Question:
So Disney announced that it was buying Lucasfilm and releasing another Star Wars film. I would think this was good news. Why did Disney drop 2% on Wednesday?
Answer:
Historically, the only company that benefits from a buyout is the company being purchased, and in this case, it is Lucasfilm, Ltd (Private). On average, the company being purchased receives about a 30% premium.
There are many reasons the purchaser may not benefit from an acquisition. In the buyout boom from 1998-2001, shareholders of acquiring firms lost about $240 billion. Maybe a company is trying to buy new growth outlets, but they overpaid for those perceived growth opportunities, hence, the 30% premium paid. Sometimes, the buyer misuses the resources and assets of the company they acquired. On other occasions, the managers of the purchasing company may be trying to build an empire, and it may be more difficult to run the new empire efficiently.
So what does The Walt Disney Company (NYSE: DIS) get from the deal? Star Wars. Disney is set to release the next Star Wars film in 2015 and another Star Wars film every two or three years. In 2005, when the most recent Star Wars film was released, Lucasfilm generated $550 million in operating income. Product licensing, such as, lunch boxes, action figures, etc., will also be a potentially robust revenue generators, considering Lucasfilm has generated more than $200 million in licensing revenue this year. Disney’s various theme parks could also benefit by developing rides associated with Star Wars.
Disney has been trying to reach younger boys for quite some time, as evidenced by their Marvel deal a couple years back. Star Wars is another avenue to gain that target audience. It also reduces Disney’s risk in developing new characters and content and making big bets on new franchises.
Question:
What is the biggest surprise you’ve seen this earnings season?
Answer:
In our opinion, Technology performed better than expected. The Street had expectations of a slowdown in technology spending, which we agreed with. However, looking at the sector, earnings grew 1.48%, and sales grew 6.5%. While it is not stellar growth for Technology, it is growth when compared to other sectors.
Another pleasant surprise was Ford Motor Company (NYSE: F). Ford had its best third quarter with great performance in America and China.
Question:
What happened to Western Union, dropping 29% in one day? I would have thought they’d be doing OK.
Answer:
Shares of The Western Union Company (NYSE: WU) fell to its lowest point in more than three years on Wednesday, after they reported third quarter results.
The company is a leading independent provider of consumer money transfer services. They offer their services through a network of about 485,000 agent locations across more than 200 countries and territories. The company derives a majority of their revenues from fees that consumers pay when they send money. Western Union’s service allows customers to transfer money to other individuals via the Internet, telephone, credit or debit card, or at any agent location.
The company’s consumer-to-consumer business provided 84% of revenue in 2011, while global business payments provided 14%. For the third quarter 2012, they missed revenue estimates and beat only slightly on earnings per share. However, this wasn’t what killed the stock. The kicker was that the company lowered its full-year earnings forecast to the range of $1.60—$1.63 from $1.68—$1.72. Analysts had forecasted $1.75 a share. The company also announced that their president of global consumer financial services left the company.
However, there are several things hurting Western Union. First, obviously, the difficult economic conditions across the globe are taking a toll. Second, increased competition from the likes of PayPal Inc. (a subsidiary of eBay, Inc., NASDAQ: EBAY), which seems to be gaining share and putting pricing pressure on Western Union. With so much competition, pricing remains competitive in the industry, and potential price cuts by Western Union add uncertainty to future sales. In essence, it was the guidance that sent Western Union shares tumbling.
Question:
Should I be selling Travelers Companies? My adviser is doing so, but I was unaware that it was out of favor.
Answer:
We were unaware that it was out of favor as well. In our opinion, it shouldn’t be.
Realistically, we do not know the extent of the damage in New York, New Jersey, Connecticut or any other states from Hurricane Sandy. However, we have heard a few numbers thrown around estimating total economic losses between $5 billion and $15 billion, with only a small portion being insured. The stock price for property and casualty insurers has been negative since the market reopened. The Travelers Companies (NYSE: TRV) has fallen by approximately 1% in the past few days.
Using figures derived from Hurricane Irene, which washed ashore in 2011, we assume Travelers is likely to lose approximately 2% of its book value, as a result of losses from Sandy; however, the company is not likely to be the worst affected among the property and casualty insurers. This is an important figure since property and casualty insurers trade very near their book value on average.
We believe some insurers will suffer losses from claims on Sandy. The most negatively affected, according to 2011 losses from Irene, are likely to be Allstate, Chubb and Travelers, not in that particular order. The hope is that these companies benefitted from last years’ experience and increased their risk management skills. We expect about 2% loss of book value. Since these companies trade so close to book value that means a 2% loss in the price of the stock. One thing to watch for in this space is the safety of the dividend, as any cut should have a much larger negative impact on the market value of the stock. However, we do not believe any of the companies will have a problem paying their dividends based solely on losses from Sandy.
We recommend that you continue to hold Travelers. If sentiment becomes bad enough to drive the price significantly below its book value, we recommend buying.
At Henssler Financial we believe you should Live Ready, which includes understanding how current events affect your stock holdings. If you have questions regarding your investments, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
