Whitney had a rough year in 2011. But his analysis is quite insightful. These are his updates on Netflix (NFLX, Financial), J.C. Penney (JCP, Financial), Goldman (GS, Financial), Citi (C, Financial), St. Joe (JOE, Financial).
1) One of our major holdings, Netflix, is one of the best-performing stocks this year, up 79%. We wrote up our take on the company’s recent earnings release (see below).
2) J.C. Penney has also been on a tear (up 20% YTD) thanks to the new CEO, Ron Johnson, and his #2, Michael Francis, hosting a two-day launch event for analysts and investors in New York City recently. They outlined their plans to transform the company and make it “America’s Favorite Store.” We were extremely impressed and after meeting and hearing from Johnson, we are even more convinced that he is the best retail CEO in the world, bar none. At the end of this email is a summary of the two press releases from the launch event.
3) Goldman and Citi (also holdings of ours) reported earnings last month and the contrast between the two couldn’t have been more stark. Goldman, as usual, was ahead of its peers in recognizing the slowdown across most of its businesses and cuts costs accordingly: compensation expense, for example, was down 21% for the year. Citi, as usual (unfortunately), wasn’t nearly as aggressive in cutting costs in its Securities and Banking division – in fact, on a 16% decline in revenues for the year in that division, expenses went UP 2%! Citi doesn’t break out its revenues and expenses in enough detail to do a real apples-to-apples comparison with Goldman, but we’re heard numerous anecdotal stories about both firms that lead us to the firm conclusion that Goldman is rapidly doing what’s necessary to bring its expense structure in line with the new reality, while Citi is still paying huge guaranteed packages (up to $30 million!) to bankers who aren’t worth anything close to what Citi’s paying them in this environment.
Why is Citi doing this? Probably some combination of empire building, poor management and incompetence, combined with a highly profitable consumer banking business that offsets losses in the Securities and Banking division – a luxury Goldman doesn’t have.
So why don’t we sell the stock in disgust? 1) Even with its big move this year (up 30%), the stock today is trading at a 31% discount to tangible book – way too cheap; 2) the consumer banking business is still doing very well; 3) The run-off of Citi Holdings (bad bank) is progressing well; and 4) Citi’s high expenses are a fixable problem.
4)We have long been bearish on St. Joe, but as the stock declined last year to under $13 in November – it ended the year at $14.66 – we covered most of our position such that it was well under 1% going into this year. Like many beaten-down stocks, however, it jumped in the first weeks of 2012, to over $17, so we took our short position to nearly 2%.
St. Joe then announced that it “intends to significantly reduce planned future capital expenditures for infrastructure, amenities and master planned community development” and will “record an aggregate non-cash charge for impairment associated with these projects that may range from $325 million to $375 million in the fourth quarter…,” an amount equal to about half of the total real-estate assets on the company's balance sheet.
We feel a measure of satisfaction, as St. Joe is finally admitting what we have long maintained: that many of its assets will likely never be developed and thus need to be written down. We shared our analysis in our May 2011 letter to our investors (along with many photos and videos from a recent trip to see some of the properties):
In the early years of the housing bubble, St. Joe built a small number of developments such as WaterColor and part of WaterSound on the ocean in popular areas. Because of their attractive location (and, of course, the housing bubble), St. Joe sold most of the lots in these developments at good prices. But then St. Joe went crazy, spending well over $1 billion during the bubble years on developments that aren’t on the ocean (WaterSound Origins, RiverCamps, RiverTown) or are far away from the airport and well-trafficked areas (WindMark, SummerCamp). The combination of the unattractive locations and the bursting of the housing bubble has resulted in these developments being ghost towns today. In our opinion, they are likely to always remain so (though they would be perfect for the government to hide people in the witness protection program).
These developments clearly aren’t worth even a fraction of what St. Joe spent to build them, yet the company hasn’t marked them down to any meaningful degree, apparently due to the use – and, in our opinion, abuse – of the “recoverability test”...
The stock has barely moved since this announcement.
5) David Einhorn’s 2011 year-end letter is out and is posted at: http://advisoranalyst.com/glablog/2012/01/19/david-einhorn-greenlight-capital-q4-2011-letter. In it, he discusses the European crisis, GMCR, FSLR (covered), DELL and XRX (we’re short the first two and long the third).
Sincerely yours,
Whitney Tilson
1) One of our major holdings, Netflix, is one of the best-performing stocks this year, up 79%. We wrote up our take on the company’s recent earnings release (see below).
2) J.C. Penney has also been on a tear (up 20% YTD) thanks to the new CEO, Ron Johnson, and his #2, Michael Francis, hosting a two-day launch event for analysts and investors in New York City recently. They outlined their plans to transform the company and make it “America’s Favorite Store.” We were extremely impressed and after meeting and hearing from Johnson, we are even more convinced that he is the best retail CEO in the world, bar none. At the end of this email is a summary of the two press releases from the launch event.
3) Goldman and Citi (also holdings of ours) reported earnings last month and the contrast between the two couldn’t have been more stark. Goldman, as usual, was ahead of its peers in recognizing the slowdown across most of its businesses and cuts costs accordingly: compensation expense, for example, was down 21% for the year. Citi, as usual (unfortunately), wasn’t nearly as aggressive in cutting costs in its Securities and Banking division – in fact, on a 16% decline in revenues for the year in that division, expenses went UP 2%! Citi doesn’t break out its revenues and expenses in enough detail to do a real apples-to-apples comparison with Goldman, but we’re heard numerous anecdotal stories about both firms that lead us to the firm conclusion that Goldman is rapidly doing what’s necessary to bring its expense structure in line with the new reality, while Citi is still paying huge guaranteed packages (up to $30 million!) to bankers who aren’t worth anything close to what Citi’s paying them in this environment.
Why is Citi doing this? Probably some combination of empire building, poor management and incompetence, combined with a highly profitable consumer banking business that offsets losses in the Securities and Banking division – a luxury Goldman doesn’t have.
So why don’t we sell the stock in disgust? 1) Even with its big move this year (up 30%), the stock today is trading at a 31% discount to tangible book – way too cheap; 2) the consumer banking business is still doing very well; 3) The run-off of Citi Holdings (bad bank) is progressing well; and 4) Citi’s high expenses are a fixable problem.
4)We have long been bearish on St. Joe, but as the stock declined last year to under $13 in November – it ended the year at $14.66 – we covered most of our position such that it was well under 1% going into this year. Like many beaten-down stocks, however, it jumped in the first weeks of 2012, to over $17, so we took our short position to nearly 2%.
St. Joe then announced that it “intends to significantly reduce planned future capital expenditures for infrastructure, amenities and master planned community development” and will “record an aggregate non-cash charge for impairment associated with these projects that may range from $325 million to $375 million in the fourth quarter…,” an amount equal to about half of the total real-estate assets on the company's balance sheet.
We feel a measure of satisfaction, as St. Joe is finally admitting what we have long maintained: that many of its assets will likely never be developed and thus need to be written down. We shared our analysis in our May 2011 letter to our investors (along with many photos and videos from a recent trip to see some of the properties):
In the early years of the housing bubble, St. Joe built a small number of developments such as WaterColor and part of WaterSound on the ocean in popular areas. Because of their attractive location (and, of course, the housing bubble), St. Joe sold most of the lots in these developments at good prices. But then St. Joe went crazy, spending well over $1 billion during the bubble years on developments that aren’t on the ocean (WaterSound Origins, RiverCamps, RiverTown) or are far away from the airport and well-trafficked areas (WindMark, SummerCamp). The combination of the unattractive locations and the bursting of the housing bubble has resulted in these developments being ghost towns today. In our opinion, they are likely to always remain so (though they would be perfect for the government to hide people in the witness protection program).
These developments clearly aren’t worth even a fraction of what St. Joe spent to build them, yet the company hasn’t marked them down to any meaningful degree, apparently due to the use – and, in our opinion, abuse – of the “recoverability test”...
The stock has barely moved since this announcement.
5) David Einhorn’s 2011 year-end letter is out and is posted at: http://advisoranalyst.com/glablog/2012/01/19/david-einhorn-greenlight-capital-q4-2011-letter. In it, he discusses the European crisis, GMCR, FSLR (covered), DELL and XRX (we’re short the first two and long the third).
Sincerely yours,
Whitney Tilson
