A Canadian on Wall Street

Good synthesis of the trends in movie distribution in the New Yorker that will impact companies across the board. With news that a company so-not-synonymous with media as Verisign working towards digital distribution, it’s pretty obvious the landscape of media companies is going to be drastically different in the next decade or less. Film-centric companies like Canada’s IMAX and the theatres are having a rough go of it as the modes of film-watching changing, both intra- and inter-generationally. How to really take advantage of this shift, though? Buy Apple and Akamai, short Carmike Cinemas and Blockbuster? Will the appeal of the theatre and the DVD disappear in time the way, somewhat in the way web applications like Google Spreadsheets may slowly replace the heavyweight but more full-featured rich applications like Microsoft Excel?

Looks like Sino-Forest may be the target of a leveraged buy-out, which could throw a ton more debt on its balance sheet. It hasn’t stopped the stock appreciating, and it’s possible that due to their attempts to grow the timber plantation business at a high rate that the debt-equity ratio of around 1 wasn’t such a big factor; I’m still not totally accustomed to industries with a great deal of capital expenditures. I’m no expert on estimating potential valuations, although according to that article:

Macquarie Bank, Australia’s biggest investment bank, and CVC Asia, a buyout firm partly owned by Citigroup, may borrow $1 billion to take over Sino-Forest, Asia-Pacific’s second-largest timber plantation company, said the people.

That sort of implies to me that the current share price of 10.39 CAD or thereabouts, which gives Sino-Forest a market cap of about 1.43 billion CAD, is probably around a potential buyout price and not worth looking into as a buy — not that I tend to push those kinds of risk arbitrage kinds of situations anyhow, since you really need crazy amounts of leverage for them to be worthwhile, in my opinion.

Would I have purchased shares in Sino-Forest back in the fall when I first looked into this stock, in retrospect? Probably, as the only thing that really kept me from buying was the debt; as far as I can tell from the numbers, the company is consistently growing earnings, is positioned in the burgeoning Chinese market but is run by Hong Kongers with contacts in both the east and west and a more Westernized business sensibility, and given the decline in higher-operating cost lumber producers in the West, I can see some of the slack being taken up by the plantations of China and Thailand, with their faster growing seasons and cheap labour. (See here for a list, and some of its effects, of the timber plantations, however.) As many people know, leverage can be very useful if you feel you can do better than the interest payments, and considering the return on average assets and equity that Sino-Forest has been delivering recently, perhaps their debt is better than I thought at first, and perhaps naive, glance.

This tickles me, somehow: the PS2 was the top-selling game console during the 2006 Christmas season. Although the PS2 has obviously entered its “value” stage, it’s pretty amazing to see any piece of consumer electronics with that kind of lifespan, which as far as I can tell hasn’t really been matched by anything else except maybe the Nintendo Gameboy back in the day. Software really drives consoles, and the PS2, with its myriad excellent games, is still highly attractive — I even purchased one recently since that sub-$200 price point makes it almost a no-brainer if you stick to buying and trading used games, as the bulk of console earnings come from the software and not the loss-leader hardware). I think it actually supports Nintendo’s model of cheap, profitably produced consoles and creating a huge library of fun games, which is why I invested in the Nintendo ADR on the Pink Sheets up until the release of the Wii, where I figured the stock would probably plateau — I don’t see a lot of additional value there and I think much of the potential future revenues/earnings has been priced into the stock, with its mid-40s PE multiple.

Having once been a happy, well-rewarded investor in LaSenza at one time (that purchase mostly predicated on the fact that I couldn’t go out in public without seeing a woman toting the ubiquitous bags), I still keep an eye on the clothing retail sector in Canada, as finicky as fashion can often be. Here are some of the stocks that I’ve taken a look at in the recent past:

Reitmans - RET.A:

A well-run, strong contender in the younger and middle-age market, I actually put some money into this for a little recently until I realized that it was probably pretty well valued for a fashion retail stock, sporting a P/E in the high teens. (I have a bad habit of buying stocks before I’ve done due diligence, a habit that hasn’t always hurt me but which I’m trying to avoid as I get older and, hopefully, wiser.) According to their last public set of financial statements, they currently have 358 Reitmans, 164 Smart Set, 39 RW&CO., 70 Thyme Maternity, 156 Penningtons, 124 Addition Elle and 8 Cassis stores, many of which came with the purchase of Quebec-based Shirmax in 2002. Not being a woman, I’m not as hooked into the quality of the stores, but I suspect Reitmans still holds major cachet with middle to older-aged women, while I’ve been seeing ridiculous numbers of RW&CO bags around as an anecdotal data point. Cassis is Reitman’s attempt to capture the elderly set, due probably due to the aging of the boomer population, though I have yet to hear about it in casual conversation. I like this stock, but would probably wait till some adverse event took it down a peg before I’d reconsider my pull-out from the stock earlier.

Le Chateau - CTU.A:

A mainstay of the Canadian fashion scene since I was a kid, the stock has been pretty lumpy, although it looks like in the past few months it took off, perhaps due to speculation about a sale of the company. They recently reported record sales with same-store sales up in the double digit percentages for the last quarter and during the Christmas season when compared to last year. That said, it looks like the founder, Herschel Segal, is selling off his stake in the company, just after the company decided not to sell itself off. This looks kind of suspicious to me — it reminds me a little of the attempts by IMAX to look for a buyer only to come up short. I avoided the stock when I looked at it last fall, and missed out on a nice short-term gain, but in the long run I’m not a huge fan of this company and I’m unsure whether it would sell at a real premium to the current price.

West 49 - WXX

I see these stores in malls across Canada, and in Vancouver the Off the Wall chain which they purchased seems to have some presence — with a noticeable store near the downtown CTV headquarters and HMV store on Burrard Street — but I’ve never got the impression of a high quality chain, and the success and numbers of the company bear that up. With a tiny market cap, lumpy earnings and cashflow and a bizarre, multi-brand strategy for such a small company:

During the quarter, the Company opened seven new stores: two West 49 stores in St. Laurent Shopping Centre in Ottawa, Ontario and Kildonan Place in Winnipeg, Manitoba; two Off the Wall stores in Upper Canada Mall in Newmarket, Ontario and Limeridge Mall in Hamilton, Ontario; one Amnesia store in Carrefour Laval, Quebec; one D-Tox store in Upper Canada Mall in Newmarket, Ontario; and one Duke’s Northshore store in the Georgian Mall in Barrie, Ontario. At October 28, 2006, the Company operated 125 stores in nine provinces under seven banners and an online retailer, as compared to 77 stores under three banners a year earlier. (taken from the

…I can understand why this stock has barely grown in the past 5-6 years its been public. Interesting to note that this company used to be Jumbo Video/Microplay, until 2004 (as noted in their financial report from the first half of 2004), when the assets were sold to Superclub Videotron/Quebecor and the corporation bought up the assets of West 49 — a quick way to get listed, I guess. Jumbo Video never really did that well versus the now-weakened Blockbuster, but Microplay was and is a well known name to the Canadian video gamer. Not the greatest pedigree, I think, and another stock I’d probably stay away from unless you wanted to play “trader” with it; it’s micro cap and low liquidity might have helped contribute to its minor spike up in mid-to-late 2005.

Danier Leather - DL

Back in 2000, when I worked for a time at IBM, Danier was one of the clients in my division, headquartered in a nondescript part of midtown Toronto. It wasn’t fancy, but they seemed to be doing well enough, and they were earnestly going about developing their online presence using old school C++ based Websphere. Nowadays, it appears they’ve given up that initiative, likely due to the cost and logistics required to properly implement a good online commerce system, and this company has the luck to be in a sector of the fashion industry that is severely beaten down but showing very few signs of returning. As a retailer focused very specifically on leather, this company reminds me now of a larger, relatively more successful version of Acton, Ontario’s most famous company (”The Old Hyde House — it’s worth the drive to Acton!”) and it seems sort of bizarre now to continue in that industry without some serious attempts to cross over into something that, well, doesn’t involve dead animal skins. I wouldn’t touch this stock unless there was a major initiative to push into something besides leather, although they don’t have the cashflow or the borrowing power to make any real moves, from the looks of it. That said, fashion like fad can shift at any time, and if Danier were smart they would be pushing into the world of hip hop, where furriers like Erving Rosenfeld are doing very well supplying its bling-sporting denizens. It’s one of the few areas where ethical concerns about clothing haven’t really yet made an impact.