CLWR - A Watershed Moment

I've written extensively about Clearwire, and it's trials and tribulations. To me, it is the most interesting ongoing stories in the telecom sector. As a quick review, Clearwire, best known for its 'Clear' wireless 4G internet products was started by a consortium of technology companies, the largest of which is Spring (with a 54% stake). Sprint has since been renting CLWR's 4G network for it's cell phone service. However, for several years now, CLWR has faced challenges reaching profitability as subscriber growth hasn't been strong enough to offset the large capital expenditures. Through all this, however, the company was still able to rely on the steady revenue stream from Sprint - their biggest customer.

The more recent issue with CLWR, however, is related to its technology. CLWR adopted WiMax as its technology standard very early on. Now, when it made that decision, it was unclear if WiMax would be the industry standard going forward. A WiMax alternative - LTE - also waited in the wings, and many thought that this would ultimately win out. Well, fast forward a few years, and those people were right. LTE was later adoped by both Verizon and AT&T, and it's quickly becoming apparent that WiMax will go the way of Betamax and HD DVD. CLWR has long maintained that, even if LTE won out, it would not be difficult to make the switch, something I doubted then, and doubt even more today.

And Things Begin to Get Ugly

Last week, Sprint announced that it is ending its agreement with CLWR and will, instead, build its own LTE network. After 2012, CLWR will lose its biggest customer, and will need to scramble to find a way to survive. I have my doubts it will be able to do so at this point. With 4x more debt than it has equity, and no expectations for profitability until at least 2014, the company will have difficult time finding the capital needed to make a switch into LTE. The company has just under $900million in cash and last year lost over a $1 Billion in operating cash flow. Things are grim, things are very grim.

The Chances of Survival

I think it will be nearly impossible for the company to make a switch to LTE in its current financial state. There a couple of alternatives that I feel are more likely. 1) They are bought out by one of their parent companies. Spring may even be willing to let the company go into bankruptcy, shed the debt, and take over the remaining assets - of which the spectrum and customer base still likely have value. 2) Get bought out by a minority shareholder or by a competitor looking for spectrum. Sadly I still think this won't happen until bankruptcy hits. In other words, stay far far away from this stock - even if it is trading at a paltry $1.42 vs. a 52 wk high of $7.44

What are your thoughts?

Questions/Comments/Feedback?Please don't hesitate to let me know of questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!

The Standard Disclaimer

Everything I've written above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I've said above. This includes consulting with a financial advisor.

Very Few Things Upset Me...

but this one really had me irked, and I feel compelled to write about it. 

Sen. Mitch McConnell, Rep. John Boehner, Sen. Jon Kyl, Rep. Eric Cantor

These are the 4 lawmakers who, last week, wrote a letter to Fed President Ben Bernanke. In the letter (the letter can be found here) they try to suggest (read: pressure) Bernanke into not taking any further monetary easing measures. In a nutshell, I feel that this letter is an absolute disgrace which borders on illegal. 

A little background for those of you who don't know - the Federal Reserve is a separate and distinct entity from the Federal government. Most countries around the world have similar entity, but not all are separate from the government. It was created to promote 2 things - control inflation, and promote employment. Now, if you really think about it, that's a tough job. It's like being told you have to navigate a ship while also plugging holes in its hull at the same time. 

Anyway, the key to all this is that the Federal Reserve was purposely created to be separate from the government for a specific reason. Similar to the principle of church and state, the activities of the Federal Reserve are free from the influence of politicians. Leaders of the Fed are appointed, not elected, and in the case of Bernanke, he does not answer to any government official (granted he is appointed by politicians, but the interaction ends there). 

This is the reason why this letter upsets me. Having the separation between the Fed and government is sacrosanct. It is essential in ensuring that monetary policy is done in the best interest of the economy and the American people. Do they always get it right? No. But that's not the point. The point is that they should be able to whatever they please as long as its consistent with their charter. The letter from these politicians comes seriously close to violating these principles. Even if the letter is merely political posturing, it shouldn't happen, ever, but especially when you have a government that is as dysfunctional as the current one.

Ever since the debt ceiling debacle, I've felt that the current government has lost sight of the greater good for its constituents and has become overly rooted in its ideologies (both democrats and republicans). However, taking this even further by trying to involve the Fed (even in the case of a token political gesture) is going much too far.

What are your thoughts?

Questions/Comments/Feedback?

Please don't hesitate to let me know of questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!

The Standard Disclaimer

Everything I've written above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I've said above. This includes consulting with a financial advisor.

Idle Cash - No Such Thing?

Hi All!

First, let me apologize for my prolonged absence the last few months. It's been an interesting year, and a lot has changed. Some family issues caused me to miss several months of sharing ideas and insights into investing with you. Afterwards, I was lucky enough to get an internship as an equity analyst at American Century Investments. The experience was awesome, but to avoid any risk of disclosure conflicts, I d

ecided to keep it quiet on the InvestingDecoded front. But I'm back! And I wanted to share with you an interesting article I read:

One of the big phenomenons we've seen lately is the build up of cash on the balance sheet of corporations and even investors. A lot of pundits have been saying that this cash is sitting 'idle' and isn't going to work in the economy. John Hussman's article (here) has an interesting take on 'idle' cash saying that there really is not such thing. However, I have a different take on this:

Hussman’s article essentially makes the point that using the cash level on company and individual investor balance sheets as a leading indicator for future stock demand is incorrect. He further states that cash on those very balance sheets should never be considered ‘idle’. Although I agree with him on the first point, I disagree with the second.

As Hussman correctly points out, companies and banking institutions will invest any ‘idle’ cash in highly liquid instruments, primarily consisting of T-Bills and corporate bonds. Although in a strict sense, this would then not make the cash idle, it does have a different impact on the economy. By investing in liquid securities, you are by definition investing in lower yielding instruments and have lower expected return. Therefore, the follow-on impact of that investment will result in more conservative investments. In contrast, by investing in capex, the company is making a direct investment on which it expects a greater return (i.e. at least its cost of capital). Furthermore, as the investment is in capex, it will be passed down the line to other investments as COGS and capex for suppliers/contractors and will result in a higher velocity for the money. Consequently, the economic impact of cash on balance sheets vs. actual investment is vastly different.

Another point worth considering is that much of the ‘idle’ cash is spent on government securities. A majority of government spending is on entitlement spending and, similar to the previous point, it is likely not the most efficient allocation of capital due to these legacy obligations (is Medicare the best place to be spending money right now vs. areas where companies want to spend money?). This further reinforces the point that the economic impact will likely be higher if it is spent on actual goods/services instead of sitting on balance sheets.

Overall, I think Mr. Hussman makes some excellent points. However, all cash isn't created equal, and the way the cash is used has a material impact on its impact on the economy.

What are your thoughts?

Questions/Comments/Feedback?

Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!

The Standard Disclaimer:

The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I've said above. This includes consulting with a financial advisor.

CLWR - New Twists in the Story

As many of InvestingDecoded readers already know, I like to continue follow the stock that I mention on this blog so I can keep readers apprised of happenings on those companies. One of the stocks that I had mentioned a while back is Clearwire, the wireless broadband company that sells internet access through its 'Clear' brand name. This company in many ways is a pioneer in the internet space. Its service is the first mass-marketed wireless internet service that provides users with 4G access by utilizing the Sprint broadband network. However, given the recent developments in the company, this pioneering spirit may now be its downfall.

The Background

Before we get to the juicy developments, let's talk a little about background. The most interesting aspect of CLWR is its ownership structure. The company was formed by a consortium of some of the biggest technology names including a 54% ownership stake from Sprint corporation. Other stakeholders include Comcast and Intel. Now comes the interesting part. As I've learned over the last couple of months, the primary reason that Sprint even got involved in creating the company was to create a technologically advanced platform from which to build its own 4G offering. But the way the ownership structure was created, Sprint did not have a direct say on CLWR's operations, and CLWR went ahead and created its own wireless broadband offering, essentially competing directly with Sprint.

The DL

Now this has apparently been somewhat of a flash point between the two companies for a while now. However, it has recently come to a head as CLWR has been hitting cash availability issues to fund its ongoing operations along with its ambitious expansion plans. As of 9/30, the company had $1.38 billion in cash and equivalents. That's down over $2B from the same time last year. To put this in perspective, operating losses for the quarter ending 9/30 were $540M, meaning the company can potentially run out of cash by end of next year.

In the past, Sprint has come to the rescue and injected fresh capital into the firm. However, it seems that its reluctance to do so now is an indication that the firm is finally trying to wrestle some control of the company. The latest rumor is Sprint my try to kill the Clear brand all together so it isn't a competitor to Sprint's own business. Instead, CLWR would become the wholesale technology provider to Sprint that Sprint originally hoped for.


Potential Impacts

This ordeal has already had a pretty drastic impact on CLWR with its stock down 30%+ in the last few months alone. The more important issue now is what the potential impacts are. Personally, I don't think that Sprint will completely kill off the CLWR name, nor will it allow CLWR to go under. The company does have an emerging brand name and strong infrastructure. Letting all that go would be foolish. Instead, I expect Sprint to arrange a new ownership structure for some bridge financing. The terms will likely be strict since Sprint itself isn't in too much of a position to help other companies since it has plenty of problems of its own.


Where Does the Stock Go From Here?

At least in the near term, I see a lot of the same volatility in the stock. However, I see limited downside potential since the company has already come down to a reasonable 7x EV/Sales multiple from a high 13x earlier this year. I see the stock trading flat overall, but there may be some trading opportunities available in Call options.

Longer term, I see some potential upside, but that really depends on how the funding crisis is resolved. Although I think it will be resolved, I can't say what the terms will be and if they will be good for shareholders.

CLWR is a good company that has a product that I feel has great long-term potential. If you want to get involved in the continued wireless revolution, CLWR would be a good way to do it. However, be ready to stomach some serious volatility and risks.

The Equity Exodus

A few days ago, I was reading an article regarding a shift that is occuring within the world of institutional investing. For those that don't know, institutional investors are entities such as pension funds, endowments, and trusts where large pools of money are invested with a stated goal (e.g. employee retirement contributions are invested to provide future retirement income in the case of pension funds).

Anyway, the article discussed how there's increasing evidence that institutional money was shifting away from equities and into fixed income markets. Up until the financial crisis, the opposite trend was occuring. Investors like institutions that generally bought more stable products were safer. However, because of the outsize returns that were being seen in the stock markets, and the growing obligations many of these institutions were facing, many increased their stock exposure in the chase of the proverbial carrot.

Well, as I'm sure you've realized already, those outsize returns disappeared in a huge hurry, and many institutional got burned just as severely as individuals. Now it looks like the money is shifting back the other way.

So What?

I think the shift away from stocks to safer alternatives is particularly interesting for several reasons. First, I think this will definitely have an impact on the markets. These institutions literally have trillions of dollars to manage, and moving just a tiny fraction won't go unnoticed. More specifically, I think that as this trend continues, stock markets will become more volatile and have at least some downward pressure. This is because institutions tend to be more longer term investors and don't trade in and out as quickly, so having that kind of money in the market provides stability to the investment. Stocks will lose this stability and it will likely move to bonds (although I should note, many institutions also invest in alternative assets and hedge funds which often have shorter duration investments).

Uncle Sam Likes This Too?

Another interesting point along these lines is how this impacts government spending. A lot has been said recently about the so-called 'bond bubble'. There has been huge demand for the relative safety of bonds, particularly treasuries, and many investors think bonds have become over-valued. Nonetheless, Uncle Sam loves this, because he is able to issue more and more bonds for fairly cheap prices (he only has to pay 2.56% on a 10 year bond right now!). Although values have gone up significantly, I think this shift from institutional investors may lend credence to the theory that bond prices have more room to go up, or at least are not going to come crashing down.

Too Late to the Party?

Now let's flip this around again. Yes the inflow of institutional money into the bond market would provide support for bond prices. However, there's been a huge runup in bond prices over the last couple of years. I do agree that they will provide stability to these institutions. However, I do question the timing of the move. If there is a significant recovery in the economy, these funds can easily get burned.


The apparent reallocation of institutional assets from equities is likely to have a sizable impact on the markets. Although it is not yet obvious, I think stock prices could be adversely affected with this trend and we will see more volatility in the equity markets.

Durable Goods Orders – Light at the End of the Tunnel?

Last Friday, the Commerce Dept. released its monthly analysis on one of the most watched indicators of economic health in the US – durable goods orders. Durable goods are items that are expected to last at least 3 years or more. They range from consumer goods like home appliances and computers to commercial items such as aircraft and turbines (these are known as capital goods).

Why Is This Report So Important?

The reasoning behind the importance of durable goods is fairly intuitive. These items tend to be higher in price than other more common goods (e.g. consumer staples) and, therefore, require a greater investment from buyers. Consequently, buyers are likely to buy these goods only if they have confidence in their ability to pay for them. Furthermore, especially in the case of consumer durable goods, many of these items are discretionary in nature (you generally buy a new dishwasher if you want one, not absolutely need one). So the orders for these goods provide key insights as to the confidence of consumers at both the individual and commercial level.

The Numbers

The overall number released on Friday indicated that orders fell 1.4% in August. However, when looking deeper into the numbers, you find that if you exclude transportation items (i.e. aircraft which are generally very volatile), the orders rose a more than expected 4.1%. This gave investors some confidence that consumers and companies were increasing their spending and provided them hope for an economic recovery.

The numbers break down as follows:

· Electronics: +3.8%

· Machinery: +3.9%

· Transportation: -10.3%

My Take

Overall, I think the number is pretty solid. I’m especially encouraged by the broad-based growth in all categories (I’m not too worried about transportation because of its volatility – last month it was up 11.6%). If these numbers can keep growing, it should soon be evident that there is demand in the economy and, hopefully, this will result an increase in employment as durable makers adapt to meet this demand.

However, there is one variable that I’m keeping a close eye on before declaring any sort of victory. The inventory levels at these durable goods companies needs to be watched closely. Last month, those levels rose .4% and were up .6% in July. Although these aren’t huge numbers, there is definitely an upward trend. If it turns out that the durable goods growth is more of an anomaly, this growth in inventory may become a big liability for the producers. Next month, I want to see if this inventory trend continues – if it does, I feel it will act as a leveraging mechanism for the companies.

I feel the economy still has a long way to go before it can fully recover. With housing still remaining weak and a lack of hiring, a strong durable goods number can easily turn out to be a blip in the overall picture. However, if these good numbers become the trend, then I think the affect will trickle down to employment and hiring and, in turn, promote some badly needed GDP growth.

What are your thoughts?

Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!

The Standard Disclaimer:

The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I've said above. This includes consulting with a financial advisor.

Another Revisit - MICC

About this time last year, I spoke about Millicom International (MICC) - the Luxembourg based emerging market wireless company that I heavily recommended (Check out the review post here). Back then, I had upped my price target for the mid-70's to approximately $90/share over the long-term.

Now, I am of the philosophy that you have to continuously revisit your investments and assess if they are still a good fit for your portfolio. Companies change, circumstances change and the reasons you bought a stock can get out of whack in a real hurry. As a wise man still says - 'Don't Buy and Hold, Buy and Homework!'.

Since that post, MICC has indeed risen in price and is now trading at right around $90. With my previous price target acheived, I dug into the numbers to see if it is still worth holding.

Still A Strong Business

For those that don't remember, MICC's primary business is selling prepaid wireless services in third world countries. This includes countries with little or no wireline infrastructure, making wireless the primary means of communication. The company operates in 3 regions - Central America, South America, and Africa with Central America being the largest segment in terms of revenue.

Looking at the last year, it's evident that MICC's business has recovered well with the global recovery. EBITDA for the last 12 months (LTM) came in at a healthy $1.59 Billion - a solid 19.5% increase over 2008 (which itself was a record). More importantly, EBITDA margin has held at a steady 44% which is on the high end for the last 4 years.

Looking Forward

But having a solid business thus far isn't the only factor we need to consider here. All that information does is justify the increase in the stock price, but it doesn't give us much insights into what we have looking forward.

Looking at the company's annual report presentation, one of the most promising numbers I see is the Customer penetration, specifically in data usage. I look at the emerging markets to somewhat mirror the developed countries in data usage growth patterns (the theory worked for voice mobile phone usage). According to the presentation, MICC's current data penetration for Latin America is 5.2%. Assuming that the number is similar for the MICC's other regions, and the average penetration growth rate for the company is 47%, I think there's a good deal of room for revenue growth for MICC. Therefore, I expect data penetration to be a solid source of revenue growth for the company resulting in total 2011 EBITDA of around $1.95 Billion (slightly higher than analyst estimates which MICC has done a good job of meeting over the last few years). Assuming the current Market Cap/EBITDA multiple of approximately 6X, we come to a expected price of $107 - an almost 20% jump to the current price.

Risks

As always, there are some risks associated with MICC, or any investment. Besides the ever-present political risk of doing business in third-world countries, I think another important risk to take into consideration is the decreasing Average Revenue Per User. This key metric in the wireless industry has been decreasing by an average of about 15% each quarter over the last year. Likely due to the economic conditions, decreasing ARPU can significantly impact the profitibality of any wireless company (just as Sprint). Nonetheless, I think this risk is somewhat mitigated by the data usage penetration mentioned above. This product will help MICC offset this decline by providing a new revenue source. Futhermore, even with penetration at only 5%, the rate of ARPU decline has decreased in the latest quarter to less than 10%.

Bottom Line

With the strong business model and a history of delivering to shareholders, I think MICC is a strong bet if you want to take advantage of early-cycle emerging market growth. Even with the runup in the share price, I think the company has a conservative upside of at least 10-15% over the next year, and therefore, I think it's a good buy.