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.

Revisiting the Motorola Play

In November of 2009, I wrote about Motorola and its attempted resurgance into the cell phone market (check out the articles here and here). The company had gone from a dominant player in cell phones with the RAZR to an also-ran with unappealing products and shrinking market share (which also resulted in a shrinking stock price that went almost as low as $3/share). However, with the introduction of the Droid and the palpable sense of negativity surrounding the stock, I thought it would be fair to give the stock another chance.

However, as was discussed in last November's posts, after looking into the DROID (both financially and physically) and keeping a close tab on sales figures, I was left unimpressed and didn't feel the DROID was a compelling enough product to justify the recent run-up in the stock price.

That was when the stock was around $9 a share. Today it's around $8 - underperforming the S&P 500 by 18%

Time For A Revisit

Although I didn't back Motorola as a pick late last year, I have been keeping an eye on the stock since then - I already did all this research, might as well keep up in case the situation changes. And recently, I've been seeing some serious signs of life for the DROID, and my philosophy is so goes the DROID goes MOT. With the introduction of the DROID X, Motorola has been building up steam in its smartphone marketshare, and in the cell phone business, marketshare is everything. As you can see below, MOT has seen a best-in-industry 136.8% growth in smartphone marketshare in Q1 2010. Granted that the overall marketshare is still pretty low, but I think that's already reflected in the stock price and nobody is arguing that MOT is starting from a difficult position.

The bottom line is that this is serious growth - the type MOT hasn't seen in a while. Furthermore, by parterning with Google's Android OS, MOT is building on what's arguably the best smartphone platform in the industry. In fact, in the first half of this year, Android smartphones outsold Apple's iPhone. Finally, keep in mind the numbers you see above are just for Q1 of 2010. Since then, the DROID X has been selling very well - a fact made apparent by the significant decrease in promotional by Verizon compared to the original DROID.

Translating that to Stock Price

The reason I'm focusing so much on this marketshare numbers is because MOT is aiming to make itself more of a smartphone maker and less of a 'run of the mill' handset maker. This translates to fatter margins that can be applied to the bottom line and a higher stock price. Right now the stock is around $8. It has had a pretty good fun with the good news coming out for DROID, but I think it can have at least another 10-15% upside with this continued momentum. Be careful, though. If you see any indication of market share momentum dropping, I would put a tight trailing stop. Coming back from the dead can be a slippery endeavour.

Jobs Jobs Jobs!

Over the last few months, when friends and family have asked me the all too common question on where I think the stock market is headed, I’ve had a pretty consistent answer – Jobs Jobs Jobs! Yes there are many other factors that come into play, including geopolitical uncertainties, economic growth from emerging markets, and housing prices. But to me, there’s one driving variable left in the market right now, and that’s the employment picture in the US.

Why I Think This

My reasoning behind this rationale is deceptively simple and can be summed up to a few bullet points:

• It’s the one area of the economy that hasn’t shown significant signs of recovery since the market bottomed in March 2009. The US unemployment rate has been stuck in the 9-10% range for a while now, while other indicators like productivity, household income, and manufacturing have improved at least modestly (yes, I know housing hasn’t improved significantly either, but I think the jobs is more the “cause” and the housing prices will be the “effect” in this scenario.
• This recession is markedly different than others because it’s the first time in many years that the US consumer has really cut back on spending. In past recessions, particularly the dot-com downturn in the early 2000’s, the consumer has been able to continue spending and, since this group makes up 2/3rds of economic activity, the recessions are able to be overcome fairly easily. With the unemployment rate being as stubbornly high as it is, the US consumer has severely cut back. Initially it was essentially all consumers that were cutting back. People were afraid of losing their jobs and cut back on non-essential spending. Although many of those consumers that didn’t lose their jobs have come back, there’s still a large contingent out there holding back on spending because they’re either unemployed, or have permanently adapted to a leaner lifestyle.
• Now that I’ve made the connection between employment and spending, let’s take it one step further to make the connection between employment and corporate spending. US corporations have a record amount of cash on hand. As the recession began, they also cut their own expenditure drastically. Corporations have refrained from spending most of this cash with the exception of increasing dividends to shareholders and buying back stock. However, real economic recovery requires that this capital be deployed and deployed effectively. To do this, companies need to see the biggest part of the economy come back to life – the consumer. And for that to happen, those consumers need to start working more. As you can see in the figure below, it’s a bit of a catch-22 – companies won’t hire until consumers start spending, and consumers won’t spend until companies hire them which requires those companies to spend that cash they’ve been hoarding. At the end of the day, once those people start getting hired, that’s when the real money will get back into the system and we can start seeing real GDP growth.
  

And Now the Bad News

Now that I’ve beaten the employment horse to death, here’s the problem. Last Friday, the government released it’s monthly employment figures which showed that companies hire surprisingly few people (83,000 vs. the expected 112,000). Keep in mind that this is the private sector employment number and that, overall, 125,000 employees LOST their jobs – mostly due to census workers being laid off as expected. Furthermore, the overall unemployment rate fell to 9.5% from 9.7%, but that’s likely due to the fact that fewer people are actively searching for jobs and, therefore, are no longer counted as unemployed.

But the real worrisome part here is that employment continues to be the nagging buzz-kill for the economic recovery. We still aren’t seeing the critical mass of hiring that is needed to spur some of the consumer spending increases and the subsequent capital deployment by private companies. The engine is sputtering and just not turning over.

Where to Invest Here

As you’ve probably noticed, the market has been down significantly the last few weeks. This is in large part due to pre-cursor signs of the economic troubles. Interestingly enough, when the actual employment numbers came out last Friday, the market was quiet and didn’t react either way. I think this was mostly due to the fact that investors already had an idea that this was coming as well as the upcoming long weekend. Therefore, I think this week will be a key indicator for the market on investor sentiment to the employment picture. It will either be perceived as a sign of more bad things to come and, hence, a longer term negative for the market (which I think is more likely) OR a buying opportunity since much of the downside may have already been priced in. It’s hard to say either way, but I’m watching the market like a hawk this week for clues on this enigma.

Long-term, though, I really think that an improving jobs picture is going to signal the next leg up in the stock market and the opposite picture will signal the next leg down. Like I said, many of the other economic indicators have been positive (although the factory orders number also came in with poor results which is cause for concern), so there is hope for a recovery here. We just need to get this employment engine revved up!

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.

A Not So Electric IPO

In case you guys haven't heard, something happened in the stock market today that hasn't happened in a very long time. An auto company went public and listed itself on the NASDAQ exchange (in stark contrast to the auto companies that have be DE-listing themselves over the last couple of years). Tesla, the name that has become synonymous with rich and famous movie stars driving around $100+ all-electric cars is trying to raise money through an IPO to take its business to the next level. But before you begin clamoring for one of the most high profile IPO's since Chipotle, you need to look before you leap. All is not well with Tesla, and some things are weirder than other...

The Small Kid on a Very Big Block

The first and foremost concern I have about Tesla (TSLA) is the fact that it's in such an early stage in an incredibly competitive industry. The company has sold no more than 1,000 cars in it's history, and since its inception in 2004, it hasn't had a single profitable quarter. Now this may not be a huge deal for a company with a novel new technology that his incredible promise and can potentially landscape-changing for its industry (think Google or Dell back in its heydey). But, despite what you may think, Tesla's technology is hardly novel and far from promising. Several other, more established, names like Nissan and Chevy are vying to enter the electric car in the next 1-2 years. With their well-established supply chains, engineering muscle, and instant market credibility, they have the potential of pushing Tesla to the side and eliminating any first-mover advantage the California based company may have.

A Little Shadiness Thrown in There Too

Now I'm not the gossipy type, but when it's related to stocks, I think I can justify it. The founder of Tesla is Elon Musk - an entrepreneur whose claim to fame include founding Paypal and the X Prize. Now, you would think the founder of Paypal is a pretty wealthy guy. After all, Ebay paid $1.5 Billion for the online payment processor in 2002. But, there's a twist in the story. Mr. Musk is currently going through a messy divorce, and in recent filings, he states that he has spent his entire fortune on Tesla. As you may already know, issuing an IPO is a great way for the partners in a company to cash in the value of the company. Who's to say Mr. Musk isn't going forward with the IPO for more personal reasons to the detriment of his investors.

Tesla motors is a pretty hot commodity on Wall St. right now. It even had a great opening day - up 40%. But I do see some storm clouds on the horizon and would be weary of investing. The business model - assets made of promises and ideas rather than actual revenue and profits - smells faintly of the dot-com bubble. The fact that it is in one of the most volatile and competitive industries only exasperates the risk. On the other hand, if I'm wrong, there may be huge upside in the company. It is after all working on a sedan for approximately $50k to make the name more mainstream. Also, I even think it may be a good aquisition target for an automaker looking to jump start its electric vehicle program (Toyota has already invested a small amount in the name). But like I said, tread carefully.

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.