipeline), but I agree that dismissing a drop off in revenue is unwise. Even granting that it is true that GILD treatment(s) have unmatched efficacy, that says nothing about what can be seen as sufficient efficacy in the competitive offerings, and what effects that marketplace dynamic will have on pricing. Management has already acknowledged as much. Why should this be such a surprise?

    As for the use of present GILD cash, it is more a matter of how much is needed to fund the current pipeline in the liver space. I would fully expect them to be acquisitive in that space with any excess.
    Apr 22, 2015. 12:57 PM | 3 Likes Like |Link to Comment
  • Bloomberg: Costco to pay near zero in new credit card deal [View news story]
    I did love the explanation. That's exactly what I expect management to do - use capital wisely. How do you think AXP has consistently achieved the ROE it has? Or do you even care?
    Apr 21, 2015. 10:46 PM | 1 Like Like |Link to Comment
  • Bloomberg: Costco to pay near zero in new credit card deal [View news story]
    That's easy Ed.

    a(x+kv)+ b(y-ku) = ax+by + k(av -bu) =ax+by + k(udv -vdu) =ax + by

    Just solve for a, d, k, u, v, x, & y
    Apr 21, 2015. 10:32 PM | Likes Like |Link to Comment
  • Bloomberg: Costco to pay near zero in new credit card deal [View news story]
    Thanks for your particular viewpoint Dsand. I've said elsewhere that the AXP metrics show incredible stats re: volume billed vs. cards issued. I guess they have to be discussed in comparison with Visa and MasterCard, but they are a very different company.

    As for Costco, the more I find out the happier I am. It would have been a big mistake for AXP to take that deal. The result is some earnings uncertainty and temporary flatness, but that is offset by a share price opportunity. This is American Express. They need not be desperate to do a bad deal, because many partners are better suited to benefit from their network.
    Apr 21, 2015. 10:18 PM | 1 Like Like |Link to Comment
  • Rayonier Advanced Materials: Small-Cap Cash Cow In-The-Making Trading At Steep Discount To Intrinsic Value [View article]
    I left this comment on your buddy's longer article.
    Apr 21, 2015. 09:31 PM | Likes Like |Link to Comment
  • Rayonier Advanced Materials: Industry Leader Priced At Steep Discount To Intrinsic Value [View article]
    First let me say nicely done on the article. Very professional.

    I own this company as a stub from the split with RYN, even though it was originally the timber operations I was after. Not one of my best picks, although I've been able to trade my basis in RYN lower. RYAM I watch in horror and fascination. It's got educational value for me so I keep it to wince at. :)

    Yes, most of their profit is from cigarette filters and at best this market is flat, at worst in decline due to cessation. No, this is not a hard supply chain switch to get if a customer is sufficiently motivated. Hint: Bracell has already received taste test approvals from China Tobacco. Sell side analysts just have this one wrong.

    Celanese is diversifying supply away from RYAM regardless of cost (as a supply chain improvement). Last year when management announced a plan to move 'significant' CS capacity to commodity grades on long term contracts I think it was an admission that they lost share to Bracell (probably Nantong). Daicel contract renewals in 2016, Eastman in 2017.

    I see the low case here as fair value.
    Apr 21, 2015. 09:24 PM | 2 Likes Like |Link to Comment
  • Bloomberg: Costco to pay near zero in new credit card deal [View news story]
    Drew, the source was Bloomberg, Visa, and Citi. AXP confirmed the deal was a loser for the payment processor, as the reason they passed. I suspected that something like this had happened - Costco is known for grinding suppliers, and I always wondered why AXP went there. Great business decision on both sides - I'm a customer and stockholder of both.

    "In a deal with Visa Inc. and Citigroup Inc., Costco’s acceptance costs will be about zero, according to people familiar with the arrangement. That compares with the roughly 0.6 percent of each transaction the retailer pays its current partner, American Express Co. While Costco will still incur small fees on Visa cards issued by other banks, incentives from Citigroup and Visa will offset them, the people said."

    Visa and (heh) Citi? Not such a great decision, IMO. "We make no money, but we'll make it up in volume." 0.002% of $100 billion is $200mm (and I doubt they get .2%). Not a great return on cap annualized for a payment process.
    Apr 21, 2015. 02:23 AM | 1 Like Like |Link to Comment
  • Amex: It's Time For Management To Get Aggressive [View article]
    I don't see too much concern from "the street." Smart money is buying, on balance. We haven't made a move like the 2013 low will be tested, but even if it looked like that, wanting management to act in "semi-desperation" to "turn technical momentum around" is a rather unusual desire isn't it? I mean, are you really saying that the management of a Fortune 500 company should use TA to look at their share price and make fundamental changes to affect it?
    Apr 20, 2015. 10:04 PM | 2 Likes Like |Link to Comment
  • A Soldier Returns From War And Faces His Financial Future In 8 Steps [View article]
    Thank you for your service Jorge. You'll be in my prayers by name. Good luck.
    Apr 20, 2015. 03:17 PM | 1 Like Like |Link to Comment
  • Procter & Gamble's Buyback Should Be Renamed 'Employee Compensation' [View article]
    "I am not convinced the whole situation is under management’s control."

    Of course this is under their control. They designed and maintain each process which results in the issuance or retirement of shares. Certainly they decide the strike and exercise prices of the options. I believe (solely based on personal experience with another Fortune 100 company) that the company will exercise expiring options on the employee's behalf if they have economic value - even if not instructed to do so by the employee.

    But you're absolutely right, the whole question is a rats nest which extends well beyond management compensation or stock options in general. Employee compensation would also include rights (preferred shares) granted to the ESOP, so the whole pension plan balance is also relevant. These are big numbers, and one need not have an opinion on whether or not they are a good thing to recognize their impact. This is the world PG occupies.

    All in all, I think the criticism leveled at the author here was not really justified. P&G management trumpeted a $6 billion buyback, yet realized a decline of only 26mm fully diluted shares YoY (value ~$2 billion at current prices). There's an identifiable $4 billion for the OCD sufferers. The author sure could have connected dots better though.
    Apr 20, 2015. 12:49 PM | Likes Like |Link to Comment
  • Why I Am Exiting My Position In General Electric [View article]
    You're welcome. The biggest flag I see is declining ROE. Timing is another thing entirely. This one depends on where you think we are in the cycle, oil price, economic recovery, etc. That's why I compare it with GE - things may not look great right away.
    Apr 20, 2015. 10:59 AM | Likes Like |Link to Comment
  • Why I Am Exiting My Position In General Electric [View article]
    I'm looking at ABB. Not exactly GE (more like EMR), but that's a good thing. With the strong $, the world is on sale and Euro easing is a tailwind too.
    Apr 20, 2015. 10:02 AM | Likes Like |Link to Comment