Raison D'ĂȘtre

To educate and learn, to promote discussion, to amuse.

Wednesday, January 25, 2012

American Eagle Tries to Pull a Fast One

Investors are well served by setting up an RSS feed to the SEC filings of their investments.  If you are invested in companies like BAC and JPMC that file constantly, this may be a fruitless endeavour, but for most companies, it is very useful.  In fact, if you happened to be following the American Eagle (AEO) RSS feed, you would have noticed an interesting 8-K come down the pipe late Friday afternoon.

For those who are unaware, companies often seek to "sneak" unsavory filings in outside the news cycle, when people are not going to be following.  In this case, AEO attempted to minimize the attention given to the sweetheart deal given to its outgoing CEO.  Just take a look at this golden parachute:

  • Earned but unpaid salary
  • Deferred compensation
  • Lump sum retirement benefit
  • his 2011 bonus
  • one year of severance (minus any compensation related to use of company aircraft)
  • lifetime discounts on AEO merchandise (usually only for active employees)
  • accrued but unused vacation
  • outstanding restricted stock and stock options
Ok, so those aren't really too bad.  I don't really understand giving severance to someone who retires but I can live with it.  And something tells me AEO clothes aren't really this guy's style anyway.

Now it gets interesting, however:

Additionally, under the Succession Agreement, Mr. O'Donnell will perform general consulting services for the Company from the Termination Date through February 2, 2013.  As payment for the consulting services, Mr. O'Donnell will receive a consulting fee of not less than $552,500 and not greater than $2,210,000, with the excess over $552,500, if any, based on attainment of performance goals for the Company's 2012 fiscal year.
 To put this in perspective, the same 8-K details the payments owed their new CEO next year: a $500,000 base salary, with a bonus up to 200% of that, and restricted stock units worth $500,000.  He could potentially make $2 million next year.  O'Donnell could make more than that!  AEO will be paying two CEOs next year.  All for a company that, though they weathered the recession decently (core operations were not decimated), still has a long way to come to get back to where they were pre-recession.

This doesn't mean I plan on selling my stake in AEO, but it does make my blood boil a little bit.  This is management serving themselves and not their shareholders or employees.  This is the reason that Occupy Wall Street exists.  I'm watching you, AEO.


Tuesday, August 30, 2011

Airlines should charge you for carrying on your bag

This has nothing to do with a stock, so allow me this economics-based tangent.

Most airlines now charge for checked baggage, with a few notable exceptions.  However, I am aware of few airlines that will charge you for carrying your bag on the airplane (Spirit is the only American one I can think of).  I think we have all been in "seating area 4" or some other horrible position, and watched the overhead bins fill up with rollerboards as we make our way back to our seat in row 35.  This happens, of course, because nobody checks anymore.*  This happens especially on domestic flights as these are presumably trips that are shorter in duration.  So why don't people check?  The obvious answer is that it is no longer free, which surely plays a large role.  But these are not the only costs of checking a bag.  Off the top of my head, you have: 1) wasted time and 2) not being close to your luggage/risking theft/etc.

So even prior to the baggage fee, there were costs associated with checking. Of course, there are costs associated with carrying on as well.  These include: 1) limited size of baggage, 2)having to carry/roll/drag your bag around the airport, and 3) restrictions on liquid.

Thus, the true cost of checking a bag (or carrying it on) is not the fee but the below equation:

Fee + inconvenience cost = cost of carrying on/checking.

How that second variable is determined depends on all kinds of observable and unobservable inputs.  How long is your trip?  Are you a light traveler?  Do you have a lot of large liquid things (or just one) to bring along?  What value do you place on not waiting around for your bag at the airport afterward?  Do you have other valuables in your baggage that you don't want to check?

Before the institution of the checked baggage fee, that first element was zero, and travelers basically had to weigh the pros and cons of checking and not checking.  Now, however, the scales have been tipped.  The traveler makes the following comparison:

inconvenience cost of carrying on <> checking fee + inconvenience cost of checking

It's abundantly clear that for the vast majority of people, the left is smaller than the right, and so they carry on.  Of course, carry ons are free to the traveler, and thus the airline does not get to monetize the inconvenience cost of carrying on.

Spirit's structure is interesting, they actually charge more to carry on than to check.  This levels with what I would have assumed, that the inconvenience cost of carrying on is lower than the inconvenience cost of checking.  

That's interesting, but one would have to know more about airplane economics than I do to know how best to price it.  I guess the way to price it would really come down to what the airline wants to do.  Right now, it seems like they want everyone to carry on, but that seems inefficient.  They can carry cargo/mail/etc., yes, but they are already forced to leave what I can only assume would be a significant amount of space in the cargo hold; if the overhead bins fill up and they have to check more bags, they need room for that.  Also, have you ever heard of anyone not being able to carry on because they ran out of space?  Maybe they add bags and then fill in the rest with cargo and mail, I have no idea, but then they have the reverse problem of making sure mail gets where it's going on time.

So what's holding them back?  It's not like you have options.  People like to think they have flight options, but they really don't.  I live in Denver.  If I want to fly somewhere, I pretty much have the option of United, Frontier, or Southwest.  Since I hate Southwest, that leaves me with two options.  United flies everywhere and Fronter/Southwest do not.  So sometimes I have options of one or the other airline, but not regularly.  People have the option to fly Southwest and not pay to check their bag, and yet many people do not fly Southwest because maybe they hate not having a seat assignment or Southwest doesn't go where they're going.  Anyway, you might technically have options, but they are probably limited.  Airlines have what I'm going to term a "semi-monopoly."  Even if United doubled their fares overnight, some people would still fly them, because they wouldn't have a choice.

More importantly, airlines copy each other.  When they started charging for checking, they all did it before long.  So far, the only airline to charge for carry ons is a fringe regional airline.  Imagine what would happen if Delta started to charge for carry ons tomorrow, how long would it take before others copied?  There would be a backlash, yes, but as I said, it's not like you can choose to fly another airline (for the most part) or just stop flying altogether.

In conclusion, I don't know why airlines don't just start charging you to carry on.  It's pretty much the only service they still give away, and it is a valuable one at that.  Do I want them to?  Of course not, but my inconvenience cost of carrying on is pretty high, so I would probably still do it.  But I don't really understand why they are reluctant.

(Aside: There are numerous other ways airlines could charge you more.  For instance, they could institute some scheme by which you could pay to have your bag come out of the tunnel first at baggage claim.  Or maybe you can pay to "reserve" a spot for your carry on on the plane, to eliminate the chance that you have to involuntarily check it.  So why don't (most) airlines do this?)

*not exact figures

Friday, July 8, 2011

UHT: Another REIT ready to crumble

If you haven't read my post on HCN on Seeking Alpha, you should probably read it first, as it will provide you some good background on my thinking towards REITs.  And while you're at it, check out this post from Hester on the dividend bubble as well.

Now that you have a little background, on with the show about Universal Health Realty Income Trust (UHT).  As you now know, there is a subset of REITs that are paying out unsustainably high dividends each quarter (or month, in the case of Realty Income (O)).  UHT is one of these.

I won't rehash the whole argument I made for HCN, because much is the same with regards to UHT.  The company pays out more in dividends than it makes in cash from operations, and has done so every year for at least the last 5 years.  How are they doing this?  They issue debt and stock each year.  In fact, they have gone so far as to start an "at-the-market" equity issuance program, good for up to $50 million in issuance.  Is it a coincidence that the initials of this program are "ATM"?  I think not.  The market cap today is just over $500 million, so this represents something like 10% of their shares outstanding.

As the author of this article (a long) points out, "Overall the FFO payout has increased from 72% in 2000 to 85% [in 2010], which was due to distributions growing faster than funds from operations."  This is also due to the fact that the cash the company makes (cash from operations, CFO) is not growing either.  In 2006 it was $25 million.  In 2010 it was $23 million.  This is not a company that should be increasing its dividend payout.  In this misleading graph (the fact that it doesn't start at zero misleads the eyes to to think there was a significant increase) you can see that the FFO per share has increased, but only by 12% in ten years.  Not good.  Over the same time period, the dividend has increased by 33% over the same time period.

UHT was spun off from UHS, and executed a series of sale-leaseback agreements.  So UHT leases many properties to UHS.  UHS owns a small but significant stake in UHT (about 6%).  So what's significant about this?  Well, among other things, this consolidates UHT's revenue sources in one giant hand.  UHT does lease to others as well, but most of their leasing goes to UHS.  UHS accounts for over half of UHT's revenues (this does not include revenues at the unconsolidated subsidiaries of UHT, about which more later).  The problem with this is that UHS is not a particularly healthy company.  Debt-equity is nearing 300%.  If UHS should have any trouble financially, UHT will take a huge hit.

UHT receives a large amount of income from its unconsolidated partnerships (income from the unconsolidated entities accounted for $3 million out of $16 million total net income last year).  Despite owning as much as 99% of these, all but one are unconsolidated.  Why?  Because the interest is "non-controlling."  Consolidation would also make UHT's balance sheet look much worse.  The unconsolidated subsidiaries have a debt to equity ratio of 6-1 (10% of their debt is to UHT).  Despite having twice the revenues in the unconsolidated subsidiaries, they have over four times as much debt and are much less profitable.  In short, the financial situation of these subsidiaries is murky (and probably not very good) and the fact that some of them are as much as 99% owned by UHT but they are unconsolidated seems like an accounting loophole to make the balance sheet look better.

So we have a company that is growing dividends but not cash flows, is reliant on one company for most of its revenue, and has some strange accounting going on.  Prime area for a short.

Disclosure: I am short UHT.

Best stuff on earth, my butt.

Snapple claims to be made from the best stuff on earth.  It's a little fuzzy, but the ingredient list to this Snapple Grape Berry Punch reads:
  1. Filtered Water
  2. High Fructose Corn Syrup
  3. Citric Acid
  4. Sodium Hexametaphosphate
  5. Sodium Benzoate
  6. Potassium Sorbate
  7. Natural Flavors
  8. Potassium Citrate
  9. Calcium Disodium EDTA
  10. Red 40
  11. Blue 1
Mmmmm, I can't wait to crack this can open.  If this is the best stuff on earth, this earth seriously sucks.  There isn't even JUICE in this.  At all.  Oh, and it tastes like grape soda, which is probably not a good sign.  I can't even tell you what most of this stuff is.

Snapple, I am disappointed.

Welcome to Parkside Value Investing

I've been writing rather long pieces on Seeking Alpha for about a year now, but decided to start a blog so that: a) I will be forced to write more, lest this blog be an abject failure, and b) I can write about whatever I want (no more editors!).  I plan to still post my longer pieces on Seeking Alpha, and will link to them on the blog (gotta get paid, yo).

On this blog, I will write shorter pieces about stocks, general investing lessons I've learned, more general articles about a broad range of stocks (e.g., a look at a sector instead of an individual stock), as well as general nonsense that pops into my head.  That's the beauty of having a blog - I write about what I want to write about.

Thanks for stopping by.  I hope you have as much fun reading this as I will have writing it.

P.S.  If you're wondering about the name, it's an ode to my childhood home (on Fireside Dr.) and my current home (near a park).