From West Coast Asset Management's Quarterly Letter:
Spring is in the air and with that should come the optimism of brighter days. Unfortunately, events that have transpired during the past few months have left a dark cloud hanging over Wall Street. Between the unspeakable tragedy in Japan, the turmoil in the Middle East and concerns over the budget deficit, there is certainly a lot to be worried about. However, investors who get too caught up in the pessimism of the day often miss out on extraordinary investment opportunities.
Over the last 40 years the U.S. has endured a number of different crises, but at each point the economy has recovered and the stock market has reached new highs. To name a few, this country has prospered through the inflationary 1970s, the stock market crash in 1987, the savings & loan crisis in the early 1990s, the technology bubble’s implosion in 2000, 9/11 and now the Great Recession. Accordingly, despite all of the current nervousness, thoughtful investors operate under the premise that “this too shall pass eventually.”
It was in this context that we decided to analyze a couple of companies that flourish because they cater to an industry that is characterized by eternal hope: professional sports. Each season, millions of diehard fans tune in their televisions and flock to stadiums because they believe that their team has a chance to finish on top. While only a lucky few realize that dream, fans continue to come back, year after year, with renewed hope that this season will be different. How can we justify this persistent optimism despite evidence of repeated failure and the long-shot odds of ultimate success? Well, the opportunity to live vicariously through our most beloved athletes is very powerful. Sports are a uniquely positive outlet for Americans and it is the related devotion that creates lucrative opportunities for companies that cater to the needs of fans.
An example of a company that has been successful in establishing one of its products as a staple for fans is Hormel Foods (HRL, Financial), the producer of Famer John hot dogs. Farmer John is the official hot dog of the Los Angeles
Dodgers as well as the Staples Center, where the Lakers, Clippers and Kings play. Given that eating food is unquestionably a significant component of the live sporting event experience, it isn’t surprising that stadiums generate considerable revenue from concession sales. According to the Arizona Sports & Tourism Authority, the average amount of money spent on food and beverages at the 2008 Super Bowl was $45.6 per person. In total, $3.2 million was spent on food and beverages inside the stadium on that one day alone! In addition, according to projections made by the National Hot Dog & Sausage Council for the 2010 baseball season, stadiums were expected to sell 21.4 million hot dogs over the course of the season, enough to round the bases close to 30,000 times.
Aside from just the Farmer John portion of the business, Hormel is a good company trading at a reasonable price. Net of debt, the company has approximately $300 million of cash on its balance sheet. After backing out that cash from the company’s market capitalization, the stock is trading at approximately 16 times earnings and yields 1.8%. Of note, the company has paid dividends every year since 1928. Hormel grew its revenue by 10.5% during 2010 and its adjusted earnings per share grew by 18%. Additionally, Hormel’s foreign revenue has increased by more than one-third since 2007 and the company may have a large runway for growth since only about 5% of its revenue is generated abroad. Finally, as of March 2011, Hormel had the authorization to repurchase 8.3 million shares of its common stock, representing approximately 3% of its shares outstanding.
Another company that has seen enormous success affiliating itself with professional sports is Nike (NKE, Financial). Nike is an official sponsor of Major League Baseball. Furthermore, starting in 2012, Nike will replace Reebok as the maker of all National Football League branded apparel and uniforms. This right cost Nike $1.1 billion but will likely provide the company with substantial benefits in terms of advertising, brand promotion and apparel revenue. Specifically, according to an analyst report from Citigroup (C, Financial) that was cited in Businessweek, Reebok’s NFL license represented about $350 million of its $565 million is U.S. apparel sales. Correspondingly, a Citigroup analyst predicted that Nike’s 2012 earnings per share could be boosted by as much as 3% just because of its new agreement with the NFL.
Despite all of these positive developments, consistent revenue growth and gradually improving margins, shares of Nike are not trading at a premium valuation. If the company’s $3.85 billion of net cash is subtracted from its market capitalization, the stock trades at 16.6x trailing earnings. Nike’s stock took a hit in mid-March when the company warned that input cost pressures may hurt margins in the near future. However, offsetting this potentially short-term concern are a number of positives. First, Nike sports a dividend yield of 1.5% and the company has raised its dividend for nine consecutive years. Next, Nike’s international presence is very formidable, with 58% of its revenue coming from abroad in 2010. In fact, during the same year, $1.74 billion and $2.04 billion in revenue came from Greater China and Emerging Markets, respectively.
The takeaway is that professional sports can serve as an oasis during uncertain times. It seems that no matter what else is going on in the world, people in America and in many other countries will continue to follow their favorite teams. As such, investors who are struggling to find attractive companies and stocks should look for businesses that have the ability to benefit from the passion and devotion associated with sports. Specifically, companies such as Hormel and Nike, which have already entrenched their products in the hearts of sports fans, may have some of the best and most resilient business models of any companies in the world.
WCAM website is here: http://wcam.com/exclusive-outlook-newsletter/
Spring is in the air and with that should come the optimism of brighter days. Unfortunately, events that have transpired during the past few months have left a dark cloud hanging over Wall Street. Between the unspeakable tragedy in Japan, the turmoil in the Middle East and concerns over the budget deficit, there is certainly a lot to be worried about. However, investors who get too caught up in the pessimism of the day often miss out on extraordinary investment opportunities.
Over the last 40 years the U.S. has endured a number of different crises, but at each point the economy has recovered and the stock market has reached new highs. To name a few, this country has prospered through the inflationary 1970s, the stock market crash in 1987, the savings & loan crisis in the early 1990s, the technology bubble’s implosion in 2000, 9/11 and now the Great Recession. Accordingly, despite all of the current nervousness, thoughtful investors operate under the premise that “this too shall pass eventually.”
It was in this context that we decided to analyze a couple of companies that flourish because they cater to an industry that is characterized by eternal hope: professional sports. Each season, millions of diehard fans tune in their televisions and flock to stadiums because they believe that their team has a chance to finish on top. While only a lucky few realize that dream, fans continue to come back, year after year, with renewed hope that this season will be different. How can we justify this persistent optimism despite evidence of repeated failure and the long-shot odds of ultimate success? Well, the opportunity to live vicariously through our most beloved athletes is very powerful. Sports are a uniquely positive outlet for Americans and it is the related devotion that creates lucrative opportunities for companies that cater to the needs of fans.
An example of a company that has been successful in establishing one of its products as a staple for fans is Hormel Foods (HRL, Financial), the producer of Famer John hot dogs. Farmer John is the official hot dog of the Los Angeles
Dodgers as well as the Staples Center, where the Lakers, Clippers and Kings play. Given that eating food is unquestionably a significant component of the live sporting event experience, it isn’t surprising that stadiums generate considerable revenue from concession sales. According to the Arizona Sports & Tourism Authority, the average amount of money spent on food and beverages at the 2008 Super Bowl was $45.6 per person. In total, $3.2 million was spent on food and beverages inside the stadium on that one day alone! In addition, according to projections made by the National Hot Dog & Sausage Council for the 2010 baseball season, stadiums were expected to sell 21.4 million hot dogs over the course of the season, enough to round the bases close to 30,000 times.
Aside from just the Farmer John portion of the business, Hormel is a good company trading at a reasonable price. Net of debt, the company has approximately $300 million of cash on its balance sheet. After backing out that cash from the company’s market capitalization, the stock is trading at approximately 16 times earnings and yields 1.8%. Of note, the company has paid dividends every year since 1928. Hormel grew its revenue by 10.5% during 2010 and its adjusted earnings per share grew by 18%. Additionally, Hormel’s foreign revenue has increased by more than one-third since 2007 and the company may have a large runway for growth since only about 5% of its revenue is generated abroad. Finally, as of March 2011, Hormel had the authorization to repurchase 8.3 million shares of its common stock, representing approximately 3% of its shares outstanding.
Another company that has seen enormous success affiliating itself with professional sports is Nike (NKE, Financial). Nike is an official sponsor of Major League Baseball. Furthermore, starting in 2012, Nike will replace Reebok as the maker of all National Football League branded apparel and uniforms. This right cost Nike $1.1 billion but will likely provide the company with substantial benefits in terms of advertising, brand promotion and apparel revenue. Specifically, according to an analyst report from Citigroup (C, Financial) that was cited in Businessweek, Reebok’s NFL license represented about $350 million of its $565 million is U.S. apparel sales. Correspondingly, a Citigroup analyst predicted that Nike’s 2012 earnings per share could be boosted by as much as 3% just because of its new agreement with the NFL.
Despite all of these positive developments, consistent revenue growth and gradually improving margins, shares of Nike are not trading at a premium valuation. If the company’s $3.85 billion of net cash is subtracted from its market capitalization, the stock trades at 16.6x trailing earnings. Nike’s stock took a hit in mid-March when the company warned that input cost pressures may hurt margins in the near future. However, offsetting this potentially short-term concern are a number of positives. First, Nike sports a dividend yield of 1.5% and the company has raised its dividend for nine consecutive years. Next, Nike’s international presence is very formidable, with 58% of its revenue coming from abroad in 2010. In fact, during the same year, $1.74 billion and $2.04 billion in revenue came from Greater China and Emerging Markets, respectively.
The takeaway is that professional sports can serve as an oasis during uncertain times. It seems that no matter what else is going on in the world, people in America and in many other countries will continue to follow their favorite teams. As such, investors who are struggling to find attractive companies and stocks should look for businesses that have the ability to benefit from the passion and devotion associated with sports. Specifically, companies such as Hormel and Nike, which have already entrenched their products in the hearts of sports fans, may have some of the best and most resilient business models of any companies in the world.
WCAM website is here: http://wcam.com/exclusive-outlook-newsletter/
