Consumer Discretionary Sector Oren Bossin Michael Cooperman Howard
Consumer Discretionary Sector Oren Bossin Michael Cooperman Howard Weiss Student Managed Investment Portfolio Class Prof. P. V. Viswanath Spring 2002
Objective To find Consumer Discretionary stocks that are undervalued, but in a good position financially to capitalize in a recovery market.
Research Methodology
Research Methodology § Debt Capacity Regression Analysis l 1 st Quartile § FCF/MVA l 1 st Quartile § FCF/Revenue l 1 st Quartile § Total Liabilities/Total Assets l 1 st Quartile
Research Methodology § Add ROE rank to the four variables in leverage and profitability analysis and rerank all the variables with each variable receiving a weight. This provided a roughly 60 -40 split of profitability and debt. We chose the top five companies from this analysis.
Initial Analysis
And the Winners Are. . .
WLS § Anticipate Fed raising rates l Result: dampen housing market § Housing market tends to lag economy l showing signs of slowing § Did not want to focus on industry directly impacted by Fed interest rate moves
TOPP § § Strong financial position Not in a strategic position for growth Good debt capacity Excess cash reserves l possibility of management not knowing how to manage excess cash § Stock price has not moved in over 2 years
KDE § § Good debt capacity Available free cash flow Growth opportunities Core product (Pokemon) fading l Result: Fad dies down earnings have substantially decreased § Success relies too much on next big fad l Risk outweighs benefit at this point in time § Stock should be tracked for future investment
SHFL and KSWS § § Good debt capacity Available free cash flows Opportunities for growth Low relative risk
Model Value vs. Market Value
Corporate Analysis Considerations: § Corporate Overview § SWOT Analysis § Damadoran 2 -Stage Free Cash Flow Model § Company to Index Comparison § Insider activity § Institutional activity
Corporate Overview Shuffle Master Inc. : Shuffle Master, Inc. develops, manufactures and markets automatic card shuffling equipment (shufflers) and gaming products such as table games, slot machine game software and slot machine operating system software for the gaming industry. The Company's card shuffler products, are automatic card shuffling machines designed to be used with table games in casinos and other legal gaming establishments. The Company's shufflers offer several benefits to its casino customers, including enhanced security and increased productivity.
Corporate Overview Products / M/A § Continuous multi-deck shuffler marketed to casino customers (fiscal 2000) l § Featured a design that eliminated card counting and tracked productivity over the Company's multi-deck batch shuffler Acquired Gaming Products Pty Ltd. (fiscal 2001) l l Quick Draw shuffler product line Certain other assets related to the Gaming Products business • Represents an alternate approach to continuous shuffler design Its long-term strategy is to develop a powerful, open-architecture game operating system that could run proprietary games on any slot machine.
Corporate Overview Strategy § Develop or acquire gaming products and systems l l l § § Market these products worldwide Card shufflers and specialty-table game lines objectives l l l § Productivity enhancing equipment New table and slot games Slot game technology Obtain licenses, patents, and other intellectual property Identify a business model to leverage and commercialize those assets Generate high-margin cash flow in line with the company’s historical gross margins (7080%) Long-term strategy l Develop a powerful, open-architecture game operating system that could run proprietary games on any slot machine
Corporate Overview Competitors Primary Competitor is WMS Gaming
SWOT Analysis Shuffle Masters Inc. : Strengths: § Core business of card shuffler and specialty-table game lines are growing and providing gross margins of between 70%-80% § No outstanding debt, an unused $15 million line of credit, and $23 million in cash § Partnered with International Game Technology (IGT), the largest U. S. slot machine manufacturer to generate revenues using its brands and licenses § Regulatory approval was given to Shuffle Master’s slot machine operating system § Strong pipeline of game titles, both by themselves (15 new game titles submitted for regulatory approval) and with IGT (538 games have been installed as of January 31, 2002) § Company one of the few leaders in gaming software technology Weaknesses: § High R&D costs associated to keeping up with the accelerating rate at which games are being advanced and changed § § Success is largely dependant on approval of gaming technology by state gaming agencies Gaming industry has been hurt by September 11, which has caused a slow down in vacations (to casinos). Recovery will take some time Opportunities: § Gaming system approval will allow Shuffle Master to develop proprietary games using its own titles and brands for casinos rather than partner with other manufacturers and share revenues § Will soon be introducing new single- and double-deck shuffler into the previously untapped poker market sometime this summer § WMS Gaming’s (WMS) (Shuffle Master’s main competitor) difficulties with its game operating system have created 1) a delay in its introduction of new titles and 2) a game base of roughly 50, 000 faulty WMS video slots machines in the domestic market Threats: § The interface for the WMS machines has not received regulatory approval which can cause new operating system to be delayed to market § Strong competition from WMS
Shuffle Master Analysis
Shuffle Master Analysis
Shuffle Master Ratio Comparison
Shuffle Master Insider Transactions
Shuffle Master Insider Activity
Shuffle Master Institutional Ownership
Corporate Overview K-Swiss Inc. : K-Swiss Inc. designs, develops and markets a growing array of athletic footwear for high performance sports use, fitness activities and casual wear. The Company was founded in 1966, by two Swiss brothers, who introduced one of the first leather tennis shoes in the United States. The shoe, the K-Swiss "Classic, " has remained relatively unchanged from its original design, and accounts for a significant portion of the Company's sales. The Company sells its products in the United States through independent sales representatives, primarily to specialty athletic footwear stores, pro shops, sporting good stores and department stores. K-Swiss also sells its products to a number of foreign distributors. The Company now has sales offices or distributors throughout the world. K-Swiss’s goal is to become retailing’s most profitable vendor.
Corporate Overview Footwear § The Classic Category - High Performance Tennis Shoes (1966) l l l § Classic Originals K-S Collection Limited Edition High-End Performance l 7. 0 System • • § launched in 1997 Sold in tennis specialty and pro-shops Training - To differentiate lines from competitors (2000) l Speed • l Strength • l moderately priced running shoes moderately priced cross-training shoes Endurance • trail running shoes
Corporate Overview Apparel and Accessories § K-Swiss branded apparel and accessories l Designed with the same classic strategies used in the footwear line • § New 7. 0 line of high tech tennis apparel (1999) l l Complement its performance 7. 0 footwear (Men & Women) The product line consists of: • • • § Appeal to a variety of new markets from an urban distribution to an upscale suburban consumer skirts shorts tops dresses warm-ups Collection for the casual athletic consumer l l tee shirts caps socks bags
Corporate Overview Competitors § Domestic l l Nike Adidas § International l Nike Adidas Reebok
SWOT K-Swiss: Analysis Strengths: § Focused distribution and allocation strategy § Senior management team has almost 16 years of experience in the industry § President, Mr. Nichols, has been at the helm since he led the company's buyout in December 1986 § Significant operating leverage from a low fixed - cost structure, resulting from efficient distribution and administrative operations § Strong financial position - at the end of 4 Q 01, K-Swiss had $61. 6 million in cash on its balance sheet with essentially no debt Weaknesses: § International revenue only comprised 15% of 2001 total revenue § Potential income loss due to a delay in starting the 2002 advertising campaign compared with that of 2001 § Expected decrease in gross margins and increase in expenses due to investments in National Geographic and Royal Elastic Brands Opportunities: § International markets present an attractive opportunity, and are performing well - international revenue increased 55. 5% to $6. 5 million l § § Beginning to see increased sales in some key markets - Asia, Europe (Classic #1 shoe in Japan) Joint venture with Rugged Shark to license, produce and market a men's, women's and children's collection of National Geographic casual footwear Acquired the rights and business of Australian designer and manufacturer, Royal Elastics (elasticated footwear) l Niche within the footwear market, with approximately $8 million in sales Threats: § Spreading out into newly formed Joint Venture and Acquisition might hurt brand image and brand strength § Core business ie. “Classic” shoe sales represent 70% of company’s total sales § Might not be able to recover lost market share from 98’ product withdrawal overseas
K-Swiss Analysis
K-Swiss Analysis
K-Swiss Ratio Comparison
K-Swiss Insider Transactions
K-Swiss Insider Activity
K-Swiss Institutional Ownership
Re-Cap § Recommend buy SHFL and KSWS § Watch KDE for future investment
- Slides: 36