A Canadian on Wall Street

The purchase of the privately held Standard Broadcasting by Astral Media announced over the weekend caught my attention, mostly because I had recently been invested in Astral for a short time around the time I owned Alliance Atlantis, buying some of the news about potential further consolidation in the Canadian media landscape. (Although, honestly, it was probably more likely that Astral would be the buyer in any deal — some speculated they’d buy Corus, but I had my doubts. As is usual, the buyer’s stock isn’t doing so hot this Monday morning, so I’m glad to have got out with a modest profit.) What with the planned merger of XM and Sirius Satellite Radio in the US (and its consequent fallout for their Canadian arms), the competition arena for radio shifts again.

It’s hard to say whether or not this Astral-Standard deal is really that much to be impressed by. Radio is fragmenting, and even with their new 81-station grip on the Canadian radio market (Corus Entertainment holding on to second with around 50-odd stations, I believe), it’s a little like that saying about exchanging deckchairs on the Titanic. Not that I think radio is dying, but with the surprising (to me) popularity of podcasts, streaming online radio, iPods and their own custom playlists and the sheer number of ways NOT to listen to the radio, I suppose it is somewhat impressive that radio, in either terrestrial or satellite form, is still alive and mostly kicking. With Google now in the radio ads realm (along with other players like Software Media Exchange and Bid4Spots) there are obviously some people who think radio will continue as a strong, stolid revenue source. It certainly won’t be a major growth industry (the attempted consolidation of satellite radio so quickly in that young industry, with its plateauing subscription numbers is an indicator of this) and I don’t know how practical it is to make bets on potential buyout targets, given that most of the public players have already bulked up considerably. Lately, I’ve been moving back to a more traditional value stance, and less about trying to exploit special situations, since these always seem much harder to call.

This Wikipedia page on the Baby Bells that were created after the breakup of the original AT&T in 1984 is fascinating, from a business standpoint. There’s so much jockeying in the telecom industry, especially in the US, that it’s hard to keep track of who’s who, but I didn’t realize how many of the old names I’ve heard have been subsumed into these newer companies, names like NYNEX, Bell Atlantic and GTE that remind me of the old BBS days. If it weren’t for BCE’s misguided forays into publishing (web and print) and television (both production, as CTV, and distribution) under Jean Monty, they might actually be a serious competitor on the world stage and a potential investor in foreign telcos. Or maybe I’m just dreaming. Well, I guess they had that failed investment in Brazil, but they pulled out of there if I recall correctly. It still amazes me how big companies like that have so much inertia that they can continue operating, poorly, and just due to sheer size stay alive, like elephantine zombies. It’s often hard to tell if a company is actually still “living” — is GM, a nice short play for me in late 2005, in the midst of a legitimate turnaround? Or is it just in a slow-motion death spiral? That last link seemed prescient at the time, but lately seems a little bit like James Kunstler predicting a return to hard, rural living from imminent oil shocks while prices settle in the low-to-mid-$50s. (Interestingly, David Olive, one of the few business columnists I usually find truly insightful and not prone to punditry, seems to think $150 barrels of oil might be in the offing; I still don’t really feel that comfortable investing in oil due to the complexity of the environment surrounding it and felt kind of like a dilettante investing willy-nilly in oil sands stocks early last year and I’m not even sure a situation that induced an oil shock like that would be investable, anyhow, unless you were really good at getting out of every other sector that would suffer.)

A familiar brand to anyone who’s lived in Montreal, Van Houtte announced last week that they were putting themselves up for sale. For the longest time, Tim Hortons had almost zero presence in the city itself (Dunkin’ Donuts had more locations, I think) and there were a few notable Second Cup locations, including the one on Rue St. Laurent in the hotbed of coffee culture; somehow it slipped in there amongst all the indie places. Now those two Canadian cousins are being named off as potential bidders for their moribund relative. Not quite as much an end of an era as the closing of Ben’s or Warshaw’s, more venerable Montreal institutions.

This really points up the fact that you need a certain visionary prescience when investing — who knew that Starbucks and the specialty coffee phenomenon was going to take off as much as it did? Of course, none of Canada’s took off in quite the same way. The spin-off of Tim Hortons by Wendy’s, much anticipated, fizzled under the hype and has been a mediocre investment for those who bought in early. Second Cup’s royalty fund now sports a decent 10% yield but I don’t know how long that will last — they’re running a deficit but I’m not quite sure how strongly that would tie in to their ability to continue distributions at the same strength. To be frank, I can barely make heads or tails of their financial statements (pdf) — I’m not familiar enough with the royalty income trust structure to figure out why there’s no mention of distributions or payout ratios or the things I’m used to seeing in more pedestrian business trust reports. Guess I’ll have to do some research, or maybe I can get some input here?

Update, Jan 23 2007: After doing some reading of the Fund report, it appears that the fund is meant as basically a vehicle to pass the royalty revenue derived from the various Second Cup franchisees directly back to the fund owners. The financial statements seem to indicate they are passing 100% or more of their earned income (from royalties, I guess) back as distributions. I don’t know if this is perhaps not that strange for a royalty fund vehicle; I suspect in this case it’s the strength of the franchisees’ business that matters since they are the ones that must pay royalties. If many franchises close or don’t earn enough to cover the royalty payments I guess that’s when an investor in the Fund should be worried.

I did a little reading yesterday after reading an analysis of Sprint that talked about the break up price of the stock and whether it was undervalued. It seems like Sprint is funnelling on the order of 3 billion USD into building out their WiMax network over the next few years, which got me looking into this big bet on the future. After doing some reading on the industry (1, 2), it’s apparent that there’s a host of competing standards under the banner WiMax, and it’s no guaranteed thing that Sprint’s buildout will be worthwhile. It smells a little like the way people rushed to optical networking during the dot-com age, building out huge networks that turned out to be completely underused at the time, but which are now seeing a lot more action.

Sprint’s WiMax network operates in the licensed 2.5 GHz spectrum, and this is by no means the definitive band that will be used worldwide, as there seem to be many countries (see the end of this Wikipedia entry) that are using 3.5 GHz and some mixed 2.3/2.5 GHz band. Although Inukshuk Wireless, a Bell/Rogers partnership, seems to be the main contender in the Canadian wireless internet space (or at least has the major backing), it appears that Look Communications has the 2.5 GHz band sewn up in Canada. That news pushed the stock out of its stagnancy in mid-December when takeover speculation, perhaps for the spectrum license and about 400 million CAD in tax losses, made news. At a current market cap of nearly 50 million CAD, the stock may be cheap by some measures, considering I’ve seen the license value estimated at 100-400 million CAD, depending on who an acquirer might be. That said, I know very little about spectrum licenses; how they work, how long they last for, how easily they can be expropriated. It’s something I may continue to research, but I’m lately pretty wary about investing in penny stocks that have nothing going for them except rumours and potentialities. It’s in this realm that casinoism is most prevalent and the gamblers come out to play.

Update, Jan 17 2007: Overview of WiMAX from an investor standpoint. Every time I read one of those articles, I imagine a crystal ball, one equally able to predict whether Apple’s iPhone and AppleTV will take off. Of course, if I had one I wouldn’t have sold my Apple stock at $22, months before the iPod announcements that would change the game. (I bought it based on an “I, Cringely” column that was a retort against those who called Apple out, during the period of the G3 Cube aka the Toaster.)

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?

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.