Friday, July 27, 2012

A Moth Eaten Groupon and Other Issues

In June 2011, we were totally flummoxed by the market's enthusiasm for Groupon, Open Table and other similar businesses. We ended that post with the observation,
"It just feels like this euphoria for these types of businesses has to end badly.
Then, in October 2011, when Wall Street's marketing tanks rolled out, we wrote,
"With the powerhouse banks behind the deal, a deal will get done. Lucky flippers will have a nice payday. The Groupon model is not healthy for most restaurant businesses, but if this industry manages to get a footing, then it will take its profits out of the hides of their small business customers. In the meantime, I can't wait to see which mutual funds wind up listing Groupon as 2% of their fund assets. An absurd valuation is now merely ridiculous. Caveat emptor! "

I had put Groupon out of my consciousness until I received a received a communication from Uber-tech Guru Om Malik, reflecting on private versus public valuations of the "new" social media companies.  This chart is from Om. 

With the exceptions of some flipppers getting out early without their usual vigorish, it has been a Davos-quality ski slope downward.  It really drove home something I've always known, reinforced by some of the savviest mentors on the Street: "There's nothing new on Wall Street."  Or, put another way, "This time it's different."  It never is.

Even long-running Amazon, which had a few early naysayer credit analysts on Wall Street, reported better than expected revenue gains, but puny profits.  Net income per share of a penny compared with $0.41 per share last year, but its services business were said to be roaring, and it was going to put fulfillment centers on every corner.  It all sounds good, but how can an investor make a silk purse out of a sow's ear?  A penny isn't forty-one cents, end of story. 

Exxon Mobil's quarter was characterized as "challenging" by the financial press, and it certainly wasn't glorious by any means.  Their oil and gas production slipped, and their realizations were down.  However, they continued to invest in their core business which has very high returns on capital.  Their down stream refinery and chemical operations showed strong results according the New York Times, "Refinery profits increased by 14 percent, while net income for the chemical manufacturing business improved by 21 percent. Both units benefited from the lower gas and oil prices, the vital feedstocks for refining and chemical production"   Good, fundamental results in a difficult macroeconomic environment.

Now, Royal Dutch Shell, owned by some value investors, reported a pretty dismal quarter with some real warning flags.

With both these companies, a good analyst or investor can pencil their way through the extensive disclosures and come to a reasonably informed decision about their company's prospects.  With the "new" social media companies, it's not a wing and a prayer, just a prayer that there's an honest man or woman somewhere in the executive suite. 

Finally, a good former institutional customer sponsors a successful international equity mutual fund, and looking over their holdings, I noticed Alcatel-Lucent, S.A., owned in the Sponsored ADR form.  I haven't looked at this company since Carly Fiorina was working her magic at Lucent in 1999.  You don't have to be an electrical engineer to understand these businesses, although much of the foggy commentary about these companies, like Juniper Networks, is replete with capitalized acronyms.  I read the press release and was a bit distraught.  I then went to the company's website and listened to the conference call.  Wow!  This was truly a dismal performance, and the cash flows in the quarter were awful, especially given the reduced outlook for 2012, a large debt load, upcoming rollovers, and loss of revenues as the company leaves behind "legacy" technology and moves to "new platforms."  I went back to my fund's annual report, and they've taken a forty percent hit from last December to date.  Value investors may not get it right very time, but they probably can demonstrate their thesis with some numbers.  I may have to call my fund and find out.

As the Dow closes about 13,000, I just don't feel the buzz, but I'm happy not to be losing my shirt on "new" social media.


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