Option Assignment – Husky Energy (HSE)

I wrote a Nov 16 $30.00 covered call option on Husky Energy Inc (HSE.TO) last month and collected a premium. This option expired in-the-money with Husky’s Friday closing price of $30.89 and was exercised closing my position in HSE.
The timing was interesting as Goldman Sachs changed their “sell” rating to “neutral” a couple of days after I wrote the options, raising the price target to $35.00. This caused the stock prices to rise (although they did fall back down a bit for a couple of weeks after that) and instead of buying back the call I had written, I let it expire as I had been thinking of selling this stock anyway.
I held HSE for approximately 3 years and generate a decent amount of passive income from it where my yield-on-cost was 4.20%. However, due to stagnant dividend growth, I wanted to sell the stock. Instead, I decided to try generating more income with the risk of being called to sell – which is what this turned out to be. I have no regrets on the option being called since I made a good profit on the investment and am leaving happy.

About Husky Energy (from Google Finance):

Husky Energy Inc. (Husky) is an international integrated energy company. Husky operates in three segments: Upstream, Midstream and Downstream. Upstream includes exploration for, development and production of crude oil, bitumen, natural gas and natural gas liquids. Midstream includes marketing of the Company’s and other producers’ crude oil, natural gas, natural gas liquids, sulphur and petroleum coke, pipeline transportation and processing of heavy crude oil and natural gas, storage of crude oil, diluents and natural gas and cogeneration of electrical and thermal energy. Downstream includes upgrading of heavy crude oil feedstock into synthetic crude oil, refining in Canada of crude oil and marketing of refined petroleum products, including gasoline, diesel, ethanol blended fuels, asphalt and ancillary products, and production of ethanol and refining in the United States of crude oil to produce and market gasoline, jet fuel and diesel fuels that meet United States clean fuels standards.

Is Cisco a Buy?

Cisco Systems Inc. (CSCO) needs no introduction. It is the networking equipment giant in the technology sector which has dominated the field for over the last three decades. As someone who works in the industry, I decided to write some of my thoughts on Cisco based on the interest due to the recent activity in the company. I work for a micro/small cap player which is Cisco’s competitor in the SDN (Software Defined Networking) field.

Cisco CSCO

Recent Activity

Cisco fell 12% on Nov 14, 2013 after the release of earnings and the lowering of forward guidance. The stock has managed to recover a bit since then. The company is facing tremendous revenue hurdles in the emerging markets due to multiple reasons. Even after the correction, the stock is up over 10% YTD. The good news for value and dividend investors is that the stock now yields over 3%. But is this a good entry point for Cisco or are we at the beginning of the fall of this giant?
Following the earnings release and low guidance, Cisco was downgraded from a number of analysts. Click here for the list of downgrades.
For a dividend stock analysis of CSCO from Passive Income Pursuit, click here (old, from May 21, 2013).

Bullish Case for Cisco

  1. Still a leader: Cisco still has innovation at the core to its business and still making great products. Its flagship products are expensive, but customers are willing to pay for it.
  2. Insieme Networks: Cisco’s spin-in has confirmed that it is working on “application-centric” technology, which is probably SDN-related. Looking at the recent job opportunities at Insieme, there is some confusion on what the new product could be. But still, I think its a step in the right direction. There is a lot of market demand for SDN and the future is bright on that front. Other acquisitions such as Meraki, Whiptail and Sourcefire should help Cisco in the marketplace.
  3. Internet of Things: The whole field of IoT is in its infancy. Theres a lot of abstract talk on what could possibly be, but theres still some hesitation from most (except from players like Cisco).  IoT could turn out to spawn a $14T industry. John Chambers, Cisco’s CEO, is a big fan of IoT and betting big on it. My take on this is Cisco is taking a build and they will come mentality. A whole new industry will get spawned once the IoT becomes a reality. The amount of data (dubbed ‘Big Data’ in the tech world) from all the connected devices is going to explode. But data by itself is not valuable; companies need to take the Big Data and build apps or do whatever it is of value to the consumers.
  4. Financials are still good: Cisco has very low debt and plenty of cash available. They can still turn things around and return to the glory days.

Bearish Case for Cisco

  1. Expensive products: There was a time when Cisco were the trailblazers in most of the networking subcategories, and could demand any price on their products and services; but other competitors such as Juniper, Alcatel-Lucent, Avaya, HP, Huawei etc have caught up. Most competitors are now able to provide similar products and services for better prices.
  2. Smaller disruptive players are wrecking havoc: With SDN, the smaller players are able to challenge a behemoth like Cisco in the networking industry with faster turnarounds and the inertia in Cisco’s management causing lag to market entry. Virtualization tools available from VMWare are also providing budget conscious consumers to opt for non-Cisco solutions.
  3. A downward trend in revenue quarter after quarter can be spotted. Cisco has had to resort to share buybacks and similar strategies to increase its EPS numbers.
  4. Bad publicity: Cisco has been getting bad publicity in the world (due to the NSA spying scandal) and the world is starting get paranoid over using US manufactured equipment or using American services. Exhibit A. Exhibit B.
Full Disclosure: I do not own Cisco.

Chatter Around the World – 20

Chatter Around the World is a weekly link update of economics, investing, dividends and personal finance articles that have caught my eye. In these weekly updates, I also capture my blog updates and news related to my holdings.

New blog posts

Let dive into the links that caught my attention this week.

Updates from My Portfolio Holdings

Image Source: ZeroHedge

Invest & Profit From Movies – Part 2 of 2

In Part 1, we saw how investing directly in the media conglomerate, which holds the movie production studio, does not necessarily mean you profit directly from the movie-making business. As a case study, we took a look at The Walt Disney Company, where movies only make a small portion of the conglomerates revenues. In this post, we will take a closer look at investing in companies running movie theatres and screenings instead of production studios as a way of profiting from this segment of the entertainment industry.
A night out for watching movies will cost only $10-$12, so it appeals for the whole spectrum of the demographics since it provides everyone with quality entertainment including the frugal-minded person. This form of inexpensive entertainment makes it attractive to the masses. The movie theatre business is one of the segments of the economy which went fairly unscathed during the recent financial crisis, as it was considered a robust business even under recession conditions.

For the movie theatres businesses, profits margins from the ticket sales are fairly limited. The real profits, about 85% (source), come from the concession stands where popcorn is reported to have been marked up by 1,275% (source). More recenrtly, what used to be simply popcorn, pretzels, candy and cola concession stands has now expanded to full blown fast food options with immense markups as the movie theatre companies are constantly trying new products to push movie-goers to spend money. Lots of movie theatres Ive been to recently (run by Cineplex Inc) have started offering hotdogs, burgers, pizzas, chicken wings etc with huge markups.

The Players

The five largest movie theatre chains in N. America by sites and number of screens are:
Company Name
Regal Entertainment RGC 580 7,367 $3.03B $19.45 4.32%
AMC Entertaintment Private 483 5,894 ~$2.6B N/A N/A
Cinemark Theatres CNK 298 3,895 $3.89B $33.74 2.96%
Carmike Cinemas Inc CKEC 232 2,242 $538M $23.38
Cineplex Inc CGX 133 1,438 $2.64B $42.02 3.43%
I am currently invested in Cineplex Inc (see My Holdings) which has a healthy yield  of ~3.5% and is one of the duopoly (other one being AMC threatres) of movie theatres across Canada. Movie theatre business provide you to profit from the movie industry even though most of the profits are made from the food sold at these locations because of people driven to the movie theatres.

Do you invest in movie theatres? What are your thoughts on this investment strategy for exposure to the movie business?

Disclosure: I am long CGX.

Invest & Profit From Movies – Part 1 of 2

A question that has crossed many investor’s minds: How do I invest in Hollywood and profit from the movie-making business? Movies makes hundreds of millions of dollars just on opening weekends, some go on to make over a billion dollars worldwide. Money pours in from box office sales, DVD/BluRay/Online sales & rentals, merchandise and toy partnerships with manufacturers and fast food restaurants, games based on the movies etc. A lot of investors have considered exposure to this aspect of the entertainment economy in order to get a piece of the pie. It is good quality entertainment for both the rich and the frugal minded and available to the masses. Afterall, its innate in every human being: seeking entertainment.

This is Part 1 of 2 posts that covers investment aspects of the movie-making business. Normally, there is no direct way of investing in and profiting from the movie industry unless you directly get involved with a movie’s production. Even investing in the movie-maker studio does not give you a great exposure for movies per se (as we will see later in this post) since the major studios are part of bigger conglomerates that are the media giants. The following are the major players in this market:

  • Universal Studios: Owned by Comcast/NBC
  • 20th Century Fox: Owned by Fox/News Corp
  • Walt Disney Pictures: Owned by The Walt Disney Company
  • Paramount Pictures/CBS Films: Owned by Viacom/CBS
  • Warner Bros: Owned by Time Warner
  • Columbia Pictures: Owned by Sony

This means if one movie does good or even great, the overall return on investment during a quarter or year is small comparatively speaking. The major studios and their respective parent corporations are listed in an older post where I compared dividends and growth: Dividend Comparison – Media.

Case Study: The Walt Disney Company (DIS)

If we take a conglomerate such as The Walt Disney Company and look through their latest (Q4 FY2013) earnings report, the annual revenues from Disney’s segments are:
  1. Media Networks:  $20.36B. This segment is comprised of a vast array of broadcast, cable, radio, publishing and digital businesses which includes the Disney/ABC television group and ESPN Inc.
  2. Parks & Resorts: $14.09B. This segment includes 11 theme parks and 44 resorts in N. America, Europe and Asia.
  3. Studio Entertainment: $5.98B. This is the segment involved in production of movies, music and stage plays.
  4. Consumer Products: $3.56B. This segment includes revenues from licensing agreements to manufacture, market and sell toys, apparel, books and fine art.
  5. Interactive: $1.06B. This segment includes mobile and console games, online virtual worlds and other online endeavors.
The Studio Entertainment includes Disney, WaltDisney Animation Studios, Pixar Animation Studios, Disneynature, Marvel Studios, Lucasfilm and Touchstone Pictures, the banner under which live-action films from DreamWorks Studios are distributed. This segment also includes music production and live theatre events. It is clearly obvious that the impact of one single movie on a company’s annual revenue is comparatively minuscule – which explains why the impact on the studios profits from movie/music piracy is negligible, even though RIAA would have you think otherwise.

The movies that contributed to the Studio Entertainment revenue ($5.98B) over the past year are: Brave, Iron Man 3, Monsters University, Oz The Great and Powerful, Wreck-It Ralph, Planes, Cinderella Diamond Release and Lone Ranger. Not listed here in the revenues as part of the $5.98B are revenues from Walt Disney’s music business and live theatre events.
Investing in production companies may seem like a direct exposure to the movie-making business, but it is only a small drop in the ocean that makes up the media conglomerate. In case of Disney, the studio entertainment segment makes only 13% of the total revenue. In Part 2 of the post, we will cover a better way of investing and profiting from the movie business.
Disclosure: None