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On Nintendo

Even before last week’s announcement from Sony (SNE), it seemed nearly certain that company’s dominance in the PlayStation 2 generation of video game consoles would give way to a much more level playing field for the PS3 generation. This time around, Sony faces much stiffer competition from both Microsoft (MSFT) and Nintendo (NTDOY).

While the Nintendo name is most closely associated with a video game platform (the NES), the company’s real focus has always been the games rather than the platform. Herein lies the true distinction between Nintendo and its two larger rivals. Nintendo seeks to make good games. Microsoft and Sony seek to control a distribution channel.

Nintendo is the only company among the three console makers that began life as an entertainment company – and it shows. Microsoft is known for software; Sony is known for hardware; and Nintendo is known for games.

American gamers are well acquainted with the Nintendo brand; but, American investors generally know very little about the company. That’s unfortunate, because despite all the attention given to Sony and Microsoft’s video game operations, Nintendo is the ultimate pure play video game company.

Nintendo is big. The company surpasses U.S. video game publishing giant Electronic Arts (ERTS) in sales, earnings, and market cap. On the last count, some may argue that Nintendo only has a larger market cap than EA, because its stock price has risen sharply over the past year, while EA’s share price has actually declined. However, there’s a much simpler explanation.

Nintendo has a larger market cap than Electronic Arts, because Nintendo (the business) is worth more than EA (the business). The run-up in Nintendo’s stock price may be entirely due to improved investor perceptions of the company’s future prospects as a result of the good press surrounding Nintendo’s soon to be launched console, the Nintendo Wii.

Regardless, such an increase in the price of Nintendo’s shares was justified by the rather low value the market had previously placed on Nintendo’s business. The same can’t be said of Electronic Arts. Even after underperforming the S&P; 500 over the last three years, EA’s stock price remains at levels that are nearly impossible to justify using any form of rational thought. So, Nintendo really is the world’s largest pure play video game company.

Nintendo is an interesting business to write about from an investor’s perspective for several reasons. The company operates in an exciting industry with excellent long-term prospects. It’s more reasonably priced than many public companies in that industry (although that’s not saying much). It’s a truly unique business (with a unique past), and it has a clear vision of what it is and what it isn’t. Obviously, Nintendo’s tremendous intellectual properties add to its appeal both as a subject of a post and as the object of an investor’s interest.

Nintendo has been a good steward of its intellectual properties. It’s been very careful to protect the image of its most beloved characters. In fact, some would say …

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Festival of Stocks #1 at Fat Pitch Financials

Fat Pitch Financials is hosting the very first Festival of Stocks today. You’ll find a lot of great articles over there. All have to do with stocks rather than generic personal finance topics like many previous carnivals. So, all of the articles will likely be of great interest to readers of this blog. I encourage everyone to visit the Festival of Stocks.

I’ll be hosting the Festival of Stocks next week. Feel free to email me about it.

Don’t forget you can bid up the Festival of Stocks on Fat Pitch News by clicking on the green “bid up” button at the bottom of the post – bidding up the Festival will help share it with other like-minded investors via the value investing community site Fat Pitch News.

Visit Festival of Stocks

Visit Fat Pitch Financials

Visit Fat Pitch News…

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Festival of Stocks Launch

Fat Pitch Financials recently announced it will host the first edition of a new Festival of Stocks on Monday:

“The Festival of Stocks will be a blog carnival dedicated to highlighting bloggers’ best recent posts on stock market related topics. This will include research and commentary on specific stocks, industry analysis, ETFs, REITs, stock derivatives, and other related topics.”

I think this is a great idea and have agreed to host a future edition of the Festival of Stocks on this blog (see schedule).

I hope readers will visit Fat Pitch Financials on Monday for the Festival’s first edition and be back here for week two.

Hosting the Festival

For those with their own investing blogs, see the announcement at Fat Pitch Financials for details on how you can host an upcoming edition of the Festival. To give you an idea of what hosting entails, here’s an excerpt from the announcement:

“The Festival of Stocks will be different from other blog carnivals in that I encourage hosts to be selective in the post links they include and to limit the number of posts included (up to the discretion of the host) to about twenty stories in order to cut down on the burden of hosting and to keep the carnivals readable and not overwhelming. I will be introducing a mechanism to help hosts rank submissions and I will also be creating an optional Excel template to help make the Festival of Stocks post easier to create. Hopefully, these features will make it easy to host and make the Festival of Stocks enjoyable to read.”

By the way, I’ll be contributing to the Festival, so if you have any suggestions on what my best recent post is, feel free to sound off by clicking the “comments” link below.

Read The Festival of Stocks Launch Announcement

See The Festival of Stocks Host Schedule

Visit Fat Pitch Financials…

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On the PlayStation 3 Delay

As a result of problems related to the mass production of a key component of its Blu-ray DVD player, Sony (SNE) will delay the European launch of its next generation video game console, the PlayStation 3 (PS3). Sony will also reduce the number of PS3 units immediately available in both the U.S. and Japan.

In the U.S., the PS3 will launch on November 17th, with approximately 400,000 consoles available for sale. The U.S. launch will come almost a week after the Japanese launch which will consist of merely 100,000 units.

Sony’s PlayStation 3 is the successor to the PlayStation 2, the world’s most popular (and as recently as July, the world’s best selling) video game console.

The Number That Really Matters

The fact that there will only be 400,000 PS3 units available for sale in the United States on November 17th is of no long-term importance. In fact, the launch date itself is unimportant. What matters is how many units will be available for sale in mid to late December.

Sony claims it will have 1 million to 1.2 million consoles available for sale by December 31st. I think it’s safe to assume they don’t plan to have many arrive between December 26th and December 31st. So, let’s assume there will be at least a million PS3 consoles available for sale in the U.S. by Christmas.

Will that be enough to put a PlayStation 3 in the living room of every household that wants one?

No. There will almost certainly be many people who have to go without a PS3 for Christmas, despite being willing to pay the very high price Sony is asking. But, that’s nothing new. Other consoles (including the Xbox 360) have been launched without an adequate number of units immediately available for sale.

This isn’t like failing to get enough Glad trash bags on store shelves. Once the console has launched, limited availability shouldn’t cause many people to switch their planned purchase. If they want it and it’s out, they’ll wait for it.

A delay is much worse than a mere shortage. There’s a promise (and a tangible product) behind a console that has already launched. So, very few people in the U.S. or Japan who planned to buy a PS3 are likely to change their minds because of a Christmas shortage – no matter how severe.

The Things That Really Matter

The success of any gaming platform is largely based on five factors:

Available Titles

Relative Launch Date

Price

Predecessor’s Installed Base

Technology

Of these five, technology is by far the least important factor. The four most important factors (available titles, relative launch date, price, and predecessor’s installed base) are difficult to separate. Clearly, having a predecessor with a large installed base (such as the PS2) can be tremendously beneficial, if you get satisfactory marks in the other three areas (titles, launch date, and price).

The PlayStation 3 dominates when it comes to having a predecessor with a large installed base. So, …

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On Freston, Redstone, and Viacom

On Monday, Sumner Redstone fired Viacom’s CEO, Tom Freston. Yesterday, Viacom announced that its Board of Directors had appointed Philippe Dauman President and CEO and Thomas Dooley Senior Executive V.P. and Chief Administrative Officer (a newly created position). Mr. Dooley’s role is expected to be similar to that of a Chief Operating Officer.

Both Dauman and Dooley are members of Viacom’s Board of Directors. They served in key positions within the previous incarnation of Viacom, which was split into two separate public corporations, Viacom (VIA) and CBS (CBS), approximately eight months ago. Sumner Redstone is the Chairman of each company. Viacom’s new CEO, Philippe Dauman, will report to Mr. Redstone. Thomas Dooley will report to Mr. Dauman.

Although The Financial Times went with the no nonsense headline “Freston Removed as Chief of Viacom”, I fear The Wall Street Journal may have had the more accurate headline: “Ouster of Viacom Chief Reflects Redstone’s Impatience for Results”. In fact, I couldn’t have said it better myself. Of course, I was planning on writing more of a personal opinion piece than a front page article (the story made the front page of both the FT and the WSJ). Still, I can’t fault The Wall Street Journal for putting the painfully obvious in big print.

The Journal article (which is a good outline of the whole affair) won’t encourage faith in Sumner Redstone among Viacom’s shareholders. It begins by quoting Mr. Redstone’s assurance (given just six weeks before) that he could imagine “no circumstance” under which he would fire Mr. Freston. Cut to Monday, at Sumner’s estate, where Tom Freston, a 26 year company veteran, is told he has managed to lose his job, just eight months after being given the helm of the new (CBS-less) Viacom.

The most obvious objection to Mr. Freston’s firing is simply that he wasn’t given enough time. There are billions of people on this planet and it took more than eight months to produce the majority of them; so, I imagine doing something truly remarkable, like steering a media company through troubled, transitional waters, takes quite a bit longer.

The other objection is that Freston had already proved himself a capable executive. He may not have been able to answer the question “What have you done for me lately?”. But, he had built up quite a reputation at MTV. Recent results have taken some of the shine off that golden boy (the channel, not Freston, who is no golden boy at age 60).

MTV is more than a golden boy; it’s Viacom’s crown jewel – accounting for about 70% of the company’s revenue and nearly all of its profits. The aforementioned Journal article fears “Mr. Freston’s departure could lead to a wider shake-up at the company, particularly within MTV networks, much of whose management has been with the company for years and is intensely loyal to Mr. Freston.”

Those fears are rational. Any time an executive …

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On The Twenty Best Financial Blogs

24/7 Wall Street has compiled a list of the twenty best financial blogs. The list, presented in no particular order, included this blog. I’m also glad to say it included several of my favorite blogs such as Value Discipline and Bill Rempel’s blog (formerly Absolutely No DooDahs). All of the blogs on the list are quite good.

While checking out those blogs on the list that I hadn’t yet read, I found something worth sharing. In a comment to a post on Frank Barnako’s Media Blog, there’s a link to a great little Netvibes module that will allow you to get all of the available feeds (18 of the 20) in one easy step – and view them all in one place. Of course, you’ll have to register at Netvibes.com to use it. But, it’s worth it just for the module.

On a related subject, Bill Rempel (author of Absolutely No DooDahs) has moved his blog to a new location. I’ll update the directory later this week; for now, just know that he’s moved and he’s worth reading at his new location (where you’ll already find some new posts).

Finally, I’ll go through 24/7 Wall Street’s list and add those blogs that aren’t yet part of my Value Investing Directory to that directory. They are all very good blogs. Now that they’ve been collected in one place, there’s no excuse for any continued oversight on my part. Expect the directory update later this week.

Read 24/7 Wall Street’s List of The Twenty Best Financial Blogs

Read Comment Containing Link to the Netvibes Module

Register at Netvibes.com (required to use above module)

Visit Bill Rempel’s Blog

Visit Value Discipline

Visit 24/7 Wall Street

Visit Frank Barnako’s Media Blog…

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Collection of Company Specific Posts

For new readers, here’s a collection of the longer company specific posts I’ve written this year:

An Analysis of Blyth (BTH)

An Analysis of Cascade Bancorp (CACB)

An Analysis of Energizer Holdings (ENR)

An Analysis of Fifth Third Bancorp (FITB)

An Analysis of Journal Register Company (JRC)

An Analysis of Journal Communications (JRN)

An Analysis of Lexmark International (LXK)

An Analysis of Overstock.com (OSTK)

An Analysis of TCF Financial (TCB)

An Analysis of Valley National Bancorp (VLY)

An Analysis of Wells Fargo & Company (WFC)…

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On Blyth

Blyth (BTH) calls itself a “home expressions company”. Most people call it a candle company. Neither description is entirely accurate.

Blyth can rightly be called the world’s largest scented candle company, because larger competitors like S.C. Johnson and Sara Lee (SLE) are primarily engaged in other businesses. Like its smaller rival The Yankee Candle Company (YCC), Blyth is primarily a scented candle company. However, unlike the Yankee Candle Company, Blyth has substantial non-candle related operations – hence the “home expressions” designation.

I’m not sure what a home expression is; but I’m pretty sure coffee doesn’t qualify. From that fact alone we can safely say Blyth isn’t really a home expressions company (last year, Blyth acquired Boca Java, an online retailer of coffee, tea, and hot chocolate). Blyth may not be a pure play scented candle company or a pure play “home expressions” company; but, that doesn’t mean it’s merely a hodgepodge of unrelated businesses.

There is a method to Blyth’s madness. From the manufacturer’s perspective, candles, ceramics, frames, vases, coffee, and gourmet food are very different products. But, from the customer’s perspective, they serve a similar purpose. Essentially, Blyth sells personal indulgences to women at affordable prices. That’s a big business in the U.S., Canada, and Europe. It also happens to be a good business.

Profitability

Since 1998, Blyth has had an average return on assets of 10.33% and an average return on equity of 18.55%. Regular readers of this blog know that I like to use a third profitability metric from time to time. One of the best ways to measure the inherent profitability of a business (independent of its current capitalization structure) is to use the pre-tax return on non-cash assets (PTRONCA). Over the past decade, Blyth has had a PTRONCA of about 19.21%, which is very good – although far from great.

To put that 19.21% PTRONCA into perspective, think of it this way: independent of its capitalization structure, Blyth generated a little over nineteen cents for every dollar invested in the business (before taxes).

Essentially, this means that if Blyth hadn’t utilized any debt whatsoever it would have had a return on equity of roughly 12% (after taxes). Although a 12% return on equity doesn’t sound all that impressive, achieving a 12% ROE without using any debt would actually represent a solid performance for most public companies under most economic conditions.

Of course, over the last decade Blyth actually averaged a much higher return on equity (18.55%). During this period, Blyth utilized a material (but far from egregious) amount of debt. As a result, the company surpassed its own stated goal of achieving a 15% annual return on equity.

Based on Blyth’s past ROA and PTRONCA, it appears to be a good business. If we put aside GAAP accounting for a moment and look at the economic earnings of the business, we’ll see that Blyth has actually performed a bit better than its reported net income figures suggest.

Cash Flow

Blyth’s free cash …

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