BeaconIdeas

Apple to Open 50 More Stores

Friday in The Tech Generation Daily I picked up a story by Emma Woollacott about Apple Inc. (NasdaqGS: AAPL) planning to open 50 new stores. I immediately was not pleased. This country is over-stored in general and I do not want Apple going the way of other specialty retailers by opening too many stores and diluting their brand.

Note to Steve: keep it special while selling millions of units!

The US already has too many stores in general. The recession is a Darwinian process reducing the total number of stores until all remaining open stores are profitable. This sucks for the moms and pops out there trying to compete with public companies and is not great for consumers seeking unique products.The big companies can weather the storm, issue more bonds or stock to raise staying capital while the mom and pops goes bust. Back to Apple, in NYC this weekend Apple opened its biggest NY store yet. By adding its fourth store, one no longer needs to make a pilgrimage to speak to someone at the Genius Bar which brings up two issues.

First, there are only so many extraordinarily trained people in this world (let alone geniuses). Each Apple store needs evangelist employees. Second, (repeating myself) is if there are now too many Apple stores; a visit may no longer seem special - that could be a brand bruiser. My kids have been indoctrinated having attended software classes at the Apple stores on photobook making, rock video production and sound manipulation. The fee for these unbelievably solid classes is zero. The brand value, loyalty and purchases made are priceless for Apple and pure genius. Having stores at all as a manufacturer is another crazy success of Apple and kids of all ages speak of the stores with glee. I worry about the magic leaving the experience when the lines are shorter and the stores are nearby.

Ms. Woollacott did not provide too many details but I will sleep better tonight knowing that more than half the new stores will be outside the US including two branches in Shanghai where the cash is flowing freely. Additional new stores will open in London, Paris and in Canada, Australia, Italy, Switzerland and Germany. She also wrote:

Earlier this week, the company opened others at the Louvre, in Paris, and at Brisbane in Australia. The stores planned for next year are also likely to be bigger than the company's existing outlets. Apple opened its first store in 2001. The company now has 280 stores in ten countries, and they're very popular, with nearly 46 million visits during the last quarter.

Bernstein published a report that is all over the Internet (I saw it when I searched today on http://www.swivel.com/graphs/show/2805737). Apple stores have the most revenue per square foot of any US retailer, Neiman Marcus is impressive at $611 revenue per square foot, Best buy is a surprising $930, Tiffany is outstanding at $2,666, but Apple takes the prize at $4,032.

With those kind of numbers, taking in that amount of cake, I understand Apple for opening more cash machines. Keeping it special is the key and not over storing a city even as large as my home town need to be part of the strategy. The $4,032 is bound to drop in NYC.  I am hoping that the stores in new cities keep the average high. Entering more markets is good, saturating any market will lead to brand dilution. To Steve and his marketing team I share a well know NYC expression; let’s be careful out there.

Disclosure: Mr. Corn is Chief Investment Officer – Equities of Beacon Trust Company. Through various equity strategies under his supervision he is currently long AAPL.

RIMM: Growing in Value

I am amazed at the line forming to attend the funeral of Research In Motion (NasdaqGS: RIMM). In just one week we have a Citigroup (NYSE:C) analyst downgrade and The Wall Street Journal warning about the growing competition from Google (NASDAQ:GOOG) Android software for smartphones from Motorola (NYSE:MOT). Then TheDeal.com suggests RIMM could be taken over.

RIMM has responded by announcing the buyback of $1.2 billion of its shares. The message from the firm by this action is clear. It believes its stock is cheap and so do I. Analysts are expecting an increase in both revenue and earnings this quarter and next year. However, they are predicting a slowdown in growth rate. A big point, they are predicting growth. The big questions at the brokers right now, are how much of a slowdown will we see and how will the forecast for next quarter be handled?

A major source of anxiety is currently coming from the impact of increased competition. Reality, RIMM has always had its products sold side by side with competitors. Verizon (NYSE: VZ) already offers Android handsets, AT&T offers the iPhone and T-Mobile offers a multitude of handsets. The real losers over time will be the manufacturers not focused on designing and selling smart phones. Firms offering lower-end handsets have already seen commoditization and margin erosion even in an expanding market. Also note when it comes to have its products sold in a multivendor environment, RIMM is a cash cow for the carriers. None of the carriers are going to throw RIMM under a bus for the Driod. They have already proven that can sell both successfully.

I do not for a minute believe that RIMM will out-sell Apple (NasdaqGS: AAPL) to consumers. I also believe Google (NasdaqGS: GOOG) can innovate swiftly and maybe one day take some meaningful share away from AAPL. However, GOOG does not have both hardware and software control the way Apple does. Droid and iPhone will be an interesting competitive case study in innovation and product advancement. RIMM, despite competition from AAPL and Android will grow in 2010 due to the relatively modest global smartphone penetration of roughly 15% of overall handsets.

It is also reasonable to expect RIMM to benefit from the return of enterprise spending both in the US and abroad, which has been largely absent from the growth side of the company’s revenues over the past six quarters. This could be a game changer in 2010.

RIMM remains the best positioned pure play in smartphones. This far into its quarter it is reasonable to assume that the firm is tracking within its guided range of $3.6 - $3.8 billion in revenues and 4 – 4.3 million new subscribers.

The pace of revenue is directly tied to margins which is another concern of analysts. Although margins will probably not be expanding this quarter I believe if the number of new subscribers is near plan and that margin erosion will slow down or stop.

Despite its stogy reputation, R&D and innovation is not asleep at RIMM. Over the summer it acquired Torch Mobile, a mobile Web tools developer and there is plenty of internal projects in progress.

Most analysts have a price target far higher than the stock is now. I am a holder waiting to be vindicated at earnings which are coming in just over a month. It is hard to believe that a more commoditized firm like Nokia (NYSE: NOK) has the Street assign it a multiple double that of RIMM. From my calculations, RIMM’s P/E and PEG ratios have been knocked so low and the company is so profitable, perhaps we need to start viewing RIMM as a major value.

Disclosure: Mr. Corn is Chief Investment Officer – Equities of Beacon Trust Company. Through various equity strategies under his supervision he is currently long RIMM, AAPL, GOOG, T and VZ.

Washington on Credit Cards – Clueless Again

Ok Washington crowd, here is a quick lesson on how credit card rates should work. Looking at rates and knowing the Fed Target Rate is not merely an oversimplification, it ignores the reality of the business. Sure there are villains to be exposed, incarcerated or fined. Unfortunately, our elected officials are once again leaning towards throwing the baby out with the bath water.

Step one is factoring the cost of money which is quite low right now. Step two is calculating a fair profit (yes I will come back to this topic). Step three is the administration of lending. This includes the time value of money paid to merchants until the credit card company collects. Step four is client acquisition costs such as advertising, mailings etc and maintenance such as statements and customer service. You get the picture.

Best practices for everything above have been published by Visa (NYSE: V) and MasterCard (NYSE: MA) plus American Express (NYSE: AXP) and Discover (NYSE: DFS).  

The next and most important factor is risk. In fact risk and a fair profit are the only two real variables which happen to be intertwined. Selling and G&A expenses are pretty well defined.

Risk is something that those of us on any side of Wall Street work with daily. The basic premise is that the more risk a firm takes on, the higher the potential reward.  One risk is late payment. This is handled by the assumption that money is either being borrowed, or that the credit card holder is having trouble meeting the obligation. In the old days, American Express only issued charge cards, meaning there was no credit. The card holder was expected to pay in full upon receipt. There was gold in those hills of issuing credit, and AXP joined the banks in providing credit to its customers.

Let’s get back to risk. Investors provide financial institutions money to put to work / invest for them. If we are talking about JP Morgan (NYSE: JPM) or Citibank (NYSE: C), there are many ways of putting money to work. Specifically with credit card issuance, risk measurement is a key factor in calculating the appropriate interest rate charged and should have no correlation to Fed Fund Rate or LIBOR.

Now banks are not in the business of communicating risk in their presentations to customers. The reality of the situation is that banks do communicate risk to their customers really well. They speak loudly and clearly through the interest rate offered each customer, individuals, small businesses or other entities. Banks make an assessment of every potential customer classifying each person into one of many buckets. Each bucket is parsed by income, total liabilities and payment history. From there a risk level is assigned and an interest rate is ultimately presented.

No one is making people sign up, use the cards or not pay their bills on time. Firms that charge erroneous and egregious fees should be prosecuted. The card issuers doing their job, making a living and returning money to shareholders should not be vilified or prohibited from providing an essential global service. I am hoping this does not further restrain consumer spending.

Disclosure: Mr. Corn is Chief Investment Officer – Equities of Beacon Trust Company. Through various equity strategies under his supervision he is currently long (MA), (DFS) and (JPM).

Proof of Concept – Spin-Offs Work

As an active manager, I am always seeking a new and persuasive investment thesis with a good long-term strategy or a strong catalyst. Our discovery process is rigorous with a deep checklist which satisfies sound business and investing principals. These include: differentiation in the marketplace (so not to be riding with the heard); the ability to out-perform major indexes (as an alpha enhancing satellite or core investment); easy to explain (I do not want a herd and do not want to be alone either); and scalable (so serious money can be put to work). One that crossed my desk a couple of years ago has been brought to fruition. It is rules-based and is more passive a strategy than most of our offerings.

It is the Beacon Spin-Off Index (^CLRSO) which is tracked by the Claymore/Beacon Spin-Off ETF (NYSEArca: CSD). The basic premise is that spin-offs; companies which have recently been spun-off from larger corporations, have the opportunity to better focus on their core market segment, better align management compensation with performance, will ultimately outperform.

After first leaning about the concept, our team began its preliminary investigation. We benefited from research written by academics at Penn State University: Cusatis et al., 1993 and Purdue University: McConnell et al., 2004. This got us excited enough to continue our discovery process. We read thorough coverage from consulting firm McKinsey: Anslinger et al., 1999, and then Wall Street firms Goldman Sachs: Stelmach et al., 2006 and Lehman Brothers: Dickson et al., 2006. All these studies support the investment thesis that spin-offs deliver superior investment performance (some of the work can be found here: http://www.beaconindexes.com/INDX.aspx?INDX=CLRSO&sub=2)

 It appeared to our team that a diverse group of smart people all came to the same conclusion and that group agreement should be meaningful. After discussion, we kept our enthusiasm but also added a degree of suspicion. Creating an investable product and the work that academics, consultants and researchers perform, regardless of how solid the work, is different than our work. None of our predecessors put money to work. We needed to redo all of the research, albeit with a well defined universe and thesis to test.

The spin-off concept seems intuitive to us. Of course thinking index versus active strategy was a little foreign for the team. We were born of active money management and not of index publishing. That has changed as we have embraced indexing when appropriate, with an active component. We think in terms of liquidity, volatility, risk, correlation to general indexes and, of course, performance.

Our index is comprised of carve outs and spin-offs. The investment thesis is that when management of a subsidiary is free to pursue its goals unencumbered by the agenda of its parent company and sibling subsidiaries or business units, it will outperform. Additionally, management compensation for the spin-off, in the form of equity, becomes closely aligned to actual performance. When receiving parent company options, obvious dilution occurs by the performance of other business units. We tracked and tested every spin-off and carve out public company over a statistically significant time frame and measured their performance.

We examined each name for suitability and developed specific rules for criteria for inclusion and lifespan. After our rules were set, we rigorously back-tested for performance, market correlation, capacity and liquidity to determine if we would be able to take what was a concept to a live, invest-able index.

Our goal was to find the sweet spot, meaning when to purchase these newly independent companies and rules for ownership duration. One obstacle was determining the curve of the cycle: as they reach a plateau as a mature company and spin-off status is no longer relevant.

We observed, measured and analyzed. Once the optimal settings were found we wrote our rules to describe when and how firms can enter and exit the index.

We then took our universe of stocks and applied our proprietary multifactor models to separate the stronger firms with greater potential from the firms that were spun-off for all the wrong reasons. This produced superior results to simply including every spin-off and is more compatible with our active management nature. We again measured to ensure that alpha was added by each facet, and in concert, of our design process.

When we launched the index, we were fortunate to have found and partnered with Claymore.

It is been a wild market ride since launch.

Looking at our back tests (http://www.beaconindexes.com/INDX.aspx?INDX=CLRSO&sub=2&res=2)
we observed that in down years we underperform and in up years we well outperform. In October, I ordered tests from the trough of this year (March 9. 2009) through the end of the third quarter (September 30, 2009) to analyze the returns. Clearly (CSD) has clearly performed as designed and tested. The question now is why the group of stocks that comprise the index outperformed.

In the pit of my stomach was the fear that this has become a big beta play. That in real life, beyond research or even back-testing that the index when compared to the S&P 500 or a Mid Cap Growth Index was simply higher beta, and perhaps significantly. Beating the S&P 500 this year has been challenging. Beating the Mid Cap Growth Index over this specific time-frame seemed unimaginable.

Bottom line: our index out-performed and has a lower beta than either of the indexes we used for comparison. For invest-ability I used ETFs for comparison; (NYSEArca: SPY) for the S&P 500 and iShares S&P MidCap 400 Growth Index (NYSEArca: IJK) in the graph. One can attribute some of the return to sector weightings. Ultimately, the bulk of the return attribution is due to the investment thesis.

I purchased shares on the day of the IPO so I am still under water. I am holding my shares confident in the work we performed, the research that came before us and attribution analysis we performed in October of this year.

Disclaimer: Mr. Corn is the Chief Investment Officer - Equities of Beacon Trust Company. He directs index design and maintenance as well as the firm’s active equity strategies. He is long (CSD).

Watch Dogging Wal-Mart

I have to admit, when a firm represents almost 10% of all retail in the US, there is going to be a major spot light on every move the firm makes. Frankly, I need to take the Vito Corleone approach when following Wal-Mart Stores Inc. (NYSE: WMT) meaning “I cannot judge what someone does for a living” as the Don would say, even if it seems predatory.

This week (WMT) announced that they are predicting that the 2009 holiday season would come late and it would progressively add discounts. It read to me like everyone should wait to shop until 12/18 and then go into a discount feeding frenzy at Wal-Mart.

Let’s face it; Black Friday is a myth in retail, as is Cyber Monday. The real action is back-timed to the schedule of shopper convenience and how the calendar falls.

Is (WMT) paranoid that this year will be worse than last year? Is there a dire prediction that gift givers will wait to pounce only when prices are lowest?

I believe everyone is cutting back this year. Frugal is the new chic; Target (NYSE: TGT) is hip and Wal-Mart is practical. I think there is a master plan at work and that the timing of this announcement, the amount of media coverage and the mood of the media is all being orchestrated. The media doesn’t see unemployment as a lagging indicator.  The media can’t wait for things to play out. The media is almost hoping for a double dip in the market and a second and maybe third Federal stimulus plan.

This plays right into the predatory nature of Wal-Mart. Price the competition out of business. History teaches us this strategy worked in steel, energy, and the railroads in the early 1900s. Wal-Mart is shrewd enough, strong enough and poised to price many weaker retailers out of business. Who does vendor management and pricing better? Who does supply chain management better? Who can still squeeze out a profit and remain standing at the end of this fight? Only Target can hold a candle to Wal-Mart on this one.

Now that is the plan domestically. That is the tip of the iceberg.

This country is near over-stored. Our population is static to shrinking, is aging and we have shut down immigration. Not a great growth scenario for the nation’s largest retailer. The next step for growth is already in place. (WMT) is already present in the most populated country on earth. Posted on 10/23 on People's Daily Online is Wal-Mart’s next move in China.

Wal-Mart, the world's largest retailer, released an ambitious expansion plan. The company has planned to open 5 branches in Sichuan in 2010 and to establish a logistics center in Chengdu within three years. It will be the fourth logistics center Wal-Mart has established in China.

"We are willing to invest in western China," said Ou Guoming, senior manager of Wal-Mart Regional Office, adding that this decision was based on the significance of the western China market.

In the first half of 2009, western China witnessed 11.8 percent of GDP growth and 19 percent retail sales growth.

This article speaks for itself. Wal-Mart stock was just about tops in 2008 stock performance and so far horrible in 2009. Many investors and analysts have lost interest; especially after (WMT) discontinued providing guidance making the game far less interesting in their eyes. Fact: Wal-Mart continues to deliver quarter after quarter. The question: will the Street reward the firm and its investors with a fair valuation in terms of its multiple (P/E)? Wake up Wall Street, I am voting yes by holding our shares.

Disclosure: Mr. Corn is Chief Investment Officer – Equities of Beacon Trust Company. Through various equity strategies under his supervision he is currently long (TGT) and (WMT).

The New World According to GARP

Growth at a Reasonable Price or GARP investing began a long time ago. One of the early spotlight managers was Peter Lynch. He was an innovator and leader as he sought out growth companies that were fairly priced. Sounds like a simple plan, but good growth companies that are not already expensive can be hard to find in any market condition.

First, the attributes of GARP investing are typically firms with low PEG (price to earnings to growth) ratios and in many cases are undiscovered. Once discovered their multiples can perhaps be worth their growth potential to many investors, but not to GARP investors. We prefer to find the growing companies that are assigned a multiple based closer to today’s earnings, rather than a high PEG based on future expected growth.

Additionally, in the case of our investment process specifically, quality measures such as low debt for its industry, strong balance sheets and good operating margins are required before we screen for low PEG. Screening to create a custom universe of these firms is a great way to narrow the overall universe of stocks to further research and is an easy project most years. Add screens such as market cap minimums and maximum, liquidity and a few of your own and you are on your way. The usual down fall is finding too many seemingly qualified firms. Screener beware; do not get caught up in refining your screens to diminishing returns. Find some basics to provide you with a good solid list of stocks to research. From there, do your own thinking and choose a good selection of stocks.

Fast forward to 2009 and the task become impossible, well improbable. I state this because the vast majority of firms experienced negative earnings and revenue growth through much of 2008 and the beginning of 2009. If one is screening for one and three years net income growth in Q109 or Q209 they narrowed their universe to a very small list of companies. Few of these firms are likely to be considered real growth candidates.

The issue is that most firms were forced to retrench in this 12 to 18 month time period. Growth stopped almost universally and many firms contracted, some quite a bit. So what is a growth investor to do, and what is a GARP investor to do?

We understand by studying history that after a market meltdown, they may be a market melt up. This year was met by an unprecedented melt up. Many prudent investors had trouble keeping up with the market as so many quality companies did not benefit from the markets meteoric rise.

Our investment team decided before the market turned around that we would redraw the lines of measurement to create our own new GARP definition. We gave every firm a free pass until 1Q09 earnings. We then shortened the timeframe from one or three year to quarterly/prior year max, with the caveat that sometimes what we would consider that growth was really earnings that are less negative than a quarter ago. We also added in quality metrics for instant wheat / chaff separation. We then categorize companies in three stages of the new GARP definition:

• Stabilizing businesses; less negative earnings than last quarter.
• Stabilized business; about to break even or make a small profit. This usually signals a right sized business and more consistent revenue.
• Growing once again; albeit from the new base we have established.

One of our holdings Intel Corporation (NasdaqGS: INTC) reported better than expected earnings this week and its stock benefited the entire market. Its revenues and earnings numbers are still down from last year, but using the new yard stick we can own a company that is growing and indeed, management announced they predict a real return to growth.

It is not just tech companies that can fit this new set of conditions. Although these firms have yet to report this quarter Cummins Inc. (NYSE: CMI), BB & T Corp. (NYSE: BBT) and even Apple Inc. (NasdaqGS: AAPL) all have exhibited these new GARP qualities. Although these may not be undiscovered, they still for a variety of reasons earlier this year made investors nervous. Each one of these firms had to press that GARP reset button to gain our consideration.

The investment strategy for success remains constant, the tactics for getting there evolves with the times. Over the next few years portfolio managers will revert back to their roots and much of 2008 / 2009 will be forgotten. I hope this generation and the up and coming investment professionals will remember all of the lessons of how we got into this down market, and the way to reestablish wealth for clients. Those who do not study history are destined to repeat it.

Disclosure: Mr. Corn is Chief Investment Officer – Equities of Beacon Trust Company. Through various equity strategies under his supervision he is currently long (INTC), (CMI), (BBT) and (AAPL).

The Bank Credit Crunch Spawns Bonds

In my firm the investment team discusses a variety of economic issues and fixed income strategies. As an equities manager, I am pleased to learn from my associate's experience and wisdom. Some of what they say sounds so simple, but is not always so easy to execute.

Right now interest rates are near zero. It is a good time to borrow money if there is a strategy behind the borrow.  The strategy is key and it can be as simple as retiring old debt, refinancing to lower payouts and stretching payments for the long-term at very favorable rates.

	Price	Yield
2-Year	100.188	0.9
10-Year	102.297	3.35
30-Year	105.156	4.2

 

As the chart (data from Bloomberg) above shows, the US government can borrow long-term money (30 years) for 4.2%. If I were running things, I would issue as much long-term paper as I could. This is a historic opportunity, but the government works, as we know in mysterious ways.

I on the other hand, have refinanced my life and borrowed money at what I feel is the lowest interest rate I will ever see. I read in the FT today, there are corporations (said with tongue firmly in cheek) just as smart as I am.

It seems some of the largest companies in the world are bypassing traditional bank lending for long-term debt. Is this a byproduct of the credit crunch and new lending practices for banks? Are they missing the lucrative boat, or are they participating in issuing the paper and bypassing lending restrictions? After all, revenue is revenue.

Companies Choose Bonds for Cheap Funds is an article in the FT by Anousha Sakoui and Nicole Bullock which appeared 10/12/09.

Companies have borrowed more from bond investors than from banks and other loan providers for the first time this year in a bid to lock in cheap, long-term funding.

Low interest rates and rising inflows into fixed-income funds have triggered record bond issuance as banks cut back lending. Global bond issuance from non-financial companies has reached $1,310bn in the year to date, surpassing corporate loan volume of $1,080bn, according to Dealogic. The data provider said this was the first time this had happened since it began collating records on the bond and loan markets in 1995.

Before the credit crunch, corporate loan volume was $4,160bn in 2007, a record four and-a-half times the volume of corporate bonds of $889.4bn. This year, US non-financial companies have raised $449.3bn in the bond market and $360bn in the loan market, and European non-financial companies $504.4bn from bond investors and $315.4bn in loans.

Companies as large as General Electric (NYSE: GE) and Royal Dutch Shell (NYSE: RDS-A) have taken advantage of the markets. Shell sold two-year bonds with a coupon of 1.3%, the lowest ever for a highly rated company.

General corporate purposes, refinancing debt that may be coming due, paying off banks and joint venture partners or building a war chest, money is cheap and the strong are eyeing the future before their peer group rivals catch the wave. I wrote about equity raises over the summer. Bonds are also filling coffers around the world.

Now the best part, I await the strategies smart, strong firms will craft with their newly filled piggy banks.

Disclosure: Mr. Corn is Chief Investment Officer – Equities of Beacon Trust Company. Through various equity strategies under his supervision he is currently long (RDS-A).

Sell Amazon, Buy Wal-Mart

It can be challenging to part with a stock that has performed so well and to hold another that has lagged all year. Yet I have sold Amazon.com (NasdaqGS: AMZN) and am holding Wal-Mart (NYSE: WMT).

Sure one stock is a Consumer Discretionary and the other a Consumer Staple so the two firms are not truly a direct comparison. Looking carefully; they are both low price retailers known for efficient back ends used to deliver products on the cheap. Yet they compete on different fields; Wal-Mart by car and Amazon by click. The world is changing as I observe these companies seeping into each other’s territories, tactics, and markets. This may accelerate direct competition.

Amazon has been the poster child for the Internet age. No bricks and mortar, no pricy real estate and consistently aiming for lower overhead in every phase of its value chain. This theoretically should allow Amazon to be the low cost and high profit provider. Its margins have always come under analyst scrutiny and continue to hold back earnings growth. Additionally, by use of the web and partnerships on the web, it can offer every product imaginable assuming it can procure it, or have it dropped shipped based on client/vendor contracts. The firm through its expansive web presence and technology has embraced cloud computing enabling other firms to use Amazon’s back end to manage their on-line presence. Now a maturing company with over 20,000 employees and massive state-of-the-art warehouses, the firm posted 2008 revenue over $19 billion. My investors benefited nicely holding the stock this year far out pacing the Consumer Discretionary Index as well as the S&P 500.

Wal-Mart is the world’s largest retailer by revenue with over two million employees and north of $400 billion in revenues. The firm is the poster child for bricks and mortar. WMT is the grizzly bear in the room and cannot be ignored. Without many acquisitions, it has grown organically in an exponential fashion. WMT’s stock is actually down year-to-date. This means the market thinks that WMT is worth materially less today, than it was worth on 12/31/08. I believe the market is wrong.

So what has changed my perspective after the spectacular run we have experienced with AMZN and the yawn-fest of WMT? It is a small announcement by WMT that could have dramatic impact.

 In Amazon’s June filing, the firm announced that it obtained only 53% of its revenue from within the United States, an impressive global expansion statistic. Gaining revenue outside the US in markets potentially growing more quickly than domestically attractively positions AMZN to our investment process. With approximately 7,873 stores and only 24% of its revenue obtained outside the United States, Wal-Mart has built a strong and powerful brand in the United States, and has enormous room to grow internationally. The firm is not shy about its global expansion plans. It is grounded with its stores and now is moving on-line.

Wal-Mart dipped its toe into the world of online retailing a few years ago and has recently decided to raise its game.  By adding one million SKU’s to its online offerings from other sellers as part of its online mall, Wal-Mart is directly threatening Amazon’s revenue. Similar to the structure of Amazon’s business, Wal-Mart will receive a portion of the revenue of all products sold from its website; however its partners will ship products directly and be responsible for exchanges and returns. Simply by entering the game, Wal-Mart’s presence will melt away some of the future growth and earnings potential of Amazon.

Back on September 19^th the NY Times published a piece Can Amazon Be the Wal-Mart of the Web? What is missing from this article is the pricing, negotiating and sourcing power that provide WMT with what many people call an unfair advantage, and that it is applying these skill sets and its size to the web.

The online retailing space itself may be growing; however, Wal-Mart has the media, financial strength, customer touch and its own cloud to potentially take significant current share, or future market share growth away from Amazon. Wal-Mart is the big, ugly monster of retail, making and breaking suppliers and as stodgy of a firm as it is viewed by the Street, it has changed retailing forever and will continue to lead store innovation. Now WMT is serious about on-line.

Amazon is moving forward and borrowing a page from Wal-Mart’s playbook by expanding its private label business offering hundreds of private label kitchen products and outdoor furniture, and using its relationships with manufacturers to undercut prices from the competition. Additionally Amazon who is no slouch has made impressive moves like the acquisition of top niche player Zappos.com. With a battle looming, any distraction due to merger integration versus Wal-Mart going it alone can also add vulnerability.

On the other side of this trade is the attitude and publicly stated goal of WMT. According to Kerry Cooper, Wal-Mart’s chief marketing officer, “Our vision is to make Walmart.com the most visited and valued online site.” This is not good news for on-line retailers of general merchandise.

Some analyst will predict an online world big enough for the two competitors. Some straight facts: AMZN has an operating margin of 3.78% compared to 5.73% for WMT. This data point has held AMZN stock back with much debate about free shipping, revenue grabs, customer loyalty, and additional volume—which to date has not closed the profitability gap, an albatross for AMZN. Traders will look at time frames and want to ride the momentum of AMZN. As a long-term investor, WMT is poised to revert to mean performance (that of the Consumer Staple Index) which would translate to shorter term out-performance to catch up and perhaps out-perform longer-term as the firm moves on-line in a more meaningful way. This opens up more channels to generate incremental revenue both here and abroad. The wake a firm the size of WMT creates will certainly rock many boats and capsize small ones. With an undervalued PE of 14 compared to a PE of 59 for AMZN, I am in the retail space, remaining long WMT.

Disclosure: Mr. Corn is Chief Investment Officer – Equities of Beacon Trust Company. Through various equity strategies under his supervision he is currently long WMT.

Verizon vs AT&T

I am an iPhone wannabe-owner. I would keep my Blackberry for work. I love the keyboard, the enterprise security and the personal privacy of two phone numbers. I am also crazy enough to carry two phones. I already carry my iTouch and Berry. It would be pretty much a straight swap from a weight/bulk perspective.

The issue as I have written about before is network coverage on the east coast. AT&T (NYSE: T) just does not have the reach or reliability to service my needs compared to Verizon (NYSE: VZ) who, I might add, could stand to add more towers in Berkshire and Hampden counties.

I own both for myself and for our investors, all four companies in this discussion: T, VZ, AAPL and RIMM. I hold them for different reasons and they are not all in the same strategy. For T and VZ, it is the dividends and that they have lagged the market during the recovery. Telecommunications may come back into vogue and we would be rewarded. For now they are nice low beta stocks in the strategies. Apple (NasdaqGS: AAPL) and Research In Motion (NasdaqGS: RIMM) are innovators (OK Apple fans, let this pass, the post is about the carriers) and technology companies. They are not quite the direct competitors the media likes to suggest. Apple is triple the market cap and has multiple product lines. The two companies do share attributes. Both are leaders. Both are dominant within their market segments. For smart phones, both now have their eyes on the others markets. Holding both of them back however are the networks that make them work wirelessly, for calls and data.

Big companies invest in their infrastructure. A major reason to invest in a company is its willingness to invest in the business and for the right projects. Both VZ and T have invested heavily in wireless. It makes sense as that is the faster growing part of their businesses and should lift their multiples. They both are shedding while maintaining legacy businesses (think land lines).

Future growth and earnings is why one pays more for a company than its present earnings and book value. If we did not look forward, all PEs (price to earnings ratios) would be essentially 1 and PEG (price to earnings to growth) would be nonexistent. The amount and speed of growth is why firms are awarded different multiples. Utilities and most telecommunications firms are slow growers. T and VZ have PEs around 13-15. These multiple could grow depending upon growth expectations.

As both an investor and a consumer I read with great excitement the WSJ headline: AT&T to Boost 3G Network in Six Cities. I just could feel that one of the cities had to be NY, Boston or Hartford (places that help me) and grant the northeast some additional network capacity. I was already deciding which iPhone to purchase. Alas, I was sadly disappointed.

AT&T Inc. on Wednesday laid out specific plans for its wireless network upgrade, including promises of faster coverage for six major cities by the end of the year.

The telecommunications company has borne the brunt of criticism over its network connection, highlighted by the heavy use by Apple Inc. iPhone customers.

The company, which has been more vocal recently with its upgrade plans, also said it expects to cover 25 of the nation's largest 30 markets by the end of 2010, and 90% of the existing third-generation, or 3G, footprint by the end of 2011.

Current plans are for Charlotte, Chicago, Dallas, Houston, Los Angeles and Miami to get the upgrades first.

AT&T views the upgrade, an enhanced version of 3G technology called High Speed Packet Access 7.2, as a necessary transition measure before it ultimately moves to the 4G network. The company plans to run trials for 4G next year, with deployment in 2011.

In telecommunications lifecycles, this is actually a reasonably fast roll out. It will provide solid infrastructure jobs and benefit many people along the way. But it will not get me my iPhone!

"Although [the network data growth] has created some challenges and operational experience for us that we are having to weather and move our way through, I think these all portend well for the future," said John Stankey, president of AT&T's telecom operations business.

Mr. Stankey said he characterizes the congestion issue as a "two-coast problem," referring to congestion in Los Angeles, San Francisco and New York. He added that New York is through the worst of its problems, with more severe issues on the West Coast.

"We feel pretty good about where we are at this juncture and as we roll through the end of this year, we think we are going to have most of these issues behind us nationwide," Mr. Stankey said during an analyst presentation.

As part of its upgrade announcement, AT&T said it will enable a number of cellphones, including the iPhone 3GS, and laptop cards to tap into the faster 3G network.

The company previously said it plans to invest $17 billion to $18 billion this year, with more than two-thirds going to broadband and wireless deployments.

AT&T is also trying to keep pace with Verizon Wireless, which plans to jump straight to 4G with deployment next year.

Seriously, $17 - $18 billion is a lot of cake. However, the demographics of cell use in money centers is well documented. My issues are shared with many other financial services professionals as well as other industries.

Is Apple giving up on the corporate market and ceding it to RIM? Or will the rumors of a deal with Verizon come to fruition? If it does, customer choice will be chosen by coverage and consumers and businesses may benefit by a price war. The capital investments are impressive and also telling of where each firm believes its future subscribers want coverage. 

As a consumer I will be voting with my hardware and wireless contract. Which model, which plan are a fun game for the whole family.

As an investor I vote with a block trade. Market participants are curious as to the plans of these firms and where they view the value chain for them and their customers. As more information is released, we are ready to add to our holdings, trim them or sell them completely.

Disclosure: Mr. Corn is Chief Investment Officer – Equities of Beacon Trust Company. Through various equity strategies under his supervision he is currently long AAPL, RIMM, T and VZ.

Equity Offerings – the Strong Thrive

Earlier in the decade, buying back shares was all the rage. I posted in 2007 my perspective. If the company has the cash, believes its stock is cheap, a small buy-back to cover options and other corporate issuance is prudent to not dilute shareholders. But, the bulk of retained earnings should be returned to shareholders as dividends and even more important, invested back in the business. If management believes it cannot invest in the business; they have serious problems. The point was that many firms were issuing debt to buy back shares. Financial engineering was in play to buy shares on the cheap with historically low interest rates and allow cash flow to pay the vig. Shareholders supposedly gained because there are fewer shares outstanding. We all know how this ended: frozen credit markets, no equity offerings, and plummeting stock prices.

As the seasons changed so did the mindset of management. Add to that, government intervention and the risk appetite of institutions. The market for equity offerings exploded in the second quarter of 2009, with over $100 billion brought to market; and the key - sold. Although, only 2% of the equity offerings were IPOs, the dollar value of IPOs Q2 was double that of Q1 and no surprise, the highest level seen since Q2 2008. The global equity rally from the low in early March, coupled with improving confidence in the economy provided the opportunity for significant capital raising via primary and secondary offerings.

Historically, low interest rates like we have now have spurred debt offerings rather than equity offerings from firms that are in need of capital. There has been plenty of refis in the corporate world.

There are a number of factors that have led to such a high level of equity offerings in 2009. The first and primary reason firms issued stock is “because they can”. After the run up in stocks from the March low, the appetite for risk has improved. There were trillions of dollars and in foreign currency sitting on the side lines seeking a return. This also helped create a market and a huge amount of liquidity for equity offerings. The fixed income markets have not thawed as quickly as the equity market, causing the stock market to be more attractive on a relative basis.

The government forced many financial institutions to add to their balance sheets and stock offerings were announced weekly by the industry. While large banks make up the majority of equity offerings in Q209, companies of all sizes from all sectors have participated.

Many firms announced secondary offerings along with earnings results that beat expectations. The result from many of these firms has been an initial price drop on the news of dilution followed by a continued run up in stock price (read: BB & T Corp. NYSE: BBT, Bunge Ltd. NYSE: BG, Petrohawk Energy NYSE: HK,  Sterlite Industries India NYSE: SLT, JPMorgan Chase NYSE: JPM, Anadarko Petroleum NYSE: APC). In the wake of the last year, firms may be looking for a source of permanent capital. Capital to gain market share, make acquisitions while many companies are struggling and capital to introduce new products and enter new markets. That takes vision and a strong measure of risk/reward scenarios.

In the second quarter, financial firms made up 74.48% of the offerings, followed by Energy 5.86%, and Materials 4.14%. The largest 10 offerings of Q2 total approximately $45 Billion:

Ticker	Name	Announcement	Effective	Offering Type	Value ($Mlns)
BAC	Bank of America Corp	5/8/2009	5/19/2009	ADDL	13,463
WFC	Wells Fargo & Co	5/7/2009	5/8/2009	ADDL	7,502
JPM	JPMorgan Chase & Co	6/1/2009	6/2/2009	ADDL	5,006
GS	Goldman Sachs Group Inc	4/13/2009	4/14/2009	ADDL	5,000
MS	Morgan Stanley	5/7/2009	5/8/2009	ADDL	4,041
USB	US Bancorp	5/11/2009	5/11/2009	ADDL	2,502
MS	Morgan Stanley	6/2/2009	6/2/2009	ADDL	2,247
STT	State Street Corp	5/18/2009	5/18/2009	ADDL	2,000
DOW	Dow Chemical Co/The	5/5/2009	5/6/2009	ADDL	1,957
RF	Regions Financial Corp	5/20/2009	5/20/2009	ADDL	1,600

*data from Bloomberg

Although Dow Chemical is the only non- financial in the top 10, American Electric Power Co, Ford Motor, and Express Scripts are not far behind and completed large equity offerings in Q2 as well. Thus far in 2009, approximately 39% of the companies that have issued equity offerings have been financials, and while this is up from previous years, the following chart indicates that other sectors such as energy, industrials, and healthcare are also participating.

Sector as a % of total # equity offerings	2006	2007	2008	2009
Consumer Discretionary	11.01%	7.79%	7.46%	5.78%
Consumer Staples	1.36%	1.98%	1.29%	2.41%
Energy	12.22%	13.60%	15.17%	16.14%
Financials	25.94%	20.40%	31.88%	39.28%
Health Care	17.04%	17.71%	14.65%	11.33%
Industrials	11.61%	13.46%	11.05%	9.64%
Information Technology	11.61%	17.14%	7.71%	6.27%
Materials	3.17%	3.68%	5.14%	5.06%
Telecommunication Services	2.56%	1.98%	0.51%	0.24%
Utilities	3.47%	2.27%	5.14%	3.86%
Total	100.00%	100.00%	100.00%	100.00%

*data from Bloomberg

It is the hope of this country as well as business executives that the equity markets allow firms to raise money, provide fair valuations and create liquidity for everyone. It is the job of investors to seek out the firms that have balanced the risk/reward spectrum and are growing their companies, gaining market share, introducing products or making strategic acquisitions in 2009, and positioning themselves for 2010 and beyond.

Shout out: research for this post was also performed by Beacon Analyst Emily Needell, who recently passed level II of the CFA tests – go Emily!

Disclosure: Mr. Corn is Chief Investment Officer – Equities of Beacon Trust Company. Through various equity strategies under his supervision he is long BB & T Corp. {NYSE: BBT}, Bunge Ltd. {NYSE: BG}, Petrohawk Energy {NYSE: HK}, Sterlite Industries India {NYSE: SLT}, JPMorgan Chase {NYSE: JPM} and Anadarko Petroleum {NYSE: APC}.