You are cordially invited to the Investor Symposium hosted by Matson Money.
When: Thursday, July 31, 2014 – Saturday, August 2, 2014
Where: Horseshoe Casino & Conference Center
1000 Broadway, Cincinnati, OH USA
Speakers Include:
Arthur B. Laffer, PhD: Chief economic advisor to Ronald Reagan
Terrance Odean, PhD: Professor at Cal-Berkley, expert in the field of investor behavior
Lyman Ott, PhD: Expert in the field of statistics, providing validity to Free Market Portfolio Theory
Concert featuring country singer (and former leader of Hootie & The Blow Fish) Darius Rucker
Seating is limited. RSVP by emailing reservations@matsonandcuprill.com. Admission is free to all Matson & Cuprill clients and their guests.
In The Headlines
Auto Parts Companies Brace for a Future of More Reliable Cars
Despite a surge in new car sales, the U.S. fleet is pretty long in the tooth. The average vehicle still on the road is 11.4 years old, three years older than they were in 1995 at just 8.4 years. This means it was made just before U.S. troops rolled into Iraq for the second time.
All those aging machines have not necessarily been a boon for parts retailers as one might think. At four of the biggest U.S. parts-sellers—AutoZone, O’Reilly Automotive, Advance Auto Parts, and Pep Boys—the average annual increase in same-store sales in the past 10 years is a plodding 2.3%. The do-it-yourself car repair market overall has grown at only about a 2.8% rate in that time.
The trouble for these auto parts retailers is that cars have become pretty reliable. People drive them for more than a decade simply because they can, according to Michael Karesh, who runs Truedelta.com, an online service that tracks auto reliability for about 91,000 members. “We stop covering cars when they turn 16, and some members are not happy with this,” he says. “They don’t see these cars as all that old!” Meanwhile, fewer vehicles are cruising U.S. roads. From 2009 to 2011, the number of registered cars shrank by 5%. Also so-called active safety measures such as bumper cameras, adaptive cruise control, and lane-guidance technology have helped reduce the number of accidents.
AutoZone has demonstrated that auto parts firms can still thrive in this environment, and has racked up 30 straight quarters of double-digit per-share profit gains to prove it. For one thing, the company focuses on selling to professional mechanics. Fixing a car these days requires a lot more skill than in decades past. Ten years ago, computer diagnostics were already the norm, and getting a wrench on an oil filter was starting to require the skills of a Cirque du Soleil acrobat.
With almost 5,300 stores, AutoZone has a big enough network to serve independent garages, as well as weekend do-it-yourself grease monkeys. Commercial sales now account for 16% of AutoZone’s business and have been outpacing its retail sales.
And the company keeps growing. In the past five years, AutoZone pushed into Brazil and Mexico and overall, added almost 1,000 new locations to bring its total locations to 5,200. It has also used its cash to buy back its own shares, an effective strategy to raise per-share profit numbers.
Parts retailers also keep a sublime perspective on all the new cars gliding out of lots: For every new car, there is a new used car. “While new car sales have been very strong these past two years, we have seen those traded-in vehicles being resold to new owners who are repairing and enhancing their new vehicle,” says AutoZone Chief Executive Officer William Rhodes.
The parts market is always “a bull story,” according to Bloomberg Industries analyst Kevin Tynan. “There’s roughly 250 million cars on the road,” he says, “Somebody has to take care of them.”
LEGO Finds Success by Going “Anthro”
LEGO is hot. The company has a hit movie out and its sales are near an all-time high. LEGO makes a popular line of construction toys and is a privately held company based in Billund, Denmark. The company’s flagship product consists of colorful interlocking plastic bricks and an accompanying array of gears, mini-figures and various other parts. These bricks can be assembled and connected in many ways, to construct objects such as vehicles, buildings, and even working robots.
LEGO began manufacturing interlocking toy bricks in 1949. Since then a global subculture has developed, supporting movies, games, competitions, and six themed amusement parks. As of 2013, 560 billion Lego parts had been produced. But just a decade ago the company was on the brink of failure, losing $1 million in cash each day and posting record deficits.
The problem seemed to be that nobody knew quite what the problem was. LEGO had tried expanding into new product lines like Click-its (snap jewelry for girls) that did not look anything like its traditional snap together bricks. Focus groups were no help, recalls Paal Smith-Meyer, who heads new strategy at LEGO, because in the drab spaces where the tests were held, kids were drawn to bigger blocks made by competitors, mostly because they thought they were supposed to prefer the bigger blocks.
The environment was “false,” according to Smith-Meyer. So LEGO set out on a radical new course—to understand the roots of play by observing its customers (kids and their parents) actually playing in the comfort of their own homes. LEGO took this anthropological approach to its R&D largely because of a Danish consulting firm called ReD Associates.
Christian Madsbjerg, ReD’s founding partner and director of client relations, studied philosophy and political science in Copenhagen and began his career as a journalist. In 2004 he and a colleague, Mikkel B. Rasmussen, were both working for a design firm when they got the idea for ReD.
Their new company’s philosophy was a rebuke of sorts to the notion held by traditional business consulting firms that a company can understand its customers simply by crunching numbers. Madsbjerg believes that to understand human behavior, you have to study humans, not spreadsheets. Bill Hoover, ReD’s chairman and a former senior director at McKinsey (where he worked for 30 years), describes ReD’s process as “messy, time-consuming and not linear. There’s no logic tree you’re chopping branches from. The insights bubble out of the experience.”
For LEGO, so-called “anthro-teams” fanned out across Los Angeles, New York, Chicago, Munich, and Hamburg. They made photo diaries, interviewed parents, and asked kids to tell them stories, some of which Madsbjerg and Rasmussen recall in a new book, The Moment of Clarity. When one ReD researcher asked an 11-year-old German boy to show him his most prized possession, the boy displayed a beat-up sneaker, then explained how each wear-and-tear mark reflected the accomplishment of a new skateboard trick.
This observation turned into insight for LEGO. The company, says Smith-Meyer, had fallen into the trap of thinking that play habits had changed, and that LEGO must change with them. That turned out NOT to be the case at all. Kids just wanted freedom to experiment on their own with the plastic bricks and to build something masterful.
Sources:
1. http://money.cnn.com/2014/02/27/leadership/lego-red.pr.fortune/index.html?pw_log=in
2. http://en.wikipedia.org/wiki/Lego
3. http://www.businessweek.com/articles/2014-03-07/how-the-auto-parts-trade-retools-for-the-era-of-reliable-cars#r=nav-r-story
The Good News Is . . .
• Job creation improved somewhat in February, posting a better-than-expected gain of 175,000 despite expectations that unusually cold weather would keep the count low. The unemployment rate edged higher to 6.7%, according to the latest report from the Bureau of Labor Statistics. The government reported that the biggest job gains in February came from professional and business services, which added 79,000 positions. Temporary help grew by 24,000, wholesale trade gained 15,000 jobs, bars and restaurants contributed 21,000, and construction added 15,000 jobs.
• Korn / Ferry International, a global talent acquisition and consulting services company, reported earnings of $0.43 per share, a 38.7% increase over year-ago earnings of $0.31. The firm’s earnings topped the consensus estimate of analysts by $0.09. The company reported that revenues were $242.2 million, an increase of 15.2%. Management attributed the company’s performance to strong year-over-year growth in fee revenue across all lines of business and within every region it serves.
• A group led by the private equity firm Cerberus Capital Management has agreed to buy Safeway in a deal worth more than $9 billion. Cerberus plans to merge Safeway with Albertsons, a smaller grocery store company it owns. By combining Safeway with its other supermarkets, Cerberus will have more than 2,400 grocery stores with more than 250,000 employees. Investors are expected to receive about $40 a share, made up primarily of a cash payout of $32.50 a share and a portion of proceeds from asset sales.
Sources:
1. http://www.bls.gov/news.release/empsit.nr0.htm
2. http://www.cnbc.com/id/101475087
3. http://www.cnbc.com/id/18080780/
4. http://ir.kornferry.com/phoenix.zhtml?c=100800&p=irol-newsArticle_Print&ID=1906993&highlight=
5. http://dealbook.nytimes.com/2014/03/06/cerberus-is-near-deal-for-safeway/
Planning Tips
Tips for Buying a Condo
For many people approaching, or in, retirement, a condo may be a good option for downsizing. However, buying a condo is not the same as buying a house. Below are considerations and concerns to be aware of before purchasing a condo.
Understand how the financing works – Lenders treat condos a little differently than typical single-family homes. The Federal Housing Administration in particular has a number of requirements before it will back a loan on a condo unit. For instance, a minimum of 80% of the units in the building must be owner-occupied, so buildings that attract a large number of investors or real estate speculators will be off-limits to you if you want to get an FHA-backed loan. The building itself must also be on the FHA’s list of approved condo buildings. Buyers can still get a loan from a private lender without government backing, but the cost can be much higher, with many lenders requiring a down payment of 20% or more.
Check out the condo association rules – With people living in close proximity, condo buildings can have a lot of rules in order to maintain a peaceful living environment. Some things to check:
- Do they allow pets?
- Can you rent out your unit?
- Are there quiet hours?
- Are there rules about shared spaces like a yard or pool?
Before you move in, make sure you are going to be able to live with the rules.
Know how the fees are levied – In most buildings the condo association levies fees to pay for common expenses such as insurance and repairs that affect all residents. While you will want to know what the fees are, it is equally important to know what exactly they pay for. A well-run condo building will set aside a third of the money for major structural repairs or an emergency fund. You do not want to move into a condo only to find out that the association is broke and cannot afford to pay for an urgent repair like a leaking roof. Ask the association to show you where the money is going each month, how much cash it has on hand, and whether there are any outstanding liens against the association.
Review the minutes of the condo association meetings – If the condo association takes minutes at its meetings, ask to see them. This will give you a good idea of the culture of the building, letting you know if there are problematic residents, or if the condo leadership is responsive to tenant concerns. It will also give you an idea of the latest news in the building. You probably do not want to move into a building that is currently engaged in several contentious lawsuits, and the minutes are the best place to find out this sort of information.
Ask how maintenance and upkeep are provided – Before you buy a condo, you will want to know who takes care of the building and whether they hire someone to clean common areas and maintain the yard. A condo building that is lax about maintenance can be aggravating to live in, but it can also hurt your future resale value, so make sure your condo takes upkeep seriously. You will also want to know what you are responsible for if something goes wrong. In many buildings the condo association’s responsibility stops at the midpoint between the walls of your unit, which means that anything that happens inside your unit is your responsibility.
Sources:
1. http://www.kiplinger.com/article/real-estate/T010-C000-S002-5-things-for-condo-buyers-to-learn-before-buying-a.html
2. http://realestate.msn.com/your-condo-buying-cheat-sheet-august-2013-homebuying-advice
3. http://www.studentdebtsurvivor.com/one-year-in-our-home-tips-for-condo-buyers/
4. http://www.foxnews.com/leisure/2013/10/11/5-tips-for-condo-buyers/
5. http://online.wsj.com/news/articles/SB10001424052748704322004574475640874117808
6. http://homeguides.sfgate.com/condo-buying-checklist-1444.html
