Wednesday, September 21, 2005

The World Poker Tour Struggles Continue

Since our sour take on the World Poker Tour (NSDQ:WPTE) back on August 29th, the stock has plunged another 25% to below $9/share as investors digest the future of the franchise. continues to disappoint and analysts are taking any potential revenue from the site out of their forecasts completely. Thus, WPTE is quickly becoming a televised-tournament pure play. Unfortunately it appears that the World Poker Tour tournament ratings are starting to taper off.

In addition, the entire poker industry is losing its steam after PartyGaming (LSE:PRTY) hinted that the boom in the popularity of online poker may be starting to wane.

The implied brand value of the World Poker Tour should decide whether WPTE is a good buy at these levels. A conservative guess is roughly $50 million or $2.50/share. With a cash value of over $1.50/share and the televised tournaments breaking even, we'd be interested in the stock around $5/share.

Friday, September 16, 2005

Strong Buy of the Month - LUV

Southwest Airlines (LUV)
Current Price = $13.80
12 mo target = $18.00

Investing in the airlines, are you nuts? But there is one gem among this mess. We have been watching Southwest Airlines (NYSE:LUV) with interest the last couple weeks as the airline industry has dropped over oil concerns. But why Southwest? They have 85% of their oil hedged at $26/barrel until 2008! In other words, Southwest need not worry about the price of oil for another 3 years. On the otherhand, oil has surpassed labor costs as the #1 expense for all other airlines. Even in the face of increasing labor, fuel & maintenance costs, Southwest margins are actually widening in 2005.

This has been known for quite some time, though. But two events happened yesterday that has turned our interest into a screaming buy:

1) Delta & Northwest filed for Chapter 11 bankruptcy after yesterday's close.
2) OPEC is expected to increase its production quota when it meets Monday.

Southwest Airlines is dominating the price wars against the legacy carriers, driving them into bankruptcy. As more carriers file for Chapter 11, Southwest will continue to steal marketshare & increase routes. Last year Southwest bought several routes from bankrupt ATA Airlines in Chicago. And with many carriers strapped for cash, Southwest should be the most likely candidate to buy new routes from Delta & Northwest.

We have a strong buy recommendation on LUV, reflecting our belief that it is the financially strongest and operationally best positioned U.S. airline, as well as our expectations of increased investor interest in the sector if industry conditions improve. LUV has posted 32 consecutive years and 57 consecutive quarters of profitable operations, and we see the quality of those earnings as high, since LUV has no pension issues. In our view, LUV has ample cash, and its debt to total capitalization is significantly below peer levels. We think these measures warrant a premium valuation to the S&P 500.

With little debt, a conservative 23 PE, a 14.5% forecasted earnings growth rate, coupled with today's catalysts, its time for Southwest to make a run.

Wednesday, September 14, 2005

Has Online Poker Peaked?

PartyGaming (UK:PRTY) shares lost a third of their value last week after the online gaming company hinted that the boom in the popularity of online poker may be starting to wane less than three months after an IPO raised just under $8 billion from investors.

Results on the surface appeared quite positive. PartyGaming, owner of the popular, said first-half after-tax profit climbed 23.8% to $171 million, with EBITDA excluding share option and IPO expenses up 70% to $257.7 million. Revenue climbed 81% to $437 million on strong growth in poker. The number of daily active players rose to 123,447 from 60,738.

So why did investors flee the stock leaving the company with $4 billion less in market cap? PartyGaming announced that it expected slower growth rates from its online poker business in future quarters. In addition, although new sign-ups were in line with expectations, more casual players joining its site weren't spending as much as its initial core of users. The yield per active player per day slid to $17.80 from $19.20. PartyGaming said it would lower its spending on advertising and marketing and prioritize customer retention.

In addition, PartyGaming has faced increasing competitive pressures in the key US market. Part of the reason is the onset of competition from WPT Enterprises (Nasdaq:WPTE) and Sportingbet (LSE:SBT), which runs the Paradise Poker website. With only 15% of its active players from outside the U.S, the group is seeking to expand into other countries as well as diversifying away from its core poker market.

With this valuation correction, should you now buy shares of PartyGaming? Unfortunately you don’t even have that option. Because hosting online poker in the US is illegal, Americans can not even hold shares of the London-based stock.

Friday, September 09, 2005

Complaining About the Price of Gas

“There are going to be questions about what major oil companies are doing with all the resources they’re accumulating…they can’t escape that.”—U.S. Senator Pete Domenici, WSJ

Now the witch-hunt begins. With gasoline prices rising in the seven days since Hurricane
Katrina disrupted a tenth of the domestic refining capacity and much of the energy transportation infrastructure, politicians whose previous “fact-finding” missions to that hurricane-prone region of the country had no doubt been limited to touring the newest casino, are doing what they do best: they’re blaming somebody else.

The above-quoted Senator Domenici’s official web site, for the record, has a handy “On The Issues” segment devoted to four topics: Health Care, National Defense, Taxes/Economic Growth, and Water.

Energy—specifically why energy policy in this country has promoted truck traffic at the expense of railroad traffic and protected car companies from including SUVs in automobile mileage standards—is nowhere to be found in Senator Domenici’s Fab Four topics.

But now that gasoline prices are up in his district—a natural occurrence when 10% of refining capacity gets shut down for a week—Senator Domenici is all over this one.

As will be, I’m sure, my own Senior Senator, Chris Dodd—whose Kennedyesque Big Hair looks really terrific on TV when he starts working up his righteous indignation at whatever it is he wants to get on TV for.

Meanwhile, here at the local Starbucks they sell “Ethos” brand bottled water for $1.85 a bottle.
The bottle contains 1.5 pints of water from the Tomhicken Mountain Springs—which happens to be in Pennsylvania, near Pottsville. Cost: $1.23 a pint.

There are 8 pints in a gallon.

So the Starbucks customer is paying about $9.85 a gallon…for water that comes from a self-replenishing spring, gets put into bottles and shipped to the store as is.

Yet that same Starbucks customer is going to complain bitterly to Senators Dodd and Domenici that it now costs $3.25 for a gallon of gasoline that has been shipped via crude oil tanker from depleting oil fields in Saudi Arabia across 3,000 miles of ocean to an offshore tanker port, pumped through pipes to a refinery in the Gulf Coast, refined via an energy-intensive distillation process into a variety of fuels—jet fuel, diesel fuel, kerosene and even asphalt, not to
mention three types of gasoline—and then shipped by pipeline to distribution terminals from whence it has been loaded into tank trucks and hauled up an Interstate Highway to a gas station for the Starbucks customer who is complaining about the High Cost of Gasoline to Senators Dodd and Domenici……

and doesn’t think twice about paying $9.85 for a gallon of water.

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