Monday, December 20, 2010

Brasil Foods long

Brasil Foods S A is new company formed by Sadia and Perdig√£o. Peridigao is the second largest protein producer in Brazil and the tenth largest company in the country. Before running into trouble with currency derivative trades, Sadia was a very profitable protein exporter to 110 countries. The combination of the two companies joins to high growth entities in the Brazil domestic market and abroad.

The author sees tremendous upside in BRFS as Brazil expands and the global economy recovers. BRFS is the second largest exporter of meats in the world, and thus will benefit from even a muddling world economy.

The company sells at a 14B USD market cap, in line with 2009 sales. Yet the company reported in 3Q 2010 it is growing at an 8% rate and guided to grow at 10-12% in 2011 due to continuation of the global economic rebound.

Risks to this investment include a rise of the Brazilian Real or fall in the USD. Brazil is also tremendous exporter of commodities so economic deceleration in China or around the world could cause significant problems for BRFS.

But while the world is living on stimulus and papering over economic problems, I am long BRFS.

The author recommends buying BRFS at $15.8.

Tuesday, December 14, 2010

Netflix: Another position

Hi,

After discussing the issues facing NFLX with a friend who is an executive in the movie distribution business (DVD sales) with a major studio, I am even more encouraged that there is no upside to NFLX. But since the market can stay irrational longer than any of us can be solvent, I am entering another position of relative safety.

Buy Mar 2011 $290 Call for $.93
Sell Jan 2012 $290 Call for $8.75

Monday, December 13, 2010

Netflix : Viva la overvaluation!

Is Netflix taking over the world? One movie studio makes a multiyear deal to stream videos for dirt cheap back when no one was getting better than 3mb downsteam from their internet connection, and lives to regret it. Netflix now offers first run movies at $8 with an unlimited subscription. This current deal cuts out DVD sales and other revenue streams for the studios. There is little motivation for the studios to continue the deal in it's current form.

"The relationship between Netflix and the media companies will most likely change drastically, beginning next year when a deal between the company and Starz, the pay-TV channel, to stream movies from Sony and Disney expires.

The original deal from 2008, in which Netflix paid an estimated $25 million annually — a paltry sum, executives say, compared with the hundreds of millions of dollars cable and satellite companies pay Starz for the same movies — is now seen as a major coup for Netflix, and a major mistake by Starz. "(1)

Any major increase cost of content will hit NFLX bottom line hard. The current margins of streaming content is huge, but may not continue to be after the next deal. More importantly, it is diffuclt to see the company sustaining a P/E ratio of 69 with massive increases in costs.

The author will sell NFLX $280 strike Jan 12 calls at $12 and buy NFLX $280 strike Jun 11 calls $4.65

(1) "Time Warner Views Netflix as a Fading Star", Dec 13, 2010, New York Times