Saturday, September 03, 2005

Fly but don't Buy

You don't have to be a business buff to realize airlines are in trouble, some blame deregulation,
others the labor unions etc. The fact remains that since the birth of commercial aviation, a hundred odd years ago the combined industry with all the numerous airlines has not turned a dollar in profit!!! In fact as Warren Buffet puts it aptly "In terms of shareholder value, the Kitty Hawk should have been shot down immediately."

Airlines are an incredibly bad business
-High capital costs (planes, engines, hangars etc) translates to high fixed costs, that extra seat doesn't cost you anything so the temptation to sell that at a terrible price is overwhelming, leading to internecine price wars.
-Requires skilled personnel (pilots, mechanics) who cannot be replaced easily since these jobs require a lot of training, gives the unions a lot of clout.
-A highly customer facing industry, the slightest issues with delays, cancellations, baggage handling leads to bad publicity and hinders new business.
-Add to all this the vagaries of the world oil markets.

So as an investment I stay away from airlines, there have been some remarkable successes with the likes of Southwest Airlines (NYSE : LUV) and JetBlue (Nasdaq : JBLU) . As a longer picture I can see a consolidation of between the larger players American, United, Delta, Continental, Northwest into 2 or 3 large carriers possibly even a trans- atlantic merger (think AA and BA) and possibly 3 or 4 regional/low cost carriers (the recent merger between US Air and America West is a good start).

Maybe then this industry with some pricing power may be an attractive place to parlay some of your hard earned money. (I do expect this to happen in the next 3-5 years). Meanwhile keep flying but heed the advice of the Oracle of Omaha.

Friday, September 02, 2005

Ten baggers??

Peter Lynch is epitomized as one of the greatest fund managers and is associated with the term “ten baggers” stock picks that went up ten times their initial value. In his book “One up on Wall Street” he mentions stocks like La Quinta hotels where he spotted a long term trend in increasing business travel and saw potential in this stock. Ok so today is my day to play Peter Lynch.

One long term trend I have often blogged about is the ageing of America and the bounty coming the way of pharma and healthcare firms. (disclosure: I own JNJ. PFE & IYH). Another take on this is same theme is “Assisted living”, started doing some research on this when my realtor mentioned that she had two clients who were selling their homes and moving to assisted living centers. These are companies that own assisted living centers and provide healthcare and nursing to seniors.

The big boys here are Sunrise Senior Living Inc (NYSE:SRZ), Beverly Enterprises Inc. (NYSE:BEV), and Manor Care Inc (NYSE:HCR). This week Beverly Enterprise was bought out by North American Senior Care Inc. That leaves us with just two SRZ & HCR. My recommendation would be either of these HCR has a $3.2B market cap about three times that of SRZ, both have fairly strong balance sheets (debt/equity between 0.33 & 0.53). HCR does have a dividend yield of 1.5% and that always helps. But this is a rapidly consolidating industry and SRZ could be a take over play. The other advantage of this industry is that it’s a combined play on two themes “elderly healthcare” and “real estate”.

Another trend that I have observed is amongst the not so old crowd the fastest growing pastime in America is NASCAR racing. The statistics are compelling about 6.6 million plus households tune in to every race. The growth has been 10% plus per year and this is not a red state phenomenon (the biggest markets are Atlanta, Philadelphia, L.A., Dallas and New York). So who takes home the bacon again three players stand to benefit International Speedway Crop (Nasdaq : ISCA), Speedway Motorsports (NYSE : TRK ) & the much smaller Dover Motorsports (NYSE : DVD). These companies own speedways where the stock car races are help. ISCA is the biggest with ownership of 14 speedways including the top rated Daytona Beach speedway, followed by TRK with eight and the smaller DVD with four races.

ISCA has a market cap of $2.8B and is about twice that of TRK. The much smaller DVD has a market cap of $280M, but trades at a P/E Multiple of 57 almost double that of its bigger brethren. So how do these folks make money, well they have four streams ticket sales, TV & radio broadcast rights, food & beverage sales and sponsorships (think Nextel & Home Depot)

My bets for the next 5-10 years would be on Manor Care Inc (NYSE:HCR ) & International Speedway Crop (Nasdaq : ISCA).