Video games revisited

A year or so ago I mused on Kids these days and the numbers behind the video game industry. There's this company Gamestop (NYSE - GME). They have stores around the country selling videogames. Back then, in March 2005 it was trading around $20. Now it's up to almost $47. Just out of curiosity, I went to have a look at what has changed in between, other than the stock price...

Cash then: $205mm Now: $171mm
Book value then: $594mm Now: $543mm
LTM Revs then: $1.6bn Now: $1.8bn
Op Inc then: $$104mm Now: $99mm

So they've got less cash, less book value, revenues a little higher but less income... and the stock has more than doubled. Hmmmm.

There's about 73mm shares out, LTM earnings per share are $1.61, and analysts seem to be estimating around $1.90 a share in 2006.

No wonder people have trouble understanding the stock market.

It reminds me a bit of the video rental stores, like Blockbuster, Hollywood Entertainment and Movie Gallery. They have basically one product. And in the long run, everybody is going to get that product over the wire (downloading from the web).

Plus it's a Texan company.

Short! Short!

Jam Today

Front page story in the Financial Times about pension reform. With the Pension Benefit Guarantee Corp piling up liabilities as companies went bankrupt, our Fearless Leader called for legislation to make it harder for companies to avoid making contributions to their pension plans, intending thereby to avert an impending bail-out of the PBGC. So guess what happened? The Senate and House have come up with legislation that makes it easier for companies to avoid making contributions to their pension plans. In exchange, the companies swear they'll make bigger contributions later.

Social security is about $4 trillion short. Medicare is about $28 trillion short. And now private pension plans. What is the US going to look like 20 years from now, I wonder?

How many paper bags does a commissary use?

Robert Reich's book, Locked In The Cabinet, is full of amusing anecdotes -- he's a very funny man. He touches more than once on the Defense Department and the immense power in the government of the Pentagon.

Anyway, Prof Reich is not a big fan of the "Defense" budget. It puzzled him, apparently, that we wasted so much money on this useless pursuit and why somebody didn't do something about it. Then one day it dawned on him: The defense budget is actually a massive jobs program. It's America's answer to European socialism. Obvious, really, isn't it?

It's actually fun to subscribe to the DoD mailing list so you can see the money flowing. Every day you get an e-mail with the latest awards (or, more likely, the ones that aren't considered Top Secret). You can do it here:

http://www.defenselink.mil/news/e-mail.html

Here's a gem from a couple of days ago:

Duro Bag Manufacturing Co., Florence, Ky., was awarded an indefinite delivery requirements type contract with an estimated value of $5,603,930 for delivery of paper grocery bags to commissaries located in the Western Region.  Work will be performed at the contractor's facility and delivery made to the commissary locations in the Defense Commissary Agency, Western Region.  The contract is for a base period starting on May 1, 2006 with a contract completion date of April 30, 2009.  Three offers were received, two awards were made.  An award was also made to Ross and Wallace Paper Products Inc., Hammond, La., a small business for the Eastern Region
commissaries in an estimated amount of $4,183,340. 

If I understand it correctly, this means that these two companies will get $9.8 million for supplying paper grocery bags to commissaries for three years. That's a little over $3 million a year. For paper grocery bags.

As it happens, I looked up the price of Duro grocery bags on the web. Their most expensive bag is offered at $92.28 for 3,000 bags. That's about 3 cents a bag. So the western and eastern commissary regions are buying, at that price, about 318 million paper grocery bags, or 106 million a year. That's assuming they're paying the full price you see on the web and not getting a volume discount.  (I think they should get a volume discount, don't you?) That means they're going to be using 290,976 bags every day.

How much do these damn soldiers eat, anyway? And shouldn't they be in Iraq rather than hanging about our eastern and western commissaries?

What new system, though?

Everyone has a great confidence in the so-called "market system". Prices are set by the balance between supply and demand. Stock prices fluctuate in such a way as to attract new capital to places where it is needed most. This creates an efficient economic machine which benefits everyone except the lazy and the handicapped. The apparently unparallelled workability of this system has created a political landscape in which almost everyone is in favor, even formerly skeptical peoples like the Europeans. There's plenty of flaws, and plenty of lies told about this market system, but nobody is really disposed to consider them significant, in the whole scheme of things.

We're heading in a direction where it might no longer work, though. And I mean "work" in the utilitarian sense of bringing the greatest benefit to the greatest number. If you extrapolate current trends, you can see the emergence of a small class of Neobarons together with a large global mass of Neopeasants. The robot thingy I talked about a couple of posts ago. Here's where I'm going to start sounding like a Marxist: eventually, the Neopeasantry will decide that this is not a fair way of allocating income, and they'll rise up and tell the Neolords to get stuffed. There's plenty of good stuff to read on this subject, my favorites being Paul Craig Roberts and the Princeton economist, Robert Frank (Winner Take All, and Luxury Fever).

Following Marx, Socialism was supposed to be the answer to the inequitable distribution of income. It just hasn't worked, though. In Russia, redistributing the "means of production" to the people just meant replacing the landowning/capitalist shit-heads with an elite of so-called "communist" shit-heads who, like their forebears, just went ahead and grabbed everything for themselves. With slightly less dire forms of socialism, involving fewer executions and less overt property theft, as we had in Britain in the 1960s and 1970s, it just resulted in economic chaos.

The question of what went wrong is complicated, but a good part of the problem was the removal of incentives. If you could make a living by doing nothing, then you probably would. The state would take care of you whether you worked or not. So a lot of people chose not to work, which, really, was just like the previous system except that the people who didn't bother to work were from the so-called "working classes" rather than the chinless wonders with inherited wealth.

In the days when labor was more important to production, that certainly mattered more than it would now. If we eventually reach the Robotic State, I suppose it wouldn't matter as much, and maybe socialism would begin to work. After all, if robots do all the work, then people could chooose not to work with no negative economic consequences. But maybe not.

Let's just say that our guiding principle is utilitarian: we want to create a system which brings the greatest benefit (= income, in our somewhat warped view of life) to the greatest number. How do we do it? Self-evidently, the market system won't do this. We badly need something to replace it.

Strange Goings on in Semiconductor Markets

Nice week for me on Patriot Scientific. My friend Cal recommended this to me a little while ago at around 20 cents. I watched it double, triple on heavy volume and finally took the plunge when it got to 96 cents only to see it drop back to around 72 the following day. Ended the week at $1.55. The company owns some patents on microprocessors. It got $25mm from licensing to Intel, AMD and HP, then announced a license to Casio and, this last week, to Fujitsu. Classic story stock: there's a lot of microprocessors around these days; if they can get a tiny piece of each one sold... There's probably a hole in the story somewhere, though. The total revenues from INTC, AMD and HWP were $25mm, and that apparently covers sales going back to 1997 or something. When you consider that INTC and AMD between them own pretty much the entire x86 market, $25mm is pretty small potatoes. So how am I going to know when to get out? Have to think about that a bit. Unfortunately, they don't ring a bell at the top.

Meanwhile, a shock to the system when Intel announced yet another revenue shortfall vs previous estimates for Q1. I've been following the OSAT (outsourced chip assembly & test) market a bit after writing up Amkor back last year. Amkor has shot up recently (pat self on back here for calling it after they announced a $30mm buyback of their 9 1/4s). I own the #1 company in the industry, Advanced Semiconductor Engineering. I bought it because I thought the market was underestimating the strength of the chip market going into 2006: both Amkor and ASX had pretty bullish conference calls, each reiterating that it wasn't going to continue cutting the other's throat on pricing. ASX has a much better balance sheet, so I figured they would survive better if I turned out to be wrong. AMKR stock has been much stronger, though, because now nobody thinks they're on the brink of bankruptcy.

But what is going on with the chip market? The OSAT guys rely heavily on the handset (cellphone) market. Also on PCs. Driving also this year, apparently, the videogame console and portable music markets. It looks to me, though, as if the handset market is running out of steam. And PCs aren't that strong, either. Durable goods generally don't look so great. Intel's weakness might be explained by AMD gaining share, but considering AMD has only 20%, roughly, of unit shipments, it would have to be a pretty big shift of market. One analyst (a Mark Edelstone at Morgan Stanley) is upping his estimates on AMD and NSM, and Goldman is apparently expecting TXN to raise its guidance on Monday.

It's often a red flag when one company in an industry appears to be growing while the rest of the industry is having a tough time. I got burned once in disk drives believing that Miniscribe could be doing well while Seagate, Maxtor, Western Digital et al were all hurting: it turned out Miniscribe was shipping bricks. But that's another story.

The point is: who is right about the chip market for 2006? Can other companies really be doing well when Intel is pulling in its horns? Are the OSAT guys shaping up for another horrible plunge of the kind these companies are prone to? Maybe long ASX short AMKR would be a good pair trade? Not for me, because I don't short, but in principle.