Cloudy Mood

M&A has been striving recently. The best drama now is DELL vs HPQ over 3PAR. Bidding War, I like. (anyway I own HP, and I want HP to win, if you wanna know why, read the many posts out there telling you why it's good for HP or DELL to take over 3PAR, although I don't like the extremely rich valuation.)

This brings me to think : What's so good about 3PAR? Data Storage Technology (DST) for High End Data Centre. You try to understand them literally will do. Just DST tells you nothing on why DELL and HPQ wanna buy 3PAR leh.

The growing demand for Data Centre and Cloud Computing are the reasons why both giants have to outdo each other.


Data Centre is just a place where you store computer servers to hold information (i.e. email, webpages, photos.....) Imagine this is like a solar farm with many solar panels to garner sunlight and convert to electricity. If you want to generate more electricity, you just need to have bigger farm, more farms to spread out your solar panels to generate more electricity.

You will ask, where got so many emails and photos? It's true that a person's effort will be limited, but you now have millions of people using facebooks, uploading millions of photos into websites everyday. Millions of people keep on uploading videos into Youtube. Millions of Emails being generated everyday and nobody bother to delete coz we don't need to pay gmail or hotmail for these emails. Surely all these have to store somewhere, and the place is NOT called internet. These data is stored in Data Centres.


Like I say, Data Centres are made to hold hardwares such as servers, routers, switches and whatsoever. Just a warehouse for big computers that are running 24/7, (cuz internet don't have rest day).

K, I blah blah blah for so long, what's my trade? Data Centre companies? Haha...

The information I tell you upfront has nothing to do with this stock really. But cuz I know alot of people out there don't know what is data centre and apparently I work in a business that started to venture into data centre and doing really well. Just for some macro background for the global trend going forward.

My pick:-

EMC Corp (EMC)
Current Price : $18.37 (as at 27 Aug 2010 Market Close)

EMC is an IT company that provides information infrastructure and virtual infrastructure technology and solutions. (Chim right, go wiki lor, wish you best of luck to comprehend)

This company earns $1B on $14B revenue in 2009, translates to Net Profit Margin (NPM) of 7%. Wah, Not High, quite low actually.

EMC currently has a market cap of $38B. But this company has a big listed subsidiary, called VMWare Inc. (VMW). If you read all those recent posts on 3PAR, why DELL and HPQ wanna buy 3PAR, it's not because 3PAR is a Data Storage Tech Company (which it really is...). The reason for this M&A is because of Cloud Computing. Abit no link, but that's the truth...

Sian, I now have to explain what is cloud computing.

Do you have a small satellite dish in your home that acts as base station so that you can make phone calls? Do you have your own generators so that you have electricity to use? OF CUZ you don't

Cloud Computing is like Telco and Utilities. Build the infrastructure, then charge a subscription plan (Telco) or Usage Billing (Utilities) to recoup the capital expenditure and earn a profit.

Cloud Computing can be defined as access of computing resources that are typically owned, operated by 3rd party provider on consolidated basis in data centre.

Why cloud is cool and attractive. Other than freeing you from having to buy servers, infrastructure and maintain by themselves, it also allows you to accommodate sudden surge in demand of computer resources by tapping on the common resource pool. Furthermore, softwares and services can be accessed from the internet. Cloud Computing also aids to data recovery and energy conservation.

K, now you have some idea on cloud, I can tell you about EMC's stake in VMW.
VMW is a cloud computing company, specialising in virtualisation. Means you can run MAC OS on Windows Servers, by creating multiple segments within a server to be shared by different users.

So what virtualisation does? Data Centre can buy server, ask VMW to create 10 virtual servers within the server with 10% capacity each and sell the virtual servers to small businesses to host their email and website at a fee. The level of support and services is world-class but for the small business, it will never be possible if they were to do it alone. If 10 small biz each buy 10% space, the server will then be fully dedicated. Each small business can access the virtual server (which is a pre-designated compartment of the server) through internet and manage it.

K, this is the simple illustration. If you have the opportunity to talk to me personally, I will tell you more on the concept of cloud.

Anyway, so it seems that VMW has a good business model, cuz of the technology. The market cap of VMW is currently $32B, as at 27 Aug Market Close.

EMC owns 27million of Class A shares and all of Class B Shares (300m) of VMW.
VMW only have 112m Class A shares and 300m Class B Shares.
Class A and Class B have the same rights, other than voting. Class A = 1 vote, Class B = 10 votes

So EMC owns 80% of VMW and 97% of the voting rights. Effectively, EMC just decides for VMW la, VMW minority shareholders totally no say lor.

K, so earlier I say EMC market cap is $38B, owns 80% of VMW (80% x $32B) = $25.5B
So EMC's own business is worth $12.5B ($38B - $25.5B)

What!!.. EMC's own business is worth $12.5B?

So, the financials of EMC after stripping out VMW?:-

Revenue : $12B ($14 - $2B)
Profit Before Tax : $1.1B ($1.3B - $0.2B)
Net Profit: $0.8B ($1B - $0.2B)

So you are paying $1 for $1 revenue, 16x PE (all based on 2009 figures)
For IBM, you pay $1.60 for $1 revenue; Microsoft, you pay $3.20 for $1 revenue.

The trade here:-

Frankly I don't have 1, the trading range for this stock is tight, $15.39-$20.97.
So at $18.37, it is roughly at the middle of the 52 weeks range.

I just want to raise awareness in this company as I can see this company grows over the years, particularly their stake in VMW is attractive. It seems quite recession proof, the 50 days moving average and the 200 days moving average has been steadily on the rise.

So what your wiki on EMC tells you? Never mind if you don't understand, just know the following:-

We will have more and more information to be stored going forward, so Data Centre has to be more efficient. Virtualisation sounds like a good way to go. (If you need more readings on cloud computing companies, you can refer to ticker CRM (salesforce.com), they are VMW's biggest competitor)

In conclusion, I will write more blogs to take up more data storage space in order to continually fuel the growth of data centre and the need for cloud computing.

Haha....

I on the Move

My second post brings me to comment on the carnage in the market.

Frankly, I never like rising stock market. Coz I don't believe in buy high and sell even higher. To me, that's more about luck. The luck in which there are people willing to transfer their wealth to you.

I ain't no Schadenfreude, but I look to analyse before finding value in a stock. Here's my next value play:-

Google Inc. (GOOG)
Current Price : $451.39 (as at 24 Aug 2010 Market Close)

K, so I guess you know what this company does.
You have used Google before and also Google Map, Youtube and Blogspot.
All these are under the Google umbrella.

And we all must admit, we never directly pay a single cent enjoying Google's innovations, but this company has a positive operating cash inflow of $9B in 2009, earns $6.5B in 2009 on $23B revenue.

To put this to perspective, they earned a net profit margin (NPM) of 28%. Wah, that's quite high lor. IBM only earns a NPM of 14% in 2009.

So how Google earns money if all the users don't even need to pay.

ADWORDS. The ultimate money spinner. It's a long explanation, so please refer to Wiki (http://en.wikipedia.org/wiki/AdWords). In short, it's pay per click ads.

Anyway, Adwords made up 95% of Google's revenue and contributes to 98-99% of GOOG's bottomline.

So can Google continue to grow? If so, how?

If nothing really happen (means no new product la), Google will still continue to grow based on growing numbers of internet users in the world, especially in China.

So need to depend on China la. But in China, Google is little brother only, not the ringleader.

Their market share is 24%, compared with Baidu's 70%. (http://www.expressindia.com/latest-news/Google--s-market-share-drops-in-China/652470/)

If they can't breakthrough this barrier and increase market share, their venture into China will just dwindle in the years to come. And frankly, I don't see them breakthrough.

No China growth, can GOOG still work? Maybe ANDROID is the answer.

Android is free also, no cost to the phone companies using this as their mobile OS platform, like Samsung, HTC and others. So the phone companies just need focus on the phone's hardware design will do, Google will spend their own resources to continually develop Android.

Free again? No money to earn?

K, this led me to the following Questions.


1) How many computers are there in the world?

2) How many mobile phones are there in the world?

3) How many smartphones are there in the world?


Answers:-

1) 1 Billion
2) 4 Billion
3) About 250-600 Million, expected to grow to 1-1.7 Billion in 4 years
(the range is so big depending on the source you use, but I always use the more disadvantaged numbers to run my analysis)


The market share (2010, 2009) is as follows:-

Symbian (Nokia) 41% 51%
RIMM 18% 19%
Android 17% 2%
Apple 14% 13%
Microsoft and others 10% 15%
(http://www.gartner.com/it/page.jsp?id=1421013)

You see the growth in Android? Somemore taking market share from leaders and small players. So Cool!!...

But don't let this giant growth misled you. Does Google earn more by people adopting Android? Don't forget, I already tell you Android and everything Google has to offer are free for end users.

What is Android all about?
It's a invitation to phone companies to make more smartphones that can access internet with ease, with better user experience.

Why?

Cuz this is called growing the pie. With 1 Billion Computers users, the growth has slowed down over the years. You can't really expect everybody to use more than 1 computer at the same time, which is limiting growth.

Personally, I have 4 computers at home, but at no time all 4 computers are used as there are only 3 computer users, and not all of us are at home all the time to use these computers.

So how? No computer user means no people searching on Google, means no people click on Ads and means Google don't earn money.

Then, the smart people of Google, instead of waiting for Samsung, HTC and others to divert resources to develop their own in-house OS, give the phone companies free access to Android, spurring them to foray into the smartphone market.

You see the point now?
People on the move can now surf internet, search on Google, watch on Youtube.
The increased internet accessibility should translate into higher ad revenues for Google.

Don't forget, you don't need to use Android to surf the internet, you can use Blackberry, Iphone or others to search also. What Google wants is more people using the internet while being away from their computers. Android is to facilitate this growth

Here is the hypothesis:-

If 1 Billion PC users + 250 Smartphone users = $23B Revenue
Likewise, 1 Billion PC Users + 1 Billion Smartphone users in 2014 = $36.8B

For prudence in calculation, we peg the increase at $10B.
So what is the cost associated with this $10B revenue increase?

Manpower? Not Really
Selling and Distribution? Maybe, but not likely (Cuz this is not AMZN)
R & D? Very Likely, so I will use half of the 2009 R&D cost as an estimate ($1.4B)
Cost of Sales? I will use the COS% of 38% in 2009 as an estimate ($3.8B)
Taxation? The effective tax rate is 22% on PBT in 2009 for Google ($1B)

So the PAT is $3.8B on the $10B revenue.

So what is the compounded annual sales growth and compounded annual earnings growth for GOOG all the way up to 2014?

Sales = 9%
Earnings = 12%

The outstanding shares is 319Million. Assuming no share increase, from my simplistic calculation, the PE in 2014 should be $451.39 / (($6.5B+$3.8B)/319M) = 14x

14x for 12% Earnings growth company is not really ex.
(Please note that at $451.39, the CASH on balance sheet is $30B, translating to cash of $94/share)

If you strip out cash, the PE in 2014 is 11x ($451.39-$94)/(($6.5B+$3.8B)/319M)
Forward PE lower than Growth is good value.

So what's the ST/LT deal here?

ST) I like it at this price, coz I firmly believe this stock is worth $500.00 at the very least. So there is a 10% price appreciation from here.
The 30 days moving average for 3 months (Late May to Late Aug) is between $472-$520.
The 30 days moving average for 1 month (Late Jul to Late Aug) is between $472-$488.
We are already buying at discount.

LT) If you can't flip the stock within 1-3mths to earn 6-10%, then hold it for 12months, wait out for $500 and above. This is on the backdrop that Smartphones will continue to grow and so will Google's Ad revenue.

To wrap up, I give you 2 trivials:-

1) Do you notice now that there is at least 1 popup ad at the bottom while playing youtube video? (Remember, for Google, Ads = $$$)

2) Why would Network System Solutions Giant (Cisco) wanna do a tablet (Cius)?
Why World No. 2 and No. 3 Computer Maker (Dell and Acer) wanna release smartphone (Aero and Liquid)?

Answer : All because Android is free and available.


Google entices other industry leaders into market even if these people have no real niche in that field. (Remember, these people don't sell phone in the 1st place)
GOOG's aim = Just to grow the pie by offering freebies, then take a bigger bite out of the enlarged pie.

SMART.

1st Pick, New Beginning

Hi all,

This is a blog where I post my analysis and recommendation for my own reflection purpose. Hee, means for people out there, it's just for reference.

So let's start:-

Warner Chilcott (WCRX)
Current Price : $29.43 (as at 23 Aug 2010 Market Close)

This is a pharma company which has acquired P&G's prescription drug biz in 2H09.

Interestingly, they announced on 20 Aug 2010 (after Market Close) that they finish the financing portion of their special dividend payment.
(http://www.businessweek.com/ap/financialnews/D9HNGL100.htm)

My goodness, their special dividend is $8.50 to be paid on 8 Sept 2010 for shareholders whom hold the stock from 30 Aug 2010 till 8 Sept 2010 (Becuz of Due Bill Period, otherwise normally no need to hold for so long 1)

Not only is the special dividend super attractive (28.9%, assuming the price don't tank after the dividend payment, which is quite unrealistic, haha), their PE oso...
It is trading at a forward PE of 8.8x. (Based on company's guidance of $3.25-$3.35)
The P&G acquisition turns out quite well and is continuing to help the company.

So what's the trade here?

2 things:-

1) Assuming the stock stay at this level ($29.43) till 8 Sept 2010, and drop $8.50 on 9th Sept to $20.93. K, you earn nothing really from the dividend, but you are left with a stock of 6.25x forward PE.

The 12mths moving average ranges from $23-$25. Before the news of special dividend payment is out in late July, the stock trades at around $22.06-$25.12 in the month of June 2010.

If the stock is to fall back to the low of $22.06, you would have earned a net $1.13 ($8.50+$22.06-$29.43) worth of dividend only, the yield being 3.84% ($1.13/$29.43) for a holding period for about 14 trading days.

Frankly, it's not a bad yield. If the stock don't fall as much, you gain more.

2) With such a big cash payment in 15 days time, it can be attractive to anyone to buy the stock nearer to the date (30 Aug 2010). So Run-up is expected over the course of these few days.

Trade Summary: Buy in anticipation of run-up for a short term trade, to sell on 26/27 August to capitalise the run-up. If run-up doesn't happen, you can fall back on a stock trading at a forward PE of 6.25x or even lower.

You Decide.