Saturday, November 8, 2014

Disney's Earnings Commentary {And how I plan to give Disney stock to the children in my family instead of gifts}

 

I purchased shares of Disney the very beginning of this year—mid January to be exact. If I could do just two things differently I would have:
1. trusted my very initial instincts {and research} and would have bought shares a lot sooner than I did.
2. I would have started a larger position.
Regardless of not getting the shares “cheaper” by buying sooner or not making this stock 50% of my portfolio; one thing I am grateful for is that I made the decision to buy shares in this phenomenal company. The stock is up 21.6% since I purchased. I encourage you to take a look, do your own research, and decide for yourself whether this company can benefit your investment portfolio.
Original Investment Thesis:
Strong brand, strong earnings, very minimal competition. As a matter of fact, one of the factors that attracted me so much towards Disney as an investor is the lack of direct competition. Before I made my initial investment in the company, I thought long and hard about who or what exactly competes with a company like Disney and I couldn’t come up with anything concise. Sure- it can be argued, for example, that Disney competes in the entertainment category and that a “competition” may be perhaps a family deciding to take a vacation to a Caribbean island, take a cruise, go visit grandma, or do nothing at all instead of going to a Disney resort. Or, if we are talking about television & sports (Disney owns ESPN) it can be argued that sports fanatics can choose another venue for their watching. However, I am not so sure how easy that would be. I don’t follow sports much but I can only deduct that ESPN probably has exclusive contracts that give it the sole right to show certain sports or events, etc. Hence, not sure there is an ‘immediate substitute’ for that.
ESPN is the most profitable network for Disney but lets not forget the company owns many other channels. Here is an overview:
 
My conclusion after a lot of research was that Disney, like other solid companies in my portfolio, is in a league of its own and it would take a lot of work for a start up to even come close to Disney's status. You can read my full investment thesis for Disney on this post which I wrote back in March shortly after I purchased shares.

Highlights of the earnings:
The best part from reading the earnings report and press release was a quote from Disney CEO  Robert A. Iger: “Our results for fiscal 2014 were the highest in the company’s history, making our fourth consecutive year of record performance”. I think is pretty incredible that a company as old as Disney is still growing and reaching record highs in financial performance.
In summary…
  • Revenues for full year 2014 increase 8% (in comparison to full year 2013) reaching a record high of $48.8 billion.
  • Net income increased 22% (compared to 2013 results) reaching $7.5 billion, another record high in this category.
  • Earnings per share for the full year increased 26% to a record $4.26 per share compares to $3.38 in 2013.
  • Cash provided by operations up 3% to $9.7 billion in comparison to last year’s $9.4 billion
Read full press release here.

{I encourage you to read the full report. Is not a very long read and it provides a quick summary on how each segment within the company contributted to a year of great results}.

My Two Cents {Plan I have in mind for my niece & nephew involving DIS shares}
Disney is not a company that was born yesterday. It has been around for nearly a century and this company is a prime example of business that has been able to remain relevant and highly acclaimed for generations. Disney was around when my grandparents were growing up, when my parents were growing up, obviously as I grew up and will likely be there for my kids and the kids of my kids as well. I don’t know exactly how they do it but whatever it is, keep it going!
One idea I’ve had for my niece and nephews is to start a position for them on Disney stock and add a share or two every year. Instead of buying gifts I would add on to their position each time they have a birthday and as a Christmas gift. I would make sure the shares are involved in DRIPS so that each time dividends are paid out, the money goes back to buying more shares creating a mini money machine for them as they grow up.
They may hate me now wondering why they are not receiving any toys or articles of clothing from me but they’ll thank me 20 years from now when their investment has grown significantly. My niece is only 2 years old and my nephew is 7. If Disney continues its track record, I wonder how far they can go in the course of two decades when they are 22 and 27, respectivery. The stock price is a bit high now. I’d like to wait for a nice pullback before starting said position. However, who knows what will happen and whether I’ll see any major pull backs. So, we’ll see what I decide to do.
Oh! And one more thing— The stock also pays dividends with an annual yield of 0.90% (or .86 cents per share).
Tell me, What are your thoughts on Disney? Ever thought of starting a position for your kids or the kids in your family? Do you think this company can be disrupted by an up and coming start up or any other kind of competition? Would love to hear your thoughts.
*I am LONG on disney stock.

Tuesday, November 4, 2014

Day Trading Vs. Investing: Five reasons why day trading is not for me

When you first think about getting involved in the stock market one of the first questions you may want to ask yourself is this: "...am a trader or am I an investor?". You may also want to look deep inside yourself and identify what exactly is your risk tolerance. It is possible you'll likely fall in to one of the categories below:


I got this diagram from a Wall Street journal article about a year ago and I loved it so much I framed it! I think is extremely important to identify your tolerance for risk before jumping head on in to the wonderful world of stocks.

The phrases "investing" and "trading" may often be used interchangeably. However, it is important to know that they mean different things. Below is a "formal" definition for each one, obtained from Investopedia.com:

Day Trader: An investor who attempts to profit by making rapid trades intraday. A day trader often closes out all trades before the market closes and doesn't hold any open positions overnight. Some day traders use leverage to magnify the returns generated from small stock price movements.

Investor [,long term]: The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit. Holding an asset for an extended period of time. depending on the type of security, a long term asset can be held for as little as one year or for as long as 30 years or more. 

Almost every time I find myself at a social gathering and the stock market conversation comes up; the first questions I get is about day trading and "penny stocks". I immediately tell people that I don't invest in penny stocks nor do I have any interest in them. I also try to explain that I invest for the long term. I often get puzzled looks from people and thus, I have to explain this a little further. Unfortunately, many people I have encountered tend to have a perception that the stock market is a "get rich quick" machine or a place where you either make a million dollars in 2 months or you loose everything you have. I'd like to think this perception is changing and I am doing my part in explaining to whomever is interested, what real long term investing is all about.

From very early on in my "investing career" I realized that I clearly fell in to the long term investor category rather than the day trader side of the fence. Here are the top reasons why I don't have the tolerance to day-trade in the stock market nor trade Penny stocks. 

1. I like my peace of mind and my serenity-- I cannot stare at a screen all day wondering "what will happen" or whether or not is a right time to "jump in" or "jump out" of a position. Even if I had all the time in the world to sit in front of a screen all day; this strategy is simply too nerve wrecking for me personally; just not for me. 


2. I have more interest in fundamentals than technical analysis-- Although I would like to learn, simply out of curiosity I cant say I fully understand exactly what goes on in technical charts and I have more interest in the financial fundamentals and prospects of a company. I feel that if you truly pick a quality stock; whether or not you grab shares at the "bottom" or at the "top" of a range, wont make much difference in the long term. It has never made much of a difference in my personal portfolio. Again, this tides back to the first point of me sitting down staring at charts all day, not for me. 


3. The idea of being a "part owner" of a company is exciting to me on a personal level- being able to say that I own a 'small piece' of Disney, visa, Mastercard, etc. and being able to succeed as these companies succeed as well, is one of the reasons why I am so passionate about the stock market. The other side of the coin, being a day trader means grabbing and selling stocks consistently. You don't really care about the company. Instead, your interest is in the technical graph and what is going on. I am far more interested in the business than its "chart" at a period of time. 


4. I have zero interest in "penny stocks" also known as "hot stocks" "get rich quick" (or get poor quick) trades. Simply not for me. I rather make sure my money is going towards a legit company that discloses all financials necessary for my review. 


5.  Trading costs can add up significantly- Keep in mind that unless you are lucky enough to buy and sell stocks for free (which I am not) every time you make a trade- it costs money! So, this is another reason why I am not a fan of day trading. For me to trade consistently it would mean spending either $4.95 every hour or so or $9.99 depending on whether I use Tradeking or TDameritrade. I would probably end up loosing a lot more than gaining. Also, the stress is simply not worth my time personally.


Perhaps you can relate to some of these or perhaps you feel you can handle all of the above. The choice is yours. As the famous saying goes: "Know thyself" that's the first key to success.

PLEASE NOTE: I am not saying day-trading is a negative thing. I have in fact met people that have been successful day trading. I recall a finance professor I had a couple of years ago; he was an active day trader and didn't believe in 'long term investing'. As a matter of fact, he shared with the class one day that he tried to be an "investor" by holding a stock for about 2 weeks and he lost too much money so he went back to trading (obviously his perception of long term is not the norm). He would come in to class one day saying he just made $5,000 and the next day he would come in bummed because he had "lost $10,000", and vice versa--- all in a days work. 

The purpose of this post is to encourage you to know yourself and truly look inside yourself and understand your tolerance for short term or long term risk. We can never predict the future. Maybe one day I'll gather enough interest or courage to try out this day-trading thing. HOWEVER, I know where my true fundamentals stand; I know what makes me feel comfortable and confident and what I truly enjoy and that is to be a "part owner" of a growing, successful company for more than a few hours a day. 

Thank you for reading!

Would love to heard your thoughts on this one-
Tell me, are you more of a day trader or a long term investor? 

Cheers to profits,
Mabel


*I am long Disney, visa, Mastercard

Sunday, November 2, 2014

Stocks I'll have my eye on for November 2014

Happy first Monday of November. Hope we've all managed to make it to work on time. I am personally thankful for that extra hour of sleep!

But anyways, I was recently inspired by this post and so I decided to write my own list of companies I will be keeping my eye on during the month of November. These are companies where I am hoping to own shares. Welcome to Mabel's watch list.



When would I buy? Well, I'll let you in to this little secret-- the perfect times for me to buy shares in a company is when the entire stock market is panicking about some macro-economic news that has absolutely nothing to do with a specific company. When wall street is busy panicking and selling off left and right, that's when I like to come in and take advantage of nice discounts. So, lets see if anything like that happens this month.

Without giving you any heavy financial stuff; I'd like to keep this post light with simply fundamental reasons as of why I would like to invest in each of the companies below. As a general rule, please know I've done my research and know that these are companies that are either highly profitable already or are doing a phenomenal job positioning themselves to be very profitable at some point in the future. So, without further 'ado here are the companies I am keeping me eyes on:


Amazon {AMZN}: I wrote a post about this company recently and the reasons why it is on my watch list. If you missed it, check it out here. I am actually disappointed at the fact I didn't pick up shares after their recent earnings announcement. Once again amazon disappointed on earnings and so there was a very heavy sell off bringing this stock down to around $284, a price I had not seen in a very long time. Unfortunately (for me), institutional investors apparently came back to their senses on how  amazing this company truly is and the stock is back over at above the $300 mark. I feel about amazon just like I felt about Google when I purchased shares 6 years ago; that this is a company that will be sticking around for many, many years. I truly believe that patient investors will have a nice pay off in the future. I believe that CEO Jeff Bezos knows exactly what he is doing with his strategy and the fact that he is taking a loss on services is all part of the "master plan" to take over the world. Patience is key with amazon. This company goes under my "visionary" category. Lets see if I can get it at a discount at some point this month. Otherwise, I'll have to wait it out.

Apple {AAPL}: I owned shares of Apple for about 4 years. It was actually one of the first companies I invested in when I first got started in the stock market. This company blew the ball out of the park for my personal portfolio and I can say I owned it when it reached $705! It was my gem for a very long time. Unfortunaly when the stock price started tumbling down a couple of years ago; I sold my shares. I wanted to buy shares immediately after the split at the beginning of this year but didnt buy and missed my chance to get shares in the ~$95 range. Lets see if something happens that can allow me to get this one. I would consider starting a position again if the price goes under $98 or so.

The TJX Companies, Inc. {TJX}: I never owned shares in TJ Maxx but I am a regular customer of ALL of its stores. My mother is completely and utterly obsessed with Marshalls, TJ Maxx and home goods. She is a true "Maxxinista". And honestly, who wouldn't be obsessed?! Getting in-season articles of clothing or furniture and everything in between for a deep discount is surely a deal no women (and many man) would not pass on! Some may be skeptical about the fact that TJX stores are brick and mortar and may get eaten alive by competition from online retailers. However, from studying this company closely I came to understand the business model this company possesses is very clever, hard to beat, and somewhat difficult to imitate. In addition, the experience of actually leaving your home and going out to shop and browse around is very much alive and well. This is a phenomenal company. The thought that I could have purchased shares when it was trading in the ~$50 range makes me feel like I missed out. As I type this post; the stock is trading at $63.32. I would be willing to buy shares if the price goes under $59 but the way this company is performing I am not sure if I'll see those numbers. But lets see what happens. 

Berkshire Hathaway Inc. B-shares {BRK-B}: Are you familiar with Warren Buffet? Well, he is my virtual mentor (he just doesn't know it yet) and one of the best investors of all time. Often recognized as the "best investor of the 20th century". He has this little company called Berkshire Hathaway for which he has two different classes of shares. Class A-Shares are currently worth $210,000 (yes, you read that right). That's actually a tad bit rich for my blood. Thankfully he also offers Class-B shares of his company for a more affordable price of $139 (price as I type this post). Owning BRK-B shares will allow me to be part owner of multiple successful companies under the Berkshire Hathaway umbrella including Geico insurance, Heinz ketchup, Brooks running, See's candy, among several others. See full list here. Warren Buffet is known for his advanced experience in investing in solid, profitable companies and we get to be part {and profit} from his wisdom by owning shares in this great company. Price is obviously high but not if we look at it as a "long term" investor. And definitely super cheap if we consider that one day class B shares may also reach the $200K mark. I'd be willing to buy shares around $130. Keeping my eyes open for a discount. 

And that is my list for now. New months are always exciting times for me as I see it as a chance for new beginnings, new adventures, and new experiences. Lets see what the market brings for us this upcoming month. I also cannot believe the year will be over soon. Lets make the best out of the remainder 2 months. Any goals in the back burner? Why not start taking steps today? is never too late.

Tell me, any companies you have the eye on for this month? Any comments or questions on the ones listed? Let me know.

Thank you for reading!

Cheers to profits,
Mabel

Saturday, November 1, 2014

Starbucks (SBUX) reports record high earnings; Wall Street responds by selling off shares: Why Im keeping mine {Earnings Commentary}

Good day my dear followers!

 
 

Welcome & Happy Saturday. Take a seat, grab a coffee (pun intended), and welcome to Starbucks earnings commentary. The company announced earnings for the quarter and full year 2014 after hours on October 30th 2014. Without yet reading the results on thursday, I took a quick glance at the stock price and noticed a somewhat significant drop. I decided to go directly to the source first and foremost (sbux investors relations site) before going on to read commentaries from outside analysts.

As I read the press release all I kept thinking was "wow, they did pretty well". I was even pleasantly surprised to see the company had actually reached record highs in several financial metrics. I wasn’t sure what the issue was. I then proceeded to go outside of the Starbucks universe and read some outside reports. As suspected, Starbucks failed to meet "wall street expectations" and so, the street punished the company with a nice sell off, and thus, down went the stock price.

Highlights of the call:

-Consolidated net revenue increased 10% for the quarter year over year reaching a record 4th quarter revenue of $4.2 billion. For full year 2014; this represented an increase of 11% reaching a record $16.4 billion.

-Global comparable store sales for the quarter increased 5%; for full year 2014 the increase was 6%. This was the 19th consecutive quarter in which starbucks reached sales of 5% or greater. {*generally, comparable store sales refers to the sales generated in already existing stores that have been in operation for one year or longer.}

--Consolidated operating income for the quarter reached $854.9 million. For full year 2014; consolidated operating income was $3.1 billion representing an expansion in profit margin which increased to 18.7%. {*Meaning that starbucks was able to retain approximately  $0.19 cents for every dollar of sales}.

-Earnings per share increased to $0.77 for the quarter and reached $2.71 for full year 2014.

-Starbucks openned a total of 503 net stores globally during the quarter alone. For full year 2014; total of net new stores reached 1,599.



-During the quarter, the company also announced an increase of 23% in their dividends, now paying $0.32 per share.

 
My Two Cents

My original thesis for purchasing shares in Starbucks remains intact. The fact that they failed to meet wall street numbers doesn’t really phase me. One thing we must learn as long term investors in quality companies is to quiet the outside noise and focus on the reasons why we bought in the first place as well as focus on the facts rather than the hype. If we sold or purchased stocks based on the actions of Wall Street, we'd probably end up very poor. So, please keep that in mind. This is specially targeted to those investors just starting out! This is one of the reasons why keeping track of "why" you buy a stock is such a valuable tool and it helps quiet down unnecessary hype.
 
With that said, I am even more excited with the company's plan for strategic growth and expansion. They also seem to be well aware of technology trends and are making strides towards making sure the business is well aligned with the increasingly high tech consumer. I liked the fact that this company seems to clearly understand that, despite being a leader in their industry, they must continue working hard if they wish to maintain their competitive advantage. Starbucks CEO Howard Schultz said it best during the conference call:
 
"Starbucks performance in fiscal 2014 was extraordinary by any metric or comparison...but we cannot be content with the status quo, as consumers continue to demand more and more in terms of convenience and excellence. You will see us continue to invest where it counts most, in mobile commerce, innovation, in the customer experience and the partners who drive it and in the quality of our coffees."
 
I also enjoyed this quote by the CFO, Mr. Scott Maw:
 
"In Q4, each of our segments delivered strong and balanced revenue and profit growth, consistent with the prior three quarters of fiscal 2014. The increasing global strength of the Starbucks brand, a robust pipeline of innovation, strong global comparable store sales growth and impressive margin expansion in conjunction with a company-wide emphasis on operational excellence and expense management give me great confidence in achieving our 2015 growth targets."
 
Complacency is not in Starbucks vocabulary and although words may be just words I am confident that this company can deliver what they promise. I will be collecting my dividends and sipping on some coffee {or green tea} while I keep my eye on this company's growth as the quarters and years go by.
 
Thank you for reading!
 
Tell me, what are your thoughts on Starbucks? the company and/or its products?
 
Cheers to profits,
Mabel

Friday, October 31, 2014

MasterCard (MA) hits another earnings home run and makes strategic investments {Earnings Commentary}

Happy Halloween & Happy day for MA shareholders!
 

The 'future' of MasterCard, picture courtesy of TechCrunch

MasterCard(MA) announced third quarter earnings for year 2014 bright and early yesterday. I am not not sure whether the two leaders in payment processing technology have agreed to report earnings right after another but this was in fact the case. Less than 24 hours after Visa earnings were announced along came MasterCard with another home run in earnings announcement.

Original Investment Thesis

If you follow the blog you know that I just recently purchased shares of MasterCard and have owned shares for less than a year. Check out the article here where I talk about why I decided to start a position. The stock is up over 11% overall in about 4 months. After earnings yesterday, the stock was up over 7% in just one day.

Highlights of the Earnings Call

  • Net income for third quarter 2014 reported to be $1 billion, an increase of 15% in comparison to same quarter last year.
  • Net revenue for the quarter came in at $2.5 billion, up 13% in comparison to same quarter last year.
  • Worldwide purchase volume increased 11% year over year to $843 billion
  • Operating income increased 14% year over year, resulting in an operating margin of 56.7%
  • CEO Ajay Banga also announced that operating expenses increased 12% to $1.1 billion in comparison to same quarter last year mainly a result of strategic investments and acquisitions. So far, the strategic investments have contributed to the 9% increase in growth for the company. Company also reported "other expenses" of $2 million (in comparison to "other income" of 6 million year over year).

My Two Cents

Felt this picture would be helpful in illustrating the future prospects for card transactions...



Two facts that caught my eye the most from this earning calls were: 1. The company's emphasis on making strategic investments for continuous growth and development. 2. The increase in operating margin to 56.7%-- in simpler terms, this means that MasterCard is now getting about $0.57 per dollar of sales. That percentage is pretty significant and is actually up from the 54.8%  previously announced for 12-month ending June 30, 2014. I have a lot of confidence in the payment processing leaders. Just the first picture above {courtesy of techcrunch on the future of MA) and reading about its strategic investments comes to show how the company refuses to stay behind and are making strides to remain relevant and at the forefront of the industry. 

I have to admit that I wasnt noticing much movement for several months since I purchased shares.I wondered why the stock price was showing so much resistance (stalling around the ~$73 range or so). I would look up any 'relevant news' that would explain it, and nothing significant would come up. The price even came down to less than my original purchase price several times. Nonetheless, I'm glad that my instincts were right in knowing that sooner or later the stock market and stock price would catch up and reflect my strong believe in this company. The stock is trading at nearly $85 as of the publishing of this post. Patience is one of the most important aspects of long term investing and I have a long way to go with this one. As mentioned, I've only been a part-owner of MasterCard for about 4 months. Excited to see where this takes me.

....I also get $0.44 per share every 3 months (yield of 0.60%). Perhaps not as higher yield in comparison to Visa but I have to admit I like the way the company is using the money towards strategic R&D and continuous growth. Call me the Dividend Diva. 

Tell me, how many cards with the MA logo do you own? What are your thoughts on MasterCard as a company?

Thank you for reading.

Cheers to Profits,
Mabel

Disclosure: currently a shareholder of both, MA & V.

Thursday, October 30, 2014

Why Visa (V) is one of my Portfolio Champions {Earnings Commentary}

Hello World!




Visa (V) announced earnings yesterday afternoon and to say they've had a great quarter (and year) may be an understatement. Last night's report was in regards to Visa's last quarter and full year 2014 results. Before I get in to the highlights I'd like to share a little background as I have been doing with my previous commentaries.

Original Investment Thesis

I purchased shares of Visa for the first time a couple of years ago and is up over 60%. If you can find me a reliable investment that would give me 30% return per year please let me know. If I could do things differently with this stock I would have purchased a whole lot more shares than I did. I currently only have a small position. However, the assurance that I picked a true winner, nonetheless, its what makes me excited about the stock market. 

I purchased Visa for  very similar reasons why I buy most of the companies in my portfolio- strong brand, strong positioning within the industry, long term prospects, and profitability. In Visa's special case I also purchased because, as we all know, this is a company with only one "major" competitor and that is Mastercard (MA). Sure, American Express and Discovery are still out there but no one is close to competition with Visa as MA. Hence, in my eyes they only have one major competitor. I am confident that the business model of payment processing companies is extremely clever and is very hard for competitors to enter this specific space. You can read more about the business model in this post I wrote about master card not too long ago. 

I remember clearly one morning in 2012 as I was getting ready for work I was listening to news radio and they announced Visa's results pre-market. At the time, they had once again reported strong profits for the quarter. I took a "leap of faith" and bought shares pre-market as I had to get to work (I normally dont do this but with a company as solid as Visa, I felt confident it was okay to do so). And the rest is history!

Highlights of Earnings

  • Adjusted net income for this last quarter was $1.4 billion, up 14% in comparison to same quarter last year. Adjuster net income for full year 2014 was $5.7 billion, up 15% in comparison to full year 2013 results.
  • GAAP Net operating revenue for this past quarter alone was $3.2 billion, an increase of 9% in comparison to same quarter last year. GAAP net operating revenue for the full year 2014 was $12.7 billion, a nominal increase of 8% in comparison to full year 2013 results.
  • Earnings per share increase was 17% in comparison to same quarter last year while full year earnings per share increase was 19% in comparison to full year 2013. Visa's CEO attributed this stellar EPS growth to Visa's "enviable competitive position, strong business model, and great talent".
  • There appears to be an increase in usage when it comes to Visa card holders as total payment transactions processed by VisaNet were confirmed to have increased by 9%, to 16.9 billion transactions, in comparison to same quarter last year. 
  • Service revenues increased by 8% to $1.5 billion in comparison to fourth quarter 2013 and 14% full year increase to $1.3 billion in comparison to full year 2013.
  • Company has also put money aside for litigation purposes for a total of $450 million, pre-tax. This shows me this company is thinking ahead. Whether this amount is enough or not may be up for discussion but something tells me this amount was strategically agreed upon.

My Two Cents

I plan to continue being a shareholder of Visa for many years to come. I am confident that, as a leader in the payment processing industry they have what it takes to maintain their competitive advantage. Although "up and coming" competition may be fierce; Visa understands this and makes solid investments in their research and development not only to retain their position within the industry but go above and beyond. As CEO Charles Scharf noted in the press release: "Our investments in Visa Checkout, Visa Token Services, and Visa Digital Solutions are just beginning to have an impact in the marketplace. We will continue to invest in these and other areas and remain confident in our ability to capture the growing opportunity in payments."

In my opinion, companies like Visa will be benefiting strongly from new developments such as Apple-Pay and others that I am sure will follow suit. Credit cards provide convenience, even if you aren't necessarily holding the plastic and the information is simply stored in your smart phone; payment processing services will still be involved one way or another. I am looking forward to witnessing how this company continues to evolve, develop, and adapt to new technology and a "changing world" as time goes by. 

...and you guessed it, Visa also pays me a quarterly dividend of $1.92 per share (yield of 0.90%). Shares are up over 8% since market opened this morning. 

Thank you for reading!

Tell me, What are your thoughts on Visa? How many cards with the Visa logo do you currently own?

Cheers to profits,
Mabel

Wednesday, October 29, 2014

Coach (COH): {Earnings Commentary}



Coach announced earnings around 7am yesterday morning. I woke up bright and early and listened to the results as I got ready for my workday. Coach is a company I've been keeping close track of for a couple of years now. I bought coach in 2012, ironically right before the time in which it started its downward spiral. As the say--- with the stock market you win some and you lose some. Owning this company during its tormentous years has taught me a whole lot not only about my personal risk tolerance (which, to my surprise, appears to be quite high) but about investing in general. I have been lucky enough that the vast majority of my portfolio has been successful but then there is always that one stock that you either need to sell immediately or you understand that it needs "more patience" than others-- and the latter is where coach has been for me for some time now.

Original Investment Thesis

One of the reasons why I first purchased shares was primarily because of the company's internationally recognized and incredibly strong brand. I had been wanting to put some money in retail- but not just any retail. I wanted a company with a history of strong earnings, profitability, and a solid brand. Truth is that for a very long time coach was one of the most profitable companies out there and they pretty much dominated the luxury bags sector for many, many years. However, as we all know-- past results are never a guarantee of future performance.

I still remember the days (not long ago) when owning a coach bag or any of its products was synonymous with style, elegance, and utmost luxury. Although this may still be the case to an extent the truth is that fierce competition, special from companies like Michael Kors (whom I believe to be its current main competitor) has resulted in Coach struggling to maintain its competitive advantage and the prestige of its brand. My original thesis for purchasing this stock has obviously changed in more ways than once including the fact that there has been a changed of management since my purchase of the stock. The company is currently going through growing pains resulting from an laser-focused and determined corporate strategy that is meant to position the company back on to a path of profitability. In general, the company is looking to transform in to more of a lifestyle brand and steering a bit away from that "luxury-only" focus the company has had pretty much since its inception.

Highlights From this morning's earnings call

The good…

  • The coach brand seems to continue its growth and strength at the international level. Overall- international sales increased 4% to $381 million in comparison to $365 million during this same time last year.
  • In China alone, sales increased 10% this past quarter with positive comparable store sales. Per the press release, Europe sales also came out strong growing at a “double digit pace” in both, total and comparable store sales.


The not so good…

  • Reported general sales of $1.04 billion, a decrease of 10% in comparison to sales same time last year which were reported at $1.15 billion. Net income was reported to be $146 million in comparison to $218 million, during same quarter last year.
  • Sales in North America decreased 19% to $634 million in comparison to $778 million during this same time last year—As per CEO Victor Luis; the sharp decrease in sales was triggered by Coach Strategy to lessen promotional events; a strategy that is meant to uplift the brand by lessening the amount of discount on products. The thought process behind this is that ongoing sales and coupons as well as ongoing outlet promotional events contributed to brand dilution. Hence, by lessening promotions; the brand is looking to strengthen; and this is an area of focus.
  • Operating income, margin and gross profit also showed a decrease in comparison to same quarter last year.


My Two Cents

The majority of my shares of Coach are on hold. As a long time investor, with a very long term view on my investments, I've made a decision to wait out this transformation period and keep the shares I currently own for at least 5 years. Although it feels like its been a century; I purchased shares for the first time around November 2012 so it hasn't even been two years. 

I have to be transparent and completely honest on this blog in terms of what I would tell an investor just starting out. Thus, I do have to say that unless your risk tolerance is extremely high and you understand this company is going through an aggressive transformation phase; this is not a stock I would recommend to anyone looking for a quick profit or a quick turn around. This is one of those high quality companies for which a whole lot of patience (and risk tolerance) is needed. 

In the meantime, I plan to continue collecting my dividends which is currently at a very nice yield of 3.80% ($1.35 per share). The company has agreed to continue paying this dividends as they continue working on their strategy of transformation. And this is a perfect example why most of my portfolio is composed of dividend-paying stocks; because you truly never know what can happen and at least you can still collect income  when the unexpected occurs. 

Tell me, what are your thoughts on Coach (COH)? {Its products and/or the stock itself}