Wynn Resorts - Odds Are Not in Your Favor

Wynn's business model is fairly simple. Four casions: 

1) Wynn Las Vegas. $1.1B of rev in 2008, 480M from gaming, rest from food and retail. The revenues looked much better in 2007 ($1.3B), when people played more and payed up for their fancy rooms. 2009 is bringing bigger (better?) things: Encore is opening, which means number of table is going from 140 to 230, slots are increasing by 700, rooms are almost doubling. Ah, if only we go back to 2007 party-time, this would be a x revenue property, with x being, lets see:

~900M from tables + $270M from slots  - 150M on losses = $1.1B from casino.

+ $500M from rooms + $600M from food and bev + $100M in retail + $150M in other. In total, lets say $2.2B! Damn that's quite a drop from analyst projections of $1.3B for 2009!! At 30% margin that $2.2B could have been $600M+ in EBITDA. Now it's at a paltry $350M.

2) Macau doesn't have the changing room component this year, and the revenue is not crushed as much: $1.8B in rev, $450M in EBITDA. 

The value of the stock is really normalized EBITDA (which is $800-$1.1B x lets say 9x, uber generously), so maybe 8B - 2.5B in debt + $500M for golf course land (is it really worth that?) = $6B / 120M shares  = 50 per share. Now, personally 9x seems rich of an industry that has consistently underperformed its ROIC targets. And the supply/demand outlook for the markets doesn't look so good. + Macau is a wild card - can go either way. Overall I'd rather stay away.

Zimmer and Stryker - Move Your Hips

Both companies are leaders in orthopedic sector, or more simply they make hips and knees. The global $12B market (5 hips, 6 knees) is fast growing (~10% growth in recent years, except little to no growth in 2009, a lot of it due to strong dollar). Post 2009, market is expected to recover to 10% growth as fatties continue proliferating (from 18% prevalence in 1998 to 25% recently - 5% growth vs 1% population). Overall procedures were growing 6%+, as tech has improved somewhat as well, making the procedure more attractive. Products are getting more competitive though (reflected in no price growth recently vs 10% growth in 2002-2004), and there are share shifts - Zimmer is losing for example. It is trading, on the other hand, pretty cheaply as well - 10x P/E. I can see how multiple can expand to 12-13x + lay a fairly attractive growth profile on top of that, but still, I struggle to see where I can have a differentiated view.

Corrections Corp - Intriguing Value, But Will Inmates Roam The Streets Soon?

CXW is a private prison operator, running around 70 high-security and temp holding facilities for federal and state governments. Bull thesis, which has been working up until recently, is simple: number of prisoners in the country is growing (2.3M now, 5% CAGR from 1980, although slowed down to 2% recently), government prisons are overflowing (running at 105%+ capacity), and with no capex in sight utilization will continue to be tight. In come the private operators, who can run the facilities cheaper and construct them faster - why not just outsource to them? In fact, that's what has been happening, as private operators share of new "beds" (fun industry term) has climbed from 10% in 96 to 30% in 2007. They're still at low levels of penetration though: 160K beds for the industry (or 7% share), so assuming the # of inmates in the U.S. grows at 2%, and private institutions get ~30% market share of new beds going forward - that's 8% growth! CXW is the leader with 47% share of private market, and with barriers to entry high - states don't just want to send inmates to a non-proven operator, they can expect to get their fair share of the pie. So 8% growth long-term - not bad, right? Couple of hiccups though.
A) States have huge holes in their budgets. With this they may try to cut pricing.
B) Obama, in spirit of his mj-smoking youth, may decide to ease up on drug abuses, which account for 20% of U.S. inmates, which would be a huge hit to utilization of the industry.

I think B is scarier than A (doubtful that states would just let everyone roam free, if CXW resists price cuts), but B is more difficult to assess, and is a longer-term threat. Overall, the valuation at 10x P/E is attractive, and I would expect to grow to ~14-15x, implying 50% upside. For the moment, I'm staying away though.

Och-Ziff - a no brainer

Buying Och-Ziff is really making a highly levered bet on partial recovery in asset prices, except with little downside, due to the management fees the company generates. From those fees alone company makes 30 cents a share, or is otherwise trading at 17x EPS. Now, assume a 10% return in 2010 (09 is written-off due to high watermarks, however they reset in 2010), far below funds performance in 04-07, and OZM suddently makes 1.30 a share, or is trading at 3.5x FWD P/E. A good asset managers used to trade at 2x P/E premium to the market (17x vs 15x for S&P 500). Now you can argue that tough times demand tougher multiples, and that OZM is too reliant on its captain, Daniel Ziff. I am prepared to concede both points, apply a 10x multiple to projected 2010 earnings and still get to $13 a share target price. That's still 150% return from current stock levels. Not bad.

The risks to the investment: 1) industry outflows naturally impacting a large player like Och-Ziff 2) fund underperfomance 3) departure of Daniel Ziff. The first one is likely in the short-term, as HF assets have sky-rocketed to 2TR in Q2 08, declined 15% due to combination of performance and redemptions and now sit at ~1.7TR. Likely hf will decline further. Fund has outperformed however -15% YTD vs -40% for S&P and redemptions have been fairly mild. Over the last 5 years fund generated 7% annualized returns vs flat S&P. And given that Daniel Ziff is only buying more shares, his abrupt departure would be suprising. Summary? Still a no brainer.

We've been so lonely

It's been quiet on the blog these days, but this weekend I plunged in with renewed energy into the process of updating my portfolio. Several stocks that I would like to buy on Monday: Autoliv, Volcom, Cynosure, Expedia, Men's Warehouse, maybe Crane? Other things that look interesting: managed care stocks, but I have yet to finish reading the managed care report.

Lets start with Cynosure: it makes medical devices for aesthetics market. They have 8% share of the market that's growing at 20%+ driven by desire of everyone to look younger, and they have been outselling the competition. The company was founded 20 years ago, but the growth really took off in 2003-2004. El.En bought 60% of Cynosure in 2002 (Italian conglomerate with focus on light tech), currently holding 30% of the company. Why have they been selling???? They're the ones that manufacture the product, can they decide they're better off with doing it themselves.

The machines that the company manufacturers cost around $100K. Penetration among dermatologist is estimated to be high - around 75%. It's tricky to know if the buying will just fall off the cliff at one quarter, which is concievable. Hard to see stock declining much futher but I see how the stock can sit at current levels for a while. I'm passing

Google - Ever reaching a $1000?

Not so long ago the stock was at $700, now it's a $450 and trading lower along with the entire stock market. Is it a steal at these levels? Lets see.

Google has been putting out a lot of cool products out there: google maps, gphone, new browser... But the financial story remains all about online advertising and its penetration which currently stands at 8%. The key questions are: 1) what will this level be globally and in the U.S. 2) what is the overall advertising growing at? 3) What is the consensus expectation for 08-10 growth and what will actually happen.

Addressing the long-term issues first. Advertising share of GDP has been pretty constant at 2.0-2.3% since 1980s, so ad just grows at GDP lines long-term (actually slight lag in the last couple of years, but lets consider that noise). The GDP growth is 3% real + 2% inflation, so lets 5% long-term for ad spend.
The penetration is 8% now. I've heard numbers up to 15% in the next five years, lets take 12% by 2013. Currently U.S. ad spend is projected to be $297B for 2008, at 5% that's $379 in 2013. Internet is projected to be $25B in 2008 (8.4% penetration), at 400bps increase that's $47B in 2013 or 14% CAGR. Sensitivity? Each 1% in penetration = 350bps of CAGR. Quite a bit.

Now to short-term questions. Historically advertising is a high-beta play on U.S. GDP - although the long-term growth for both is the same, ad spend has fallen in the last two recessions (-1.2% in 1991, - 6.5% in 2001). The effect is typically lagged by a year because the 2008 budgets a while ago so do not incorporate the new economic outlook. The analysts however expect the recession to not impact advertising very significantly this time. They're saying in 1991 companies cut budgets and chose to focus on value which was proved to be an error, while in 2001 the recession was corporation vs consumer based? Perhaps I buy the first argument but not the second - consumer trickles down to corporate eventually. I think a particulary vulnarable area is Internet advertising that dropped 12% in 2001 and 16% in 2002. The analyst would rebut this by saying the area is much more mature now, companies are convinced or internet value, and look at the latest number - 16% growth in q2 2008 (bernstein tracker) while overall market is down 2%. I partially agree with all this. At the same time, I fear that a lot of the businesses advertising online a inherently lower quality than those using TV for example (low entry cost), and they're the ones that get squeezed the most in the tough economies like this one. So I'm cautious on the outlook, and think the 2009 online growth will likely be around 8-10%, below expectations. This is below expectations and seemingly a recipe for the fallout in stocks.

As for Google itself, the company faces several issues that I think raise a pink flag for me: increasing acquisition costs (TAC) that may be offset by decreasing R&D spend but operating margin improvement expected by the analysts strikes me as too optimistic. Second there's the competition from MSFT/YHOO, and third is the rising capex.

Lear Corp. - Bargain in the Scary Auto Sector

The industry is desperately flailing its arms and trying not to sink, but the stocks have sinked already and provide a great value pick here. A great value in particular is Lear - manufacturer of seating systems with 20% share of the global market ($12B revenue) and electrical distribution systems ($3B). North America is ~45% of sales, and overall sales are projected to decline 7-8% - 15% in North America and flat in RoW. The key question is really normalized profit. I say the margins on the business should be around 4-5%, plus given the history of chronic restructuring you should shave another $100M off cash flow, so you get to implied $500-$650M EBIT. Say x9 multiple, and we get to the most conservative range of $4.5B valuation (and $4B to be ultra conservative). That means backing out net current debt of $1.8B the equity should be value in the ultra conservative scenario at $2.2B, 120% upside from current levels. I say lets get rich and buy some stock.