Reviewing Our 2013 Picks: MPEL, MSG, TTWO, YHOO, FL

5th Street Research

5th Street Research’s Buy Recommendations Easily Outperform The Market

Having been away from the market with other obligations for the past month or so, I thought it would be interesting to review our 2013 picks before making any new recommendations in 2014. Since launching in late September, we have published buy recommendations on 5 different companies: Melco Crown Entertainment (MPEL), Madison Square Garden (MSG), Take Two Interactive (TTWO), Yahoo (YHOO), and Foot Locker (FL). While the S&P 500 and Nasdaq finished out the year strong, our picks have easily outperformed the broad markets, returning an average of 16.5% vs. 7.5% for the S&P 500. A brief update on each of our recommendations below…

Melco Crown Entertainment (MPEL): City of Dreams Manila and Studio City Macau

Buy Recommendation
Published 9/27/2013: The Best Bet in Macau is Melco Crown Entertainment (MPEL)
Price Then: $31.60
Price Now: $42.99
% Change: +36%


Macau as a whole has been the recipient of quite a bit of attention around here since launching, and for good reason… Macau has been the world’s fastest growing economy over the past decade with average annual GDP growth near 15%. It generates more than 7x  the revenue of Las Vegas and is the gambling epicenter of the world. Melco Crown’s City of Dreams is one of the most impressive properties in Macau and dominates the ultra important “Premium-Mass” market in the region. MPEL’s revenues and profits stand to explode over the next two years as they open two new massive properties, Studio City Macau and City of Dreams Manila. Studio City boasts the best location on the Cotai Strip, Macau’s version of Las Vegas Blvd., and is poised to be one of the biggest beneficiaries of the continued growth of the Macau. Despite the 36% gain since our initial recommendation of their shares, I continue to view MPEL as a strong buy for the foreseeable future.

Madison Square Garden (MSG): Hidden Assets and Rising Sports Franchise Valuations

Buy Recommendation
Published 10/11/2013: Significant Value in Madison Square Garden (MSG)
Price Then: $57.54
Price Now: $56.72
% Change: -1.4%


Madison Square Garden has been the laggard of our model portfolio thus far, currently down 1% since our original recommendation. The New York Knicks have gotten their season off to a terrible start this year, however there has been little to no other news or events out of MSG in the past 3 months. With the Madison Square Garden renovation project finally complete, cash flows and earnings will start becoming normalized for the first time since their IPO. The real story here though remains the hidden value of the company’s array of assets. As the owner of the Knicks and Rangers, MSG Networks, Madison Square Garden Arena and its associated air rights, and numerous other venues/ assets; MSG remains greatly undervalued when using a sum of the parts analysis. This one may require some patience, but I continue to view MSG as a strong buy.

Take Two Interactive (TTWO): Massive Cash Hoard, Best IP Portfolio in the Industry

Buy Recommendation
Published 10/15/13: GTA V Makes Take Two Interactive (TTWO) a Steal
Price Then: $16.94
Price Now: $17.80
% Change: +5%


Although shares of Take Two have appreciated since our recommendation, they have lagged the market, which is somewhat perplexing after Grand Theft Auto V shattered analyst estimates and became the highest grossing entertainment release ever. While analysts anticipated TTWO would sell 18 million units of GTA V during their most recent quarter (a number I reported would prove to be very low), 25 million copies were actually sold. TTWO stock failed to jump on this news though, they actually traded down sharply the next few sessions as management failed to give much clarity regarding their future pipeline/ next blockbuster release. TTWO’s haul from GTA V should leave the company with more than $1B worth of cash on their balance sheet. With a market cap of only $1.6B, this cash hoard is substantial. Take Two also owns arguably the most valuable intellectual property portfolio in the industry with proven franchises such as GTA, BioShock, Red Dead Revolver, Max Payne, and NBA 2k. Despite management remaining mum on the next big release for now, they have an amazing track record when it comes to making hits. Everything considered, I see fair value for Take Two stock between $22-$24, at least 25% upside from today’s closing price. I maintain a buy rating on shares of TTWO.

Yahoo (YHOO): Alibaba Stake Continues to Create Value, Meyer on Acquisition Spree

Buy Recommendation
Published 10/15/2013: Amended Alibaba Agreement Makes Yahoo (YHOO) More Attractive
Price Then: $33.38
Price Now: $41.03
% Change: +22.9%


As Alibaba continues their rapid growth, Yahoo continues to reap the rewards. Despite a core business that is still struggling to gain momentum, Yahoo had a great 2013 with shares more than doubling during the year. New CEO Marissa Mayer has been on quite the shopping spree since taking the helm, with Yahoo acquiring 28 companies in 2013, including a $1B purchase of Tumblr. Mayer has made it clear that she intends to ensure Yahoo remains the world’s homepage while also placing a large emphasis on mobile and content creation. In a demonstration of their commitment to content, Yahoo recently hired Katie Couric as a ‘global anchor’ and released a new News Digest App. It is yet to be seen how any of this efforts will pan out, but if nothing else, Mayer has been ambitious. YHOO should still see some upside from Alibaba as it nears its inevitable IPO and could get a lift from the news when announced, but shares aren’t as much of a bargain as they were 3 months ago. If you already own YHOO stock I wouldn’t be in any rush to sell it, but I wouldn’t be in any rush to go out and buy more either. I view shares as undervalued still with 10-15% upside, but would need to see core operations start to show signs of improvement before considering YHOO a strong buy at current levels.

Foot Locker (FL): Buy into Nike, Adidas, and Under Armour’s Growth at a Discount

Buy Recommendation
Published 10/26/2013: Try Foot Locker (FL) on for Size
Price Then: $34.20
Price Now: $41.11
% Change: +20.2%


Last but certainly not least of our recommendations during 2013 was Foot Locker. The athletic apparel industry has been one of the strongest performers of the past 25 years. Nike is one of the all time great growth stocks and shows no sign of slowing momentum. Adidas and Under Armour fit the same mold. Justifiably so, all three of these companies trade at lofty valuations. Foot Locker is the largest retailer of athletic shoes in the US, dominating the market with the portfolio of brands including FootAction, Eastbay, Champs, and of course their namesake stores. Management has proven to be shareholder friendly, approving a $600 million buyback and an 11% dividend hike last year. While many retailers reported lackluster earnings in their most recent quarter, Foot Locker easily exceeded both earnings and revenue estimates. Despite all of this, shares still trade at a significant discount to retailers such as Finish Line and Dick’s Sporting Goods. The athletic apparel industry has shown no signs of slowing, and Foot Locker is as well positioned to benefit from this trend as anyone. As long as they continue to trade at such cheap valuations relative to their peers, I will continue to maintain a buy rating on shares of FL.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Foot Locker (FL) Stock Jumps After Beating Estimates


Foot Locker (FL) shares rise after reporting strong revenue and earnings growth

Fueled by stronger than expected same-store sales growth, Foot Locker (FL) reported 3rd Quarter revenues and earnings that easily exceeded analyst expectations, sending shares to a new 52 week high this morning. Foot Locker recorded non-gaap earnings per share of $0.68 on $1.62 billion in sales as same-store sales increased by 4.1% year-over-year, bringing their eps to $2.04 on $4.71 billion in revenue for the first 9 months of 2013. Foot Locker continued their trend of closing unprofitable domestic stores, consolidating in the US while expanding their store base overseas. The company closed 16 stores in the US market while their international store count grew by 208 year-over-year.

During the conference call, management was quite upbeat about the prospects for the current quarter. They are expecting same-store sales growth in the low to mid single digits, currently running in the mid-single digit range for Q4 thus far. CEO Ken Hicks stated that new athletic apparel product launches have been well received so far this quarter, led by Nike (NKE) and their Jordan brand, and expects launches to remain strong throughout the holiday season. Foot Locker also said the implementation of Runners Point Group, acquired earlier this year, has been progressing well. Runners Point Group was profitable for the quarter and management believes they have yet to begin to drive the margin improvements that they see themselves generating there. FL sees margin improvements in current Foot Locker and Footaction stores coming from future price mark-ups, an improved product blend, and better performance from their private branded apparel products.

Foot Locker (FL) stock is a buy at current levels, Management Agrees

Foot Locker remained aggressive with their share buyback in the 3rd Quarter, repurchasing nearly 2 million shares of stock at a cost of $67 million during Q3. FL has bought back almost 5 million shares total in 2013 at a cost of $167 million while simultaneously paying an $0.80 annual dividend. They have $423 million remaining on their current buyback plan and are well ahead of pace to complete it within the allotted 3 years. Their balance sheet remains extremely strong with cash and short-term investments totaling $796 million versus only $140 million in debt.

As of publication, FL stock is up 4% on the day, setting a new 52 week high. I have had a strong buy recommendation on Foot Locker since I published my analysis of them last month with a long-term price target of $58. My thesis is based on the continued strength of long-term trends in the athletic apparel sector, Foot Locker’s leading position in the US athletic shoe retail market, and an assumed gradual appreciation towards fair value (FL currently trades for significantly less than their peers in the athletic apparel industry using just about any valuation metric). I continue to view Foot Locker as a strong buy and one of my top picks in today’s markets.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Foot Locker (FL) Stock Near 23 Year High


Foot Locker (FL) Share’s Rally Should Extend

Less than 3 weeks ago I recommended buying shares of Foot Locker (FL) as a means of capitalizing on the growth of the athletic apparel sector at a much cheaper valuation than Nike (NKE), Adidas (ADDYY), or Under Armour (UA) can be purchased at. Shares are up 9% since then and are now approaching their highest level since 1990. In August Foot Locker traded as high as $37.85, and we will be watching closely as the stock looks to take out that level in the next few trading sessions. In the past 3 months FL has tested and bounced off of their long-term uptrend line multiple times, a very bullish sign for investors. Very similar to what we’ve seen with Yahoo (YHOO) this week, Foot Locker has a great deal of upside above their 52 week high from a technical perspective with virtually no overhead resistance. More importantly they also possess the fundamentals to warrant significant appreciation. The athletic apparel sector as a whole is thriving right now with NKE, ADDYY, UA, Dicks (DKS), and Finish Line (FINL) all at or near all-time highs. Foot Locker the strongest balance sheet of the group, trades at the lowest multiples, and has a buyback program in place that will account for nearly 10% of outstanding shares. FL remains a strong buy and one of our top picks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Try Foot Locker (FL) On For Size

Foot Locker (FL): The Smarter Way To Invest In Nike (NKE), Adidas (ADDYY) and Under Armour (UA)

Despite the amount of technology companies that have emerged in the 21st century, two of the greatest growth stories of the millennium are those of Nike (NKE) and Adidas (ADDYY).  They had a combined market cap of $19.2 billion on 1/1/2000, today that number has swollen to $92 billion. Under Armor (UA) has also emerged in that time, and sports a $8.5 billion valuation. The athletic apparel industry has been one of the most successful sectors of the past 20 years and continues to grow at a brisk pace. With the world becoming more and more educated everyday on the importance of physical fitness, the popularity of sports rising throughout the world, and the continued emergence of the middle-class consumer in Asia, this is an industry that will continue to outperform for years to come. I expect one could do reasonably well for themselves by simply buying a basket of stock in NKE, ADDYY, UA. However, I believe one can invest in these companies’ continued growth at a better price by simply buying shares of Foot Locker (FL).

Foot Locker dominates the retailing of performance and casual athletic shoes in shopping malls and online in the United States. Outside of Finish Line (FINL), Foot Locker’s portfolio of brands contains nearly every other popular mall-based athletic shoe store, consisting of Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports,  and Footaction Their online operations are composed of the company’s aforementioned stores’ websites and Eastbay. Foot Locker ended Q2 with 3,495 company owned stores, 2,482 in the US and 1013 international locations, reflecting a closing of 42 storefronts in the US and an increase in store count internationally by 202. This is a positive trend for shareholders as the company closes unprofitable stores in the over-saturated US market and expands its presence overseas where there are far greater opportunities to grow revenues and profitability. Foot Locker also recently began franchising their stores in the middle east and South Korea, in the past year the number of such stores has nearly doubled to 69.

Foot Locker’s $600 Million Buyback Plan, Shareholder Friendly Management Team

Foot Locker’s management team, led by CEO Kenneth Hicks, has a strong track record and a history of undertaking share-holder friendly initiatives. In February Foot Locker presented their 2013 Capital Allocation Plans to investors, announcing an 11% dividend increase to $0.20 per quarter and a $600 million buyback program extending through January 2016, replacing their previous $400 million program under which they had spent $129 million since 2012. With a market cap of $5 billion, the new buyback program will the number of shares outstanding by more than 10% , thus increasing FL’s earnings per share. The current program is well ahead of schedule with $100 million worth of shares repurchased during Q2 alone. I believe management will continue to buyback aggressively with FL shares currently trading $1 below the average price paid to repurchase the first $100 million worth of shares under the program. This could lead to a future hike in their buyback plan being announced sooner than later, certainly a potential positive catalyst for shareholders to watch out for. With a net cash position of $700 million and levered free cash flows over $300 million annually, Foot Locker is in an extremely enviable financial position, that gives them the flexibility to keep returning significant amounts of capital after reinvesting for growth.

Foot Locker Is Undervalued Relative to Their Peers in the Athletic Apparel Sector

Despite their strong balance sheet, dominant position in mall-based and online retailing, and efforts to unlock value for shareholders, shares of Foot Locker currently trade at a steep discount to rest of the athletic apparel sector. Using any valuation metric Foot Locker trades at a lower multiple then their peers, fellow retailers and apparel companies alike.

As we can see pretty clearly, Foot Locker has at the lowest sales and profitability multiples of the group and trades at a huge discount to their peers in terms of enterprise value/ free cash flow.

FL Is A Buy At Current Levels

Foot Locker is a long-term buy at today’s closing price of $34.20 per share. This company has numerous things going for it that make it one of our top picks at present. Athletic apparel has been one of the strongest and most consistent growth sectors of the past 20 years. While most clothing designers and retailers are wildly susceptible to changes in fashion and styles, sports never go out of style. Almost anyone playing soccer, basketball, baseball, football, exercising in their local gym, or jogging in their neighborhood, is doing so in sneakers and clothing made by Nike, Adidas, Reebok (owned by Adidas) or Under Armour. As NKE and ADDYY go, so does FL since 1/1/2000, with NKE up 534%, ADDYY up 368%, and FL gaining 416%.

As a believer in the long-term sustainable growth prospects of the athletic apparel industry, therefore a believer in Nike, Adidas, and Under Armour, I view Foot Locker as a way to gain direct exposure to these businesses fortunes at a steep discount to their own valuations.  Management has a proven track record of utilizing capital effectively and is aggressively buying back shares, which should unlock shareholder value long-term. They also pay a not insignificant dividend yielding 2.4% annually. All things considered, Foot Locker should be trading at valuations at least in line with their peers if not in excess of them. The group average EV/ FCF of 32.9 is rather high. Lets assume long-term that a 18-22 would represent a more normalized range. If Foot Locker can grow their free cash flow by 8.5% per year for the next 3 years, a number we think is very reasonably attainable, they will be generating  FCF of $400 million per year by 2016. Based on the low-end of our conservative valuation range (EV/ FCF= 18), I believe Foot Locker will have an enterprise value of at least $7.2 billion within 3 years, representing an upside of 68% from today’s price or $58 per share. Our price target becomes $61 if dividends are taken into account.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

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