Monday, August 11, 2014

Recent Buys - Putting Cash To Work

I went on a shopping spree the past 2 weeks putting cash to work as the market went from plummeting to small leaks downward. For the most part, this is more about buying quality companies that I’ve been eyeing for a while rather than seeing specific catalysts or levers to boost earnings. For some of these companies, I’m actually looking for the market to go down further so I can buy more.

Here are some bullet points for each.

·         Nielsen (NLSN)

o   Not cheap but you’re buying an established monopoly in TV and part of a duopoly in digital along with comScore. Advertisers trying to measure effectiveness across multiple platforms (TV, online, mobile…etc) require a single currency and Nielsen is it.
o   The company recently started integrating its Online Campaign Rating (OCR) system into Google’s DoubleClick. Although comScore has a lead in digital, Nielsen’s unique proposition is allowing Google to measure online video against TV viewership - an important first step toward taking advertising dollars from TV.
o   Buy the dips.

·         Wells Fargo (WFC)

o   As the king of mortgages, WFC stand to benefit from any rebound in industry volumes, which are at a trough. Citi and Bank of America recently settled, giving hope that the regulatory troubles are starting to subside, and industry is talking about a new non-agency RMBS framework to revive that market.
o   Aside from mortgages, WFC is also #1 in auto loans. And they’re expanding their card business by teaming up with Amex. Talk about keeping the good people together. (Btw the 2 companies share the same founders).

·         American Express (AXP).

o   The legal issue  with Department of Justice is overblown. The DOJ case is really about the smaller merchants. The guys who would steer customers away from Amex is probably already doing so - I mean how would you even catch those guys?  And besides what can merchants really offer to steer AMEX customers?  A 1% discount?  That’s not going to sway customers who use AMEX as their first card out of the wallet.  Even if DOJ wins and AXP cut prices, they’ll likely get more volume. (Keep in mind AMEX is already signing up merchant acquirers to acquire small merchants)
o   Slow growth and weaker consumer spending are threats. This one could actually face existential threat down the road with payment tech evolving.  If it breaks below technical support of $84 I will cut my losses.

·         Citigroup (C)

o   This is a turnaround story, so what’s the plan?  First, Citi has to get through the CCAR process. This will not only lift some overhang but allow them to return capital and boost ROE. Second, continue to wind down its CitiHoldings legacy business as it adds to risk and detracts from ROE. Thirds, management talked about improving their efficient ratio. I certainly don’t doubt there are lots of fat to cut here! If anything litigation expenses should naturally come down.
o   Citigroup would benefit if interest rate goes up. Also, don’t forget Citi does have one of the best credit card franchises out there along with JPM. Here’s a better, more detailed write up on SA by Weighing Machine.
o   I would strongly consider cutting my losses if more setbacks arise or stock falls below the $46 support level.

·         McDonalds (MCD). 

             There are no catalysts - if anything near term headwinds. This can go lower and I will be buying. As a big consumer of fast food I just love this company. Consider what you’re getting with $93-$94/share:
o   Best real estate portfolio in the business. I like Wendy’s sandwiches better, but I end up eating at McDonald's a lot more. Why? MCD is usually at more accessible locations (and tend to be cleaner).
o   Global brand recognition built with massive advertising dollars and history. Arguably the brand recognition hurts them because people identify them with junk food. But hey not everyone’s a health nut.
o   One of the few companies in the world that can legitimately claim a “culture”, as high level executives routinely come up the ranks starting from cashier. Franchisees have restaurant experience and goes through Hamburger University training. 
o   History of using creative solutions to improve results - drive-thrus, breakfast, increase franchising…etc.  Great financial flexibility with high ROE and cash flows.
o   In terms of current initiatives, MCD have great coffee. I actually prefer their iced-coffee to Starbucks’ version. McDonalds got the formula down on the ice coffee – exactly the right amount of milk and sugar regardless of location.

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