We Must Protect This House: Under Armour vs. Nike

Through out the history of capital markets there has always been natural competition.  There are monopolies, but for the most part Pepsi competes with Coke, Phillip Morris competes with British Tobacco, AT&T competes with Verizon.  One company in particular has been a monopoly for quite some time.  Recently, Under Armour has emerged and taken on Nike. 

Does UA have what it takes to take on the retail King of the World?  A couple months ago UA’s stock split 2 for 1.  It was trading upwards of 1$12.  It saw heavy resistance at those levels and management probably felt that the stock price was getting too high and started to price investors out at over $110.  It split to around $55, got a little above $60 (120 split adjusted) and has since fallen to $47. 

Nike, just like Under Armour, was trading upwards of $114.  This week Nike split 2 for 1 and raised their dividend (UA does not pay a dividend).  Nike also probably felt that the stock price was getting too high and wanted investors to be able to buy at a lower price.  Now the major question is would you buy Nike at $50 or UA at $47?  Did Nike purposely split so that their stock price would be around the same as UA?

Companies come and go, but we all know Nike is here to stay.  Does UA have what it takes to take on this world-renowned behemoth?  The Nike Swoosh is one of the top recognizable symbols in the world along with the McDonald’s arches and the colorful Google logo.  Will UA continue to thrive or hit a wall and crash like so many companies have in the past?  Only time will tell.    

Procter, Meet Gamble: Part 2

Flurries of new products were released after P&G became an international corporation.  Tide laundry detergent was introduced in 1946, and Prell shampoo in 1947.  In 1955, they started to sell the first toothpaste to contain fluoride, known as Crest.  Branching out again in 1957, P&G bought Charmin Paper Mills and began manufacturing toilet paper and other paper products.  In 1960, Downy fabric softener was released, and in 1972, Bounce fabric softener sheets.  One of the most revolutionary products to come from P&G was Pampers.  Prior to this point, disposable diapers were not popular; babies always wore cloth diapers, which were leaky, and a pain to deal with. 

Procter & Gamble acquired a number of other companies that diversified its product line and allowed the company to greatly expand its profits and market reach.  These acquisitions included:  Folgers Coffee, Norwich Eaton Pharmaceuticals (makers of Pepto-Bismol), Richardson-Vicks, Noxell (Nozema), Shulton’s Old Spice, Max Factor and the Iams Company.

In January 2005, they acquired Gillette, forming the largest consumer goods company in the world placing Unilever second.  The added brands from Gillette were Gillette razors, Oral-B, Duracell and Braun.  They had to spin off some overlapping brands to complete to acquisition.  Their electric-battery-operated SpinBrush business was sold to Church & Dwight.  They also divested Rembrandt.  Deodorant brands Right Guard, Soft & Dri, and Dry Idea were sold to the Dial Corporation. 

P&G’s dominance in many different consumer product areas makes its brand management alone worth a study.  For example, Procter and Gamble has to account for one of their products taking sales away from another.  In August 2009, Warner-Wilcott (an Ireland based pharmaceutical company) announced it was buying P&G’s prescription drug business for $3.1 Billion.  P&G exited the food business in 2012 by selling its Pringles brand to Kellogg’s.  They had previously sold Jif peanut butter and Folgers coffee in separate transactions to Smuckers.

As far as companies to invest in for 20+ years, I see nothing better than P&G.  Their range of products and brand recognition are unmatched.  It’s impressive to have one billion dollar brand; how about over 20?  Maybe one day P&G will merge with McDonald’s and take over the world!  

Procter, Meet Gamble: Part 1

Procter & Gamble was created on Halloween 1837.  William Procter, a candle maker and James Gamble, a soap maker, emigrated from England and Ireland.  They settled in Cincinnati and met when they married sisters, Olivia and Elizabeth Norris.  Their new father-in-law, Alexander Norris had a meeting with his newfound son-in-laws and persuaded them to become business partners.  Procter & Gamble was created.

Sales reached $1 million in 1858-1859 and the company grew to include about 80 employees.  During the Civil War, the company won contracts to supply the Union Army with soap and candles.  Along with increased profits from the war, this also exposed soldiers from all over the country to P&G products. 

In the 1880s, they began to market a new product, an inexpensive soap that floats in water.  This soap was called Ivory.  William Arnett Procter, William Procter’s grandson, began a profit-sharing program for the company’s workers in 1887.  By giving the workers a stake in the company, he correctly assumed that they would be less likely to go on strike.

The company outgrew its Cincinnati facilities and soon started to build other factories in other locations.  The company’s leaders started to diversify its products as well and in 1911 began producing Crisco, a shortening made from vegetable oil rather than animal fats. 

As radio became more popular in the 1920s and 1930s, P&G sponsored a number of radio programs.  These shows became to be known as “soap operas.” 

The company moved into other countries, for manufacturing and product sales.  It became an international corporation in 1930 with the acquisition of Thomas Hedley Co., based in Newcastle, England.  Numerous new brand names and products were introduced over time.  

The Oracle of Oracle

We’ve all heard of the iconic and profound uber billionaire investor Warren Buffett.  His legendary tactics of buying the good stuff (Coca-Cola, Procter and Gamble, American Express) has allowed his wealth to ever grow.  His nickname is the Oracle of Omaha.  Let’s take a look at a lesser known billionaire.  His name is Larry Ellison and he is the Oracle of Oracle!

In the 1970s he worked for a company called Ampex.  While at Ampex one of his projects was a database for the CIA which he called Oracle.  In 1977, he founded Software Development Labs (SDL).  In 1979, the company was renamed Relational Software and then later renamed Oracle after the flagship product the Oracle database.  Early on, Oracle ran into some rocky financial times, their financial model was extremely flawed.  Oracle had an “up-front” marketing strategy, in which sales people insisted that potential customers buy the largest amount of software all at once.  The sales people then booked the value of future license sales for the current quarter; this allowed the sales employees to increase their bonuses in the quarter.  Oracle eventually had to restate their earnings twice and also had to settle out of court with a couple of class action suits. Ellison would later say that they had made “an incredible business mistake.”

Once Oracle’s top rivals (Sybase and Informix) were defeated because of bad mergers and faulty business plans, they enjoyed years of dominance until the rise of the Microsoft SQL server in the late 90s.  In the latest year, Oracle had a net income of $8.5 Billion. 

Larry Ellison retains a 21% stake in Oracle.  That gives him 1,105,234,580 shares.  If you do the math and the current price of Oracle is $27.50, you’re looking at stock worth over $28 Billion.  It has also been as high as $34 in the recent months.  He’s not a household name, but he is worth about $36 Billion.  Currently, he is the 5^th richest person in the world.  So next time you hear the Oracle of Omaha, remember there’s another oracle and he was the founder of Oracle!        

               

Faceplant

Who would of thought an internet company with 900 million users would fall so hard once it hit the open market?  Well, apparently all the insiders knew.  During the week of their “IPO Roadshow” the underwriters for Facebook slashed estimates some 50%.  That would be all fine and good but they did not alert the public of such doings. 

Nevertheless, Facebook promoted their IPO like Men in Black 3D!  Their main point was that we have 900 million users so we are profitable and everything is fine.  In reality, this company was valued at over $100 Billion with net income somewhere around $500 to a 1 Billion.  To put into perspective, a company like 3M (NYSE: MMM) has a net income of $4.2 Billion and even pays a dividend of $2.36!  There market cap is half of what Facebook was.  The market has thrown FB back down to where it should be (or should it be lower?). 

I would say the fear now would be is FB going to pop like a balloon.  After their first earnings release, if they do not completely crush their estimates, the stock will get absolutely crushed.  The insiders have made some heavy trades already, as early as the first day of trading.  Goldman Sachs sold 25 million shares ($800 million), Microsoft sold 6.5 million shares ($246 Million) and the boss Mr. Zuckerberg sold 30.2 million shares ($1.2 Billion).  Is this relevant? Maybe not.  But what is most intriguing about these insiders’ sales is that they all sold at the same price, 37.58. 

The IPO price was $38; Meaning that these major holders were satisfied with selling their stock under the IPO price.  They are not even holding until the first earnings release which could potentially move the stock upwards quite a bit.  To me it looks like the main investors have been trying to cut their losses.  Maybe is it a bubble that’s going to pop.  Maybe they really do have what it takes to survive in this extremely tough economic environment.  Just keep in mind that from the .com bubble there are only 3 surviving .com’s which are Yahoo.com, Amazon.com and Ebay.com (Google does not count as they IPOed in 2004).  Will FB be a survivor?   

Starbucks: Taking Over the World One Cup At a Time

Named after the first mate in Herman Melville’s Moby Dick, Starbucks now has over 19,000 stores worldwide.  However, this coffee magnate and iconic symbol of the recent times was not always large and in charge.  The first Starbucks opened in Seattle in 1971, founded by two teachers and a writer.  The three were inspired by entrepreneur Alfred Peet (Peet’s Coffee).  Originally they purchased green coffee beans from Peet’s and then began buying directly from growers.

In 1984, the original owners of Starbucks, led by Jerry Baldwin, purchased Peet’s Coffee.  In 1998, they sold to Schultz II Giornale, which rebranded the coffee stores Starbucks.  After graduating from Northern Michigan University, Schultz worked as a salesperson for Xerox.  In 1979, he became general manager for Swedish drip coffee maker Hammarplast. 

On a buying trip to Milan, Italy for Starbucks, Howard noticed that coffee shops and bars existed just about everywhere.  He learned that they not only served great espresso, but was a common meeting place for the population.  It was a large part of the country’s “social glue”. 

After having success with the café concept, the owners of Starbucks still refused to become a part of the restaurant business.  A frustrated Howard Schultz started his own coffee shop in 1985 called II Giornale after a Milanese newspaper.  Two years later, the Starbuck’s management decided to focus on Peet’s Coffee & Tea and sold the Starbuck’s retail unit and II Giornale to Schultz for $3.8 million.  He renamed II Giornale with the Starbucks name and began to aggressively expand across the United States.

Schultz did not believe in franchising and made it a point for Starbucks to retain ownership of every domestic outlet.  25 years later, Starbucks is a household name all over the world.  I think the original owners of Starbucks that decided to focus on Peets Coffee & Tea may be somewhat upset with their original course of action.  Currently, Peets Coffee & tea (NASD: PEET) has a market value of $828 million.  Not too shabby.  Today, Starbucks sits at $55 a share and has a market value of $42 billion.  It’s almost 40 times larger than Peet’s. 

The aggressive nature of Shultz’s expansion combined with a product that everyone in the world seems to like will perhaps keep Starbucks growing forever.  You figure people will never stop drinking coffee as long as people always have to get up for work.

Apple Wireless and Apple Computing....Too big too Fail?

          Should the government break up Apple?  With their value crossing over $600 Billion and their overall command of the consumer computing sector and the domination of wireless devices, why hasn’t it happened yet?

         
          They broke up Motorola!  They broke up AT&T, why is Apple any different?  Is the government waiting to see if Apple comes down to Earth in the next 2 years?  When AT&T was split up they broke into many different companies, Pac-Bell, SBC, and Verizon.  Once Verizon got big enough, the government allowed AT&T to start putting itself back together.  So now there is natural competition between AT&T and Verizon, which is AT&T!

         
          If Apple were to be split, it would probably go something like Apple Computing and Apple Wireless.  One would think that Apple Wireless would be bigger because it would have the iphone and ipad and all that’s goes along with it. 

         
          Apple is so big right now they could just buy AT&T straight out, scary isn’t it?  Well when a statement like that can be made, you know their are a monopoly!  At least ExxonMobil has companies that are comparable in size (Chevron, Royal Dutch Shell, Petrobras).  You could make the argument that Apple has companies comparable in size as well (Microsoft, IBM, and Google).  But the difference is, Apple makes much different products than Microsoft and Google.  The oil companies all produce; yes you guess it, crude oil!

         
          Recently, as in yesterday, Apple was sued for colluding with the major publishing houses on pricing.  Is this the first of many to come?  If Apple has this much pricing power and leverage over not just technology companies, but over all other companies, they need to be split right?  If they did it to AT&T shouldn’t it be just a matter of time before it gets done to big daddy Apple?

AppleSanity!

Will Apple Explode?  Will there be another behemoth to knock them off the block?  Throughout the history of Apple, they have always felt that they were not the enemy, rather Microsoft.  In recent years, the tables have turned drastically. 

With the introduction of the ipod, Apple took the world by storm and has since redefined how we receive media today.  I grew up in an era where paying for music was taboo.  There were multiple sites to download music for free in a timely fashion.  We all know the number one site for that was Napster (thanks Metallica).  You know for a group that says they were just a couple of fans that started a band they sure don’t act like it!

The real monkey wrench for any company trying to go after apple is not their devices, rather the large anchor they have for all their media that we all know as itunes.  The itunes store and cloud have revolutionized the revolution by making it very simple to buy media and to store it in a wireless environment.  Imagine this, I have had an iphone for many years now, I love it as does everyone else.  But, from time to time I do check out other devices because change is inevitable.  I really like the Samsung Galaxy Note which is a cross between a tablet and a phone (has a much larger screen and a magic pen).  It was fun to use, moved very fast.  Nevertheless, I was still missing something.  I was missing the itunes store.  I need to be able to plug my phone into my computer and drop media onto it.  This is the largest problem any competitor will run into.

They need to figure out how to make media transfer seamless with another store I suppose.  Amazon has attempted to do it with the android store.  It’s just not good enough though.  Many years ago, when Microsoft and Cisco ruled the world and Apple was still just an afterthought that made these things called Macintosh, those two companies combined at one point were worth $1.2 Trillion ($600 Billion a piece). 

Today, at current market value, Cisco was under $100 billion in the last couple months and Microsoft has been making somewhat of a run this year, now with a market cap of $257 Billion.  The point is that Apple crossed $600 Billion a day ago.  If history repeats itself Apple should be worth at least half of what it is by 2020.  Or they will become the first Trillion dollar tech company ever.  Just keep this one important note in mind, Apple does not make one single product that anyone NEEDS, they make a slew of products that everyone WANTS.  Exxon produces a product that everyone will NEED FOREVER.

Dow Jone Jonesin' for 20,000??

20,000 sounds like a bold number.  Back in the early days, the Dow Jones Industrial Average was a mere 100 points.  In the 1930’s if someone told you the DJIA would be 13,000 in 80 years they would most likely have sent them to the insane asylum.  Fast forward to 80 years later and look where we’re at.   The DJIA is pushing right up against 13,000 (with a lot of help from Apple being $556) and the NASDAQ is 3,000 (has not been 3,000 in 10 years).  So what’s next?

          
          If my calculations are correct, either the market will be going down sharply and quickly like it did in 2008 or will keep going right on up past 15,000 basically like it has since 2008.  Will there be a correction?  Will Europe derail the market once again?  It seems as though the market lately has been shrugging off the woes from overseas.   Just a few months ago, the market was in a wild state.  Going up and down 400-500 points a day, but ultimately ending up where it started in the beginning of the summer. 

          
          Think about it.  If the DJIA is 20,000, current levels are low.  That means you think Exxon should be 110, Wal-Mart should be 85 and Caterpillar should be 175.  I think already most companies are at very high levels and feel that there is a lot of air under the stock price.  Meaning, if Apple goes down 150 points, it is still extremely high with a huge market capitalization.  The market could get cut in half quickly; we’ve all seen it before.

          
          Or, did corporate America get it right this time.  Are the big companies so lean now that their profits are going to keep going thru the roof?  Most large global companies figured out a couple years ago that they need about half the amount of workers they had employed to run their business effectively.  For example, if company A had 100,000 employees in 2008 and they shed 40% of their work force in the last 4 years to 60,000 employees and are still making as much money as they were with 100,000 employees, their making 40% more profit.  The bad effect of this is that these companies will never hire that amount of people back.  Those jobs are considered lost forever. 

          
          The market is always a roller coaster, but has this one peaked at the top of the mountain of track and on its way down face first at a 90 degree angle?  Or do we keep truckin’ up way past any levels we have hardly seen before?

The Good Ol' Boys

If you know someone that has a couple million dollars, you would categorize that said person as ‘’rich”.  If you see said person driving around in a Rolls-Royce Phantom, you assume that person is rich (it’s only a $400,000 car).  If that same person went to eat at the nicest steakhouse five times a week, was able to put his four kids through college without taking out a loan and has a couple properties spread across the United States, this person has the characteristics of being “rich”, right?.  During the tech boom of the 1990’s, that word “rich” was taken to a new level.  Although, $50-100 million is a lot of money by all accounts and would set up your family for generations upon generations, a new level of wealth was obtained.  We will look at three examples in particular.

Bill Gates, Larry Ellison, and Jeff Bezos (I’ve left out Larry Page and Sergey Brin because Google is post tech boom having gone public in 2004, but they are worth $19.8 billion a piece) redefined the word rich and took rich beyond wealthy and took wealthy to some level that is unimaginable.  This was the first time in history that a founder of a company gave themselves a large amount of their company and their company took off such that these particular entrepreneurs are in the stratosphere compared to even the ultra wealthy.

We all know Bill Gates.  We all know Microsoft.  He owns a commanding 500,981,726 shares of his baby.  That equates to $15.02 billion in just stock alone.  He is worth about $50 billion to date and has been worth as much as $80 billion at his peak.  Remember, $50 billion is 999 million times 50 (a lot of zeros).  Just a side note, Microsoft is such a monster that Bill’s partner Paul Allen cashed out years ago with $20 billion and current CEO Steve Ballmer is worth over $14 billion with $10 billion in stock (333,252,990 shares).

Larry Ellison may be less known than Bill Gates or Warren Buffet, but I don’t think he cares about notoriety.  Lawrence Joseph Ellison is the founder and largest shareholder by a mile of Oracle; the second biggest software company in the world behind Microsoft.  He owns roughly 21% of the company that has a market cap of $145 billion.  You could do that math but I’ll do it for you.  He owns 1,106,834,580 shares of Oracle (yea you read that right) times $29 a share equals around $30 billion in stock.  Hey Larry, how about giving me a million or two? 

Last but not least, is the founder of Amazon.com, Jeff Bezos.  If you don’t know what Amazon is you really have been living under a rock and I’m not using it as a figure of speech!  Amazon has had a great last two years until recently when their stock price has gotten a little rocked because there spending a lot of money on expanding and hardware (Kindle products).  Nevertheless, his 88,068,493 shares are still worth beyond a gold and diamond mine.  Amazon.com has been trading around $180 a share and has been as high as $246.  He has roughly $16 billion in stock. 

This type of wealth is so serious you almost laugh when you talk about it.  When you know how much things cost, expensive things such as a private jet (average $25 million for a very nice one, Lamborghini Reventon, which goes for around a million give or take) and think that these items have 0 effect of their money, it’s really mind boggling.  They could buy the NFL without a blink of an eye.  They could buy whole cities and towns and countries.  They could sit in their living room and dream a dream and make it a reality immediately.  There’s nothing they can’t do or can’t have or can’t invent.  What an interesting position to be in. 

Will this ever happen again?  Will there ever be another boom where people, normal people, are able to make this kind of coin?  Combined these three guys are worth roughly $100 billion. 

The numbers are unfathomable, what would you do with that kind of money?  Would you give it all away?  Would you expand your own baseball team? (I would)  Would you build a castle that has a bat cave? (I would)  Would you have your own Delorean from Back to the Future Part II (I would)?  Would you have a full size USS Enterprise (I would)?  Would you build your own casino/hotel in Las Vegas (I would)?   

The Amazon Showroom

           Many have dubbed the retail market place “the Amazon Showroom” because consumers will go to the retail store and check out the price and go look on Amazon to see how much is cost.  A fair estimate would be 8 times out of 10 that Amazon would probably be cheaper than the retail establishment.  Will Amazon ever become the Wal-Mart of the web?

With low overhead costs and a virtual fun marketplace to shop in the comfort on your home, why is Amazon not your choice?  Picture this:  It’s a rainy/snowy Saturday morning in New Jersey during the dark winter months and all you want to do is stay in bed and not move all day.  Well, how about you can stay in bed and not move all day, and spend thousands on Amazon?  They also offer free two day shipping when you are an Amazon Prime member ($79 a year, you also get free streaming content included). 

The company has grown from a small website based tech company to one of the only surviving .com’s.  There are three .com’s from the tech boom that survived [Ebay.com, Yahoo.com and Amazon.com].  Google would count, however they IPOed in 2004.  Is the sky the limit for Amazon (was worth over $100 Billion by market cap in the last couple months)?  Will more and more consumers choose Amazon over their local mom and pop stores?

                Only time will tell.  The web consumer space has grown so much that there is actually a holiday called Cyber Monday!  After black Friday at the local retail stores, you can wait until Monday to sit back and relax and see all the deals sitting around in your comfy sweatpants. 

                If Amazon does become the Wal-Mart of the web, and Wal-Mart stays Wal-Mart of the real world, will that be it?  Will every consumer go to a Wal-Mart in person and Amazon on the web?  Will Amazon and Wal-Mart combine to be the ultimate tandem of consumerism?  What an unstoppable force that would be!