Investors Looking for Income

Ben Stein has recommended DVM, a Cohen and Steers closed-end REIT fund (Dividend Majors Fund). I will keep my eye on this fund as well as EWM (Malaysia) for my retirement accounts. I am also looking at WES (Western Gas Partners), but not as a dividend or income play. As my readers know, I am concerned about making any investments until 2009 or beyond.

The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.

Las Vegas Sands Corp Annual Meeting and Report

The LV Sands' (LVS) annual report focuses on its expansion into Asia, more specifically Macau/Macao and the Cotai Strip (a term coined by LVS like the Vegas Strip, to identify the casino district of Macau).

One problem I have with its notice of meeting is that it doesn't tell you exactly where it is--just that it's at the Venetian 3355 Las Vegas Blvd South, Las Vegas, NV 89109. That's all very nice, but where in the Venetian? This sort of vague notice always activates my "welcome" sensors and makes me think a company doesn't want to deal with individual shareholders, a sign of insularity. Lo and behold, page 25 of the 10K confirms my suspicions: "Mr. [Sheldon G.] Adelson and trusts for [his] benefit...beneficially own approximately 69% of our outstanding stock...we are considered a controlled company under the NYSE listing standards...The interests of Mr. Adelson may conflict with your interests." Really? You don't say.

But the situation in Macau isn't much better. Stanley Ho practically owned all the casino licenses and now "holds one of the three concessions." Guess who owns another concession/license to operate? His daughter: "MGM MIRAGE has entered into a joint venture agreement with Stanley Ho's daughter, Pansy Ho Chiu-king, to develop...two major hotels....in Macau." (page 8, 2007 annual report). Wynn owns the third concession.

Here are the rest of the 10K's highlights, at least from my perspective:

1. LVS's main geographic areas are in Vegas, Macao, and Singapore. The international expansion is a prodigious move, because Asian consumers are more flush with disposable income and have a non-Puritan culture that doesn't deem gambling sinful.

2. One issue I don't understand is why there are so few tables and slots at Sands Macau. The Sands Macao has 630 table games and 1,350 slot machines (page 2). The Pennsylvania license LVS received allows 3,000 to 5,000 slot machines (page 13), and the Venetian Macau has 1,150 table games and 2,650 slot machines. There is obviously a size difference involved (229,000 sq ft for the Sands Macau vs. 550,000 sq ft for the Venetian Macau), but it is hard to see why visitors will choose the Sands Macau over the Venetian. One reason may be its location near the waterfront, i.e. the casino just wanted a location near the waterfront and was willing to sacrifice amenities and space. Page 44 shows the difference in revenue--the Sands actually made more than twice the revenue of the Venetian Macau, but that's because the Venetian Macau opened in August 2007. Over time, I see a less prosperous future for the Sands Macau unless it can somehow differentiate itself.

3. If anyone is interested, the Vegas Venetian's table games win percentage was 22.3% in 2007, which means that players won slightly more than 1/5 of the time (page 44). Not good odds. For more on this issue, see

https://blogs.wsj.com/numbers/lady-luck-didnt-visit-the-venetian-218/

For gamblers: https://www.amazon.com/Gamblers-Book-Shelf-Straight-Percentages/dp/B003O5SSEI

4. At the MGM shareholder meeting, CEO Lanni implied that LVS's real estate development wasn't progressing smoothly. If that is the case, LVS's condos, set to open in late 2009, may impact LVS negatively up to 600 million dollars (page 3).

5. As cities lose manufacturing, they will turn to casinos to make up lost tax revenue. Witness the Sands Bethworks, a casino set to open in Bethlehem, PA in summer 2009. Brace yourself, Sean Thornton--Steeltown is now Gamingtown (page 3).

http://www.pbase.com/ckuhn55/bethlehem_pa

6. LVS may build a casino/resort in Kansas City, KS (page 5).

7. Macao's currency is called the "pataca," and it is linked to the Hong Kong dollar, which is pegged to the U.S. dollar (page 7).

8. There are apparently popular games called "pachinko" as well as "pachislot parlors" in Japan (page 8). I've never heard of these games, and I've played a round or two of Doppelkopf. Baccarat is the most popular game in Macao (page 7).

9. Nevada generally taxes gross revenues from casinos at a 6.75% rate (page 12).

10. The Nevada Board requires casinos to put 10,000 dollars into a revolving fund for any possible investigation "into their participation in such foreign gaming operation." (page 12) This struck me as hilarious, because the 10K doesn't really define what this investigation would entail, and the amount is too low for an adequate investigation.

11. One major problem with Macao is that Macao taxes gross revenue, but "gross gaming revenue does not include deductions for credit losses" (page 17). This means that if a player gets x million dollars in credit from the casino and fails to pay up, the casino still has to pay taxes on that x million dollars. As a result, casinos aren't going to be as willing to extend credit to their players, which could be a problem in the future, as some major players might feel disrespected.

12. Singapore seems to have the most fair taxation structure. See page 18: it taxes 15% of the gross gaming revenue, but reduces the tax to 5% for VIP players. Singapore protects its own citizens by disallowing LVS from extending credit except to "premium players and non-Singapore residents." I bet there's going to be some interesting discussions about who a premium or VIP player is for the purpose of calculating taxation. Singapore allows bad debts (credit extensions to players that are not paid) to offset corporate income tax. Once again, Singapore seems to be at the forefront internationally in how it deals with business.

13. LVS employs about 28,000 employees worldwide. The Venetian and Palazzo employees are non-union (page 18-19).

14. One the easiest sections in a casino operator's 10K is the IP section. There's practically no risk in having your intellectual property taken away from you except for someone mis-using your name.

15. Here's one interesting note for next quarter's numbers, and perhaps some good news for LVS investors: see page 20--LVS has most likely sold its Shoppes at the Palazzo on or around February 29, 2008 for around 700 million dollars, which will boost gross revenue as GGP pays off LVS. I can't see any specific one-time payments from GGP in the most recent quarterly reports (nothing in "Gain (Loss) on Sale of Assets" line on the Income Statement--maybe recorded under "Non-Cash Items" in the Cash Flow?), but it must be recorded somewhere.

16. For people who are unfamiliar with how real property transactions typically occur in China and places where there isn't much land (Side note: America's single greatest advantage is its vast land. Thank you, France--that was the best 23 million ever spent in the history of the world): basically, you don't buy the land, you get long term renewable leases. Page 30 indicates that LVS has a long term lease for 25 years, with automatic extensions of 10 years. I don't know how "automatic" that renewal really is. The bottom line is that if LVS ticks off the Macau government, those investments on the land may revert back to the state.

17. Some bad news: LVS has been getting a corporate tax holiday in Macau--this tax break will continue only to the "end of 2008" (page 34).

18. We now come to the straight dope. See page 40: for 2006 and 2007, diluted earnings per share went from 1.24 to 0.33. Ouch.

As I indicated in my earlier post on the MGM shareholder meeting, I am neutral on gaming stocks.

No matter how its gaming stocks are performing, Vegas makes for a fun trip and will continue to benefit from Californians' love of a quick weekend getaway and cheap Southwest Airlines fares. If you get to Vegas and you're a sports fan, go to the sports book at the Wynn. If you love food, check out the buffet at the Rio. Personally, I wouldn't miss the Burger Bar at Mandalay Place. Get the buffalo burger (cook it medium) with an egg over easy as a topping and the sweet potato fries.

Economic Calendar

Economic Calendar:

http://biz.yahoo.com/c/e.html

Of course, one of the best ways to decide whether to buy a stock is reviewing similar companies that are reporting earnings and studying their earnings; however, it is also very important to see what economic numbers are being released, such as unemployment, new home sales, etc.

I have a feeling I may wake up early tomorrow.

Walmart's (WMT) Annual Report

Walmart's (WMT) annual report is clear, concise, and so well-written, it could function as a lesson in basic accounting terminology. WMT actually explains why it includes one measure of accounting over another, and then provides both numbers, GAAP and non-GAAP. In providing more than the usual information, WMT ends up giving its readers some accounting definitions that make it easier to understand financial statements.

For example, what is the difference between diluted and basic earnings per share? "Diluted" earnings per share include options and share-based awards and therefore provide a more complete picture of how the company is doing.

On the very first page, Walmart actually tells you exactly what its free cash flow is, which is an important measure of a company's success. (If consumers aren't buying your products, your cash flow will decrease--and that one number can tell you if your products are in demand.) "Free cash flow" is basically net cash from operations. Walmart's cash flow increased 25% from the previous year. In addition, Walmart had more than $100 billion--yes, billion, with a "b"--in sales in just the fourth quarter alone.

There was also some discussion of ROI (return on investment, non-GAAP) vs. ROA (return on assets). Typically, GAAP numbers are more accurate, but that's not always the case. After the era of pro forma earnings, which allowed Enron to keep growing based on speculation about how it would do in the future, I always look at GAAP numbers. GAAP numbers can can still be fudged, but if I'm going to be fooled, at least I'm going to be fooled by looking at the most realistic numbers.

WMT has most of its stores in TX, FL, and CA. With the mortgage crisis, will WMT benefit from more traffic in its FL and CA stores as consumers become more price conscious?

I recommend that you read Walmart's annual report first if you've never read one before. I am still deciding whether I can go to the annual meeting in Fayetteville, AR. After all the hoopla in the press about Walmart, it was interesting to read about it in its own words. WMT's 10K front cover says, "We save people money so they can live better." It's interesting when a large, powerful retail company focuses its mission on saving consumers money rather than appealing to the quality of its products or some other non-concrete advantage, but it's hard to argue with more cash in your pocket at the end of the day.

Many economists have said that WMT helps the poor because the poor buy more fixed, or "hard" materials, like shampoo, cleaners, detergent, razors, clothing, etc., which are cheaper at WMT, while the rich buy more expensive items or high class services (like vacations and Gucci), which Walmart doesn't sell. I agree with that assessment, but the unresolved question is whether WMT negatively or positively affects the growth of a middle class in the areas it operates. At this point, I don't think that WMT affects the middle class in areas that have diversified economies. WMT may drive out smaller mom-and-pop retail stores, but when was the last time anyone in a large city bought their detergent or razors from a mom-and-pop shop? If smaller cities lose small businesses because they sell the same things WMT does, but at higher prices, does the benefit of cheaper prices offset the unemployment of the small business's employees (who now probably also lack health care)? It probably depends on how many small businesses are displaced.

Most likely, as long as WMT doesn't expand its offering of services, like haircuts, food service, gourmet coffee service, massages, cell phone sales and service, tax preparation, car repair, or other non-concrete products, the average small business won't suffer or will survive by competing based on quality. For example, I doubt the local Panera Bread franchise or the local gourmet coffee shop is concerned about WMT, even if WMT did decide to expand its food service operations. Large, less efficient corporations that sell products rather than services, like Circuit City, are the real entities who should be concerned about Walmart.

With its tens of thousands of employees, WMT might believe that if it offers full benefits to part timers, it might not be able to sustain its growth. Many have argued that WMT is a burden on local resources because its wages are too low and it doesn't offer medical benefits to all its employees, causing them to go on the dole. WMT may not be overly concerned about its employee benefits because its competitive advantage isn't based on its employees. (Sadly, lower level retail employees are not difficult to find, especially in the developing countries where WMT is expanding.) WMT's advantage is that no one its size has been able to replicate its handling of its worldwide supply chain and inventory management, which allows WMT to offer lower prices by being efficient and leveraging (arbitraging?) global operations. This is where the problem of capitalism comes to light--what is best for shareholders isn't always great for employees. The case of whether to criticize WMT for not offering full benefits is especially difficult, because WMT isn't polluting like Exxon Valdez or forcibly demanding its American employees work in dangerous conditions like coal mines. Therefore, you could argue that WMT deserves to be left alone, because if you don't like its products or way of doing business, you don't have to shop there, and WMT doesn't affect you directly unless you choose to work for them.

Also, at the end of the day, WMT's numbers don't lie--$100+ billion in sales in just four months means enough people believe in the company and its products to continue shopping there, and until that changes, WMT opponents are basically resorting to the argument that because a company is big and can afford it, it should offer more benefits to its employees.

I run a small business. If a non-customer came to my door and told me how to run my business, I'd feel that it was my right to choose my own path, because it was my money and time at stake. Why does that principle of the "right to be let alone" change just because Walmart makes more money than I do? I don't know Walmart's requirements for receiving benefits, but Walmart may want to offer its employees working at least 24 hours per week and with 6 months of tenure some kind of subsidized health care coverage. Costco (COST) demonstrates that you can grow and offer reasonable benefits to employees. At some point, Walmart's sales will decline if consumers gravitate to COST because of its presumably happier, more motivated employees, or better reputation. Few consumers want to save a few bucks by breaking the backs of local employees. At the same time, Walmart has many long time employees--by one count, they had 20,000 associates who had been with the company 20+ years. That's a reputation for retention not too many companies can boast.

See 2007 report of annual shareholder meeting:

http://www.bloggingstocks.com/2007/06/01/
liveblogging-wal-marts-annual-shareholders-meeting/

Panera Bread (PNRA) Annual Report Review

Panera Bread (PNRA) is one of my favorite places to hang out. I believe it has replaced Starbucks as a middle ground between home and work. (As PNRA says, it "competes on the basis of providing an entire experience rather than price only.") The "cobblestone"--a sweet apple pastry with cinnamon and frosting--is my favorite product, and most weekends, they sell out if you don't get to the bakery early enough. (It may have a lot of calories, but it also provides some fiber.)

The company's HQ are in Missouri, and I wasn't able to go to the annual meeting this year. Here are some interesting tidbits from the annual report.

PNRA used to be Au Bon Pain Co. (I wondered what happened to those stores--I'd seen them sprouting all over S.F. and had expected them to keep growing all over California.)

PNRA indicated its summer salads would be a big hit, and that it was able to hold off temporarily on some price increases. It did have to remove the Crispani (pizza) from its menu to save on labor costs.

To give you an idea of just how small Peet's is, with its 166 stores, PNRA opened 169 new stores in 2007. Of those stores, 89 were company-owned, and 80 were franchisees. (PNRA has 1,167 stores total.)

PNRA played its hand well in the futures market for wheat, so wheat costs won't impact its bottom line, at least not in 2008. (Wheat costs won't "materially impact earnings growth" in 2008.)

PNRA's Board of Directors has a Berkshire (Dairy Queen's COO) member, Charles Chapman III--it's always a good sign when Berkshire Hathaway is involved.

PNRA's franchisee situation is interesting. Its arrangement seems fair and requires less start-up costs than a McDonald's or many other franchises. A franchisee must put a small percentage
of its sales into a national advertising fund and spend a certain percentage on local marketing efforts. PNRA receives 4 to 5% of the franchise's sales, in addition to 35,000 dollars as a one time franchise fee.

It costs 1 million dollars to open a PNRA store.

PNRA also owns 51% of Paradise Bakery and Cafe, as well SLB and Pride. It appears to be acquiring companies as part of its efforts to continue growing.

Most of PNRA's stores are in FL, IL, CA, PA, MI, and VA, in that order.

I don't have an opinion on how well this stock will do in the future. Chipotle (CMG) might be the newer growth story, because PNRA stock has already appreciated 1000% for its long time shareholders. I am guessing that PNRA shareholders who bought and held for years aren't complaining. I won't either, as long as I get my cobblestone pastry in the morning.

Peet's Annual Report Review

Peet's 10K provides more information about the company. Here is my summary of the highlights:

First, Peet's currently has 166 stores. That means they plan on opening another 24 stores before the end of the year. The cost of opening those stores will drag down Peet's earnings in the near future. Once more time passes, Peet's will recoup its costs from a consistent stream of revenue from those new stores.

Peet's mentions a well-known fact--that arabica beans are known as the best quality beans. I point this out only because we can finally see the word arab receiving some positive connotation in America.

Peet's has only 687 full time employees. However, with 21 hours per week + 500 hours of work, employees can receive full benefits.

Peet's says that "green beans" are not highly perishable and are the largest cost of sales and raw materials. Green beans appear to be coffee beans that haven't been roasted yet.

I can't say I'm as bullish on Peet's stock as I am on the coffee, but I will keep an eye on the stock--especially if Peet's P/E becomes more reasonable.

A detailed review of the 2008 shareholder meeting is here:

http://willworkforjustice.blogspot.com/2008/05/peets-coffee-and-tea-shareholder.html

Broadcom 2007 Annual Report

Broadcom (BRCM) has an office in San Jose, but apparently their headquarters are located in Irvine, CA. I first confused Broadcom with Broadcast.com, which is famous for making Mark Cuban, owner of the Dallas Mavericks, rich. He wisely sold the online video company to Yahoo at the height of the bubble then turned around and used the proceeds to buy an NBA team (as close to a male version of a Disney fairytale as you can get). Broadcom, not to be confused with Broadcast.com, makes semiconductor chips.

Broadcom's annual report shows a difficult future for the company and an unusual ownership structure. Perhaps to divert attention away from its decreased sales, BRCM highlights its litigation success against Qualcomm in the report's first few pages. Whenever a technology company emphasizes litigation rather than business strategy or R&D, shareholders have to wonder whether their company's money is being wisely spent. For the most part, extended litigation is a black hole primarily benefiting lawyers. There is another issue here--while BRCM talks about its success against QCOM, it doesn't highlight its most recent litigation (SiRF is suing BRCM).

BRCM's revenue stream seems too concentrated on a few customers. BRCM states on pages 17 and 28 of its report that "sales to our five largest customers represented 39.7%...of our revenue in 2007." Later, on page F-41, it clarifies that its top two customers are Motorola and Cisco Systems. MOT isn't doing very well these days, and while I own shares of MOT, I bought them as purely a value play, not as a growth story. When your best customer is losing market share, that is a terrible portent for your company.

But it gets worse: BRCM, on page 40, states that company insiders and management "held 58.5% of the total voting power." BRCM also has anti-takeover provisions (see page 41). This double-whammy of unaccountable management and a moat to protect itself from outside interference may have created an insular culture.

Fans of Gordon Gekko might disagree with me: "The Carnegies, the Mellons, the men that built this great industrial empire, made sure of it because it was their money at stake. Today, management [of Teldar Paper] has no stake in the company! All together, these men sitting up here own less than three percent of the company. And where does Mr. Cromwell put his million-dollar salary? Not in Teldar stock; he owns less than one percent. You own the company. That's right, you, the stockholder. And you are all being royally screwed..."

But one look at the financials shows that this company is experiencing lower growth, so ownership structure might be the least of its problems. Diluted earnings per share went from 0.64 cents a share to 0.37 cents from 2006 to 2007. Net cash from operations went lower from $891,659,000 in 2006 to $831,909,000 in 2007. In case I have somehow misinterpreted these numbers, see google's finance page, which contains a wonderful tool allowing anyone to view a company's balance sheet, cash flow, and income statement on a quarterly as well annual basis:

http://finance.google.com/finance?fstype=ii&q=NASDAQ:BRCM

To get another measure of how the company is doing, go to Annual Data, click on "Cash Flow," and compare numbers in "Net Change in Cash." Yup--it's not good.

Surprisingly, BRCM stock has rebounded considerably over the past several months. I am leaning towards selling my very small number of shares next week; however, I will keep this stock on my radar screen to see how Motorola--its largest customer--is doing.