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
The Battle for Supermarket Supremacy Takes a New Turn
Recently, Cerberus Capital Management, the private-equity company that owns grocery chain Albertson’s, acquired Safeway for $9.4 billion. Safeway’s 1,335 stores racked up $36 billion in sales in 2013. Adding Albertson’s stores will create a company that is almost on a level with the larger Kroger, the leader among conventional supermarkets. But the combined market share post-merger of the companies will be just 5.4%, compared with Wal-Mart’s share of the grocery business which is nearly 30%. Kroger has 9.6% of the total market with sales of $98 billion in 2013.
However, both Kroger and Safeway are caught in a competitive crossfire between Wal-Mart, Costco, and other large discounters and warehouse stores, and natural grocers and specialty stores like Whole Foods and Trader Joe’s. At the same time, changing shopping habits are sending more people to drugstores, dollar stores, and increasingly, to websites to buy their groceries.
The impact of Wal-Mart on the retail food industry has been significant. Its share of the grocery market has risen from 4% just 16 years ago to nearly 30% today. Groceries now represent half of Wal-Mart’s revenues. These factors have driven consolidation and asset-shedding among traditional grocery chains.
Combining Safeway and Albertson’s procurement and distribution systems will not result in parity with Wal-Mart’s purchasing power, or allow the combined companies to match Wal-Mart’s prices, but it will at least help the new entity to compete with Kroger for the middle market. Kroger will still lead that category, with more than 2,600 stores to Cerberus’ more than 2,400 operating under 16 different names.
Kroger has moved more aggressively than Safeway in recent years to make needed changes. Its strategy has been to diversify as a way to fend off challengers from both the high and low ends of the market. In January, Kroger completed its purchase of the Harris Teeter chain, giving it about 200 upscale stores and enlarging its presence in the southeast. At the same time, it deftly navigated the economic downturn by making its existing stores more value-oriented and by launching a rewards program to appeal to price-conscious shoppers.
Safeway has been a bit slower than Kroger to respond to a changing market. While it has made its stores more appealing in recent years by, among other things, adding more organic and fresh foods, industry observers say that has not given local managers enough leeway to adapt to local consumers. Its biggest recent strategic moves have involved shedding assets. Last year it announced it was pulling out of the Chicago market by closing all 72 of its Dominick’s stores. Many of the locations were sold to competitors, but the fact that the chain was not salable as a whole is a sign of the challenges faced by conventional supermarkets.
Last year, Safeway unloaded its Canadian operations in a $5.7 billion sale of 1,300 stores to Empire Co. Also last year, it spun off its Blackhawk Network Holdings gift-card business in a public offering, and it is looking to shed its 49% stake in Casa Ley, a 185-store Mexican chain it has owned since 1981.
Whether either company will succeed is still open to question. What seems beyond doubt is that steering a middle course is difficult and could end badly.
Is Real Estate the Real Pay-off for Casino Operators?
Shares of Boyd Gaming have been on a hot streak following the announcement of investment firm Elliott Associates that it was taking a 5% stake in the Las Vegas-based casino company. The move signals Elliott’s interest in replicating a real estate strategy Penn National Gaming made last year when it spun off its 22 properties into a publicly traded real estate investment trust (REIT).
In November, Penn completed the tax-free spinoff of Gaming and Leisure Properties, which owns Penn’s 19 casino properties. Penn manages those businesses and pays rent to Gaming and Leisure, which distributes its pretax profits to investors as dividend payments. Wall Street analysts cheered the arrangement and have pronounced the transaction a success.
At a time when most states are either allowing new casinos or have shut the regulatory door on them, the gaming industry faces a U.S. landscape that is largely saturated. Practically any American who cares to gamble can do so not far from home, and even online in three states. The value for shareholders of traditional gaming operators, therefore, could lie in the property on which their casinos sit.
“Record low interest rates are certainly propping up real estate values, and that is not something that is unique to gaming properties,” says Christopher Jones, an analyst with Telsey Advisory Group. He predicts that Pinnacle Entertainment will also explore a REIT spinoff. He speculated that the time to make these REIT conversions may be growing short as the Federal Reserve slowly begins to engineer interest rate increases.
Boyd operates 22 properties in eight states, including a 50% stake in the Borgata Hotel Casino & Spa in Atlantic City, NJ, and several casinos in downtown Las Vegas that cater to locals, away from the glitzy end of the Strip. Boyd has annual revenue of about $2.9 billion, and more than $4 billion in debt. This debt load could prove difficult for a newly formed REIT to manage, according to Jones.
He and some other analysts are also quick to note that Boyd is no Penn National when it comes to easy comparisons of a REIT spinoff. First, Penn was a federal taxpayer, while Boyd carries some $1.1 billion in net operating losses on its books, which means it does not owe the government any cash come tax time. Jones estimates that Boyd will not owe cash taxes for at least a decade.
Another wild card for any REIT conversion is the Boyd family, which has not commented publicly on the matter. William S. Boyd founded the company with his father in 1974 and remains executive chairman. His daughter serves as chief diversity officer and his son is a company vice president. The three Boyds, who also sit on the company’s 12-person board of directors, control 27.5% of Boyd’s outstanding shares.
Macquarie analyst Chad Beynon says the Internal Revenue Service and the states in which Boyd operates may not look kindly on any structure in which the operating losses are kept by Boyd. “If it were that easy, we would live in a tax-free world and own penthouses on Park Avenue,” Beynon wrote in a March 12 client note. “Clearly, REIT conversion or ‘REITional gaming’ is not that simple.” It may not be simple, but it could happen in an industry whose investors want their casino stocks to pay out.
Sources:
1. http://abcnews.go.com/Business/wireStory/albertsons-parent-cerberus-buy-safeway-22808856
2. http://features.blogs.fortune.cnn.com/2014/03/14/supermarket-safeway/?iid=SF_F_River
3. http://www.businessweek.com/articles/2014-03-14/casino-investors-look-to-real-estate-investment-trusts-for-payoff#r=nav-r-story
4. http://www.reviewjournal.com/columns-blogs/business/inside-gaming-boyd-deal-sparks-torrent-speculation
The Good News Is . . .
• Minerals Technologies announced that it had agreed to purchase Amcol International, a specialty minerals and materials firm based in Illinois, for $1.7 billion. Amcol is a leading producer of bentonite, which is used in machine tooling, construction and drilling. Minerals Technologies manufactures precipitated calcium carbonate, which is used in the paper industry. The CEO of Minerals Technologies said the combination of MTI and Amcol should be well-positioned for growth through geographic expansion and new product innovation
• Williams-Sonoma, Inc., a retailer, reported earnings of $1.38 per share, a 3.0% increase over year-ago earnings of $1.34. The firm’s earnings topped the consensus estimate of analysts by $0.03. The company reported that revenues were $1.5 billion, an increase of 4.2%. Management attributed the company’s performance to strong holiday sales, increased market share, and the success of its e-commerce strategy.
• U.S. retail sales rose slightly more than expected in February. The Commerce Department reported that retail sales increased 0.3% last month as receipts rose in most categories. That followed a revised 0.6% drop in January, ending two straight months of declines. Economists say this may point to renewed strength in the economy after harsh winter weather slowed activity in recent months.
Sources:
1. http://dealbook.nytimes.com/2014/03/10/minerals-technologies-wins-bidding-war-for-amcol-international/?_php=true&_type=blogs&_r=0
2. http://www.cnbc.com/id/18080780/
3. http://www.williams-sonomainc.com/files/press-releases/WSM-Q4FY13ER.pdf
4. http://www.cnbc.com/id/101490752
5. http://www.reuters.com/article/2014/03/13/us-usa-economy-idUSBREA2C13J20140313
Planning Tips
Tips for Evaluating Peer-to-Peer Lending
Peer-to-peer lending is a method of lending money or obtaining a loan without going through the traditional loan application process at a bank. This form of lending has become popular because it offers borrowers the benefit of lower loan interest rates and the lure of higher yields for lenders seeking a better rate of return on the funds they lend. However, there can be risks for lenders. Here are some tips on how to evaluate peer-to-peer lending.
Understand how peer-to-peer lending sites work – In their most basic form, peer-to-peer lending sites match lenders to borrowers. Borrowers apply online for loans of up to a certain limit. Loan officers then run a vetting process that includes credit history checks, employment verification, and an analysis of the borrower’s debts and assets. Generally, these sites will only work with borrowers whose credit score is in the mid-600s or higher. An interest rate is assigned based on the judged riskiness of the loan, similar to the process used for bond rating and insurance underwriting. Investors (the lenders) are invited to individually sign up for whatever portion they would like of a particular loan. A loan is “approved” when enough investors sign up.
Consider the type of loan you want to make – Larger peer-to-peer lending sites connect a wide spectrum of lenders and borrowers who make loans covering a variety of purposes. But there are many specialty peer-to-peer lending sites that specialize in loans to entrepreneurs in developing countries, students, startups and artists engaged in creative projects.
Evaluate the loan criteria – Person-to-person lending sites have different criteria for a lender to establish a loan. Some sites allow you to set the interest rate you want attached to your loan, but these loans are often not guaranteed. Others set an interest rate for you that can result in a lower overall profit. Choose a peer-to-peer loan website that guarantees your loan. This means the loan is backed by a credit union or other financial institution and you will get your money back, even if the borrower misses payments or defaults.
Consider the borrower’s risk rating and diversify to lessen you risk – Each borrower will have a risk rating attached to his or her profile based on credit rating and estimated annual income. Consider this risk against your potential earning from interest when you choose a borrower. Avoid putting all your funds into one loan. Consider spreading the funds you are lending among a number of different loans with staggered maturities to lessen the risk of any single borrower’s default. You can also choose to only partially fund a loan. When several people fund a single loan, everyone is able to reduce the risk they bear.
Sources:
1. http://www.moneysavingexpert.com/savings/peer-to-peer-lending
2. http://www.forbes.com/sites/billfrezza/2013/08/13/caveat-emptor-banking-peer-to-peer-lending-challenges-too-big-to-fail-status-quo/
3. http://scrapingthefringe.org/2014/03/08/how-to-evaluate-the-risks-in-peer-to-peer-loan-investments/
4. http://www.getrichslowly.org/blog/2011/02/01/a-brief-intro-to-peer-to-peer-lending/
5. http://www.wikihow.com/Use-Peer-to-Peer-Lending
6. http://voices.yahoo.com/how-lenders-evaluate-borrowers-peer-peer-5137425.html?cat=3
