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There are two reasons to invest in stocks, the prospect of Capital Gains and the distribution of Dividends. Capital gains are achieved when an investor sells stocks that appreciated in value, however most investors seeking capital gains fail to beat the overall market. Dividend stocks on the other hand, don’t need to be sold to generate income, and often have a higher rate of return than the overall market.

I recently purchased stock in Microchip Techology (MCHP)  at $36 a share.  Microchip is a semiconductor manufacturer based in Arizona, and for the purposes of this post, MCHP has a 3.61% dividend yield as of the end of the trading day 7/7/11.

Why Dividends, Why Now?

Companies that pay out dividends are generally profitable and in sound financial shape, so as to be able to pay a dividend. A dividend centric investing strategy represents a relatively stable source of income at a lower risk, often with higher returns than capital gains. Additionally, as a stock prices go down, the dividend yields rises, make it a more a stock a more appealing buying opportunity. Finally, in the event of a long drawn out recession, parking your money in a dividend playing stock gives you an income stream while waiting for the stock price to increase.

How do Dividends work?

The key date for getting paid a dividend, is the Ex-dividend Date, anyone who owns a company’s stock on that date will be paid a dividend. Dividends are paid either on a quarterly basis or on an annual basis, Microchip offers a $0.35 quarterly dividend, therefor 35 cents will be paid out for each MCHP share owned, 4 times a year. The better way to think of dividends is as a percentage of the stock value, called the Yield. For MCHP, the yield which is measured on a annual basis is 3.65%  or (0.35/36)*4.

July 2010, facebook.com reaches 500 million active users, making it one of the most visited and important websites on the web. Given its size and social impact, how can this company make money in a way that is consistent with its Vision & Mission? Here’s the Facebook  mission statement: “Facebook is a social utility that helps people communicate more efficiently with their friends, family and coworkers. The company develops technologies that facilitate the sharing of information through the social graph, the digital mapping of people’s real-world social connections.”

Given Facebook’s mission statement, where is the profit making potential, and could  the company ever be worth as much as Microsoft’s 2007 deal that valued Facebook at $15 billion? The biggest potential for profit with Facebook seems to be its ability to collect information on people and then sell that to marketers who sell stuff or by charging companies for on-site advertising, either way the amount of people who join Facebook will have a big impact on the value of the company.

Number of People  on Facebook

Here’s a graph showing the number of active users on Facebook since its inception in February 2004. Note the acceleration in the number of  active users, it took 4 years for Facebook to go from 0 to 100 million users, but only 4 months to go from 400 million to 500 million.

The source for this data is Facebook itself, specifically here, and an active user is defined as someone who has logged in within the last 30 days.

Previous Offers to Buy Facebook

June 2004 – An unnamed investor offered $10 million to buy thefacebook.com
March 2005 – Viacom offered 75 million
February 2006 – Viacom offered $1.5 billion
June 2006 – Yahoo offered $1 billion
October 2007 – Microsoft buys 1.6% for $247 million

Microsoft’s purchase of a portion of Facebook came after Google, the only tech company with the money to buy Facebook started negotiating a buyout in the Fall of 2007. The Microsoft stake values Facebook at $15 billion, and comes with a stipulation that Facebook would have to give Microsoft notice before an potential buyout offer from Google is considered. As of today, Microsoft is best positioned to buy Facebook.

How Much Revenue does Facebook Generate

While Facebook is a free service to its users, it is able to make money by selling ads to advertisers and by selling virtual goods to users. Here’s a breakdown of where the revenue came from in 2009 according to David Kirkpatrick’s book, The Facebook Effect.

$500 million in estimated 2009 revenue:

  • $300 million in self service ads
  • $100 million in user involvement ads
  • $50 million in Microsoft ads
  • $50 million in virtual sales

Crawfish in paradise

Nothing says Louisiana quite like a crawfish boil.

In the DVD rental industry, Blockbuster has been King-of-the-Hill for as long as I can remember, but today the company finds itself in the lowly position of copying its competitors and closing stores, just to survive for tomorrow. The situation has become so bad, they’ve turned to cute bunny videos. Could emerging competitor Redbox lead to the ultimate demise of the Block?

Hanging by a thread

With $1 billion in debt and downward trending sales, Blockbuster is teetering on the edge of bankruptcy. Below is the 10-yr stock history of Blockbuster (BBI), the stock price as it sits today is 0.33:

How did it come to this

Some blame poor management decisions, like eliminating the profitable ‘late fee,’ some blame a slow reaction to competitors like Netflix, both were contributing factors, but my guess is that the emergence of Redbox has more to do with Blockbuster’s downfall than anything else.

According to flexplay.com, this is how the DVD rental industry works:

DVD rental stores make their money through a number of different methods including membership fees, rental fees, late fees, and DVD purchases. However, the major key to their success is that they operate under a pure supply and demand business plan. When a new DVD title is set to be released, demand for these titles skyrockets. To accommodate for such a high demand, DVD rental stores buy up the title in bulk to make sure their shelves are stocked with the hottest new release. As demand for the DVD title begins to wear off, the rental stores then sell the excess DVDs as “previously viewed” DVDs at a reduced price. This system has made DVD rental stores quite profitable over the years.

Redbox does all that, and it doesn’t need a store to do it. Blockbuster’s bread & butter has been its stores, where people can roam the aisles in search of the ultimate DVD choice. But running a store also means that you have to lease  commercial space, hire employees, pay the utility bills, hold extra inventory and deal with everything else than comes with running a store. Redbox isn’t burdened with a lot of the costs of a traditional brick & mortar store,  its essentially a vending machine.

Why rent from a vending machine?

Admittedly,  I was a bit afraid when I first tried using Redbox, and even more reluctant to give it my credit card.  But now that my fear of the unknown has passed, I am a regular Redbox customer; it’s quick, it’s convenient and it’s inexpensive,  creating a solid value proposition.

In just 5 years, Redbox, which is owned by Coinstar(CSTR), has grown to 22,000 locations, today, these refrigerator sized boxes can be found in fast food restaurants, pharmacies and even Walmarts. In a seemingly symbiotic relationship, Walgreens benefits from the additional foot traffic generated by the Redbox, and Redbox benefits with the convenient location & residence of a neighborhood Walgreens. Finally, customers benefit due to the ease of vending experience compared to checking out at a store, and the comparatively low price of $1 for a new release DVD. The only parties dissatisfied with Redbox (other than Blockbuster), are the movie studios, which make a killing off DVD sales and have traditionally prompted a premium ( up to $4)  for the rental of new releases. Movie studios hate that Redbox charges the same price ($1) for a new release DVD as it does for older DVDs, and there could be some retaliation coming that shakes-up the DVD rental industry. But my guess is that Reb Box is already too relevant for Hollywood to simply dictate terms. Here’s a breakdown of the DVD rental industry by sales according to research firm NPD Group inc. :

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 Redbox is up to 19% market share after representing only 2% in 2007. Redbox has grown by leaps and bounds, leading Blockbuster to start its own DVD vending service, but one has to wonder if its too little too late. There are three RedBoxes on a 2 mile stretch of the main road next to my house, the topmost picture in this blog post is one of them,  also, here’s a picture of the local Movie Gallery.

However, the problem I now have with Redbox… is the line of indecisive customers I have to wait behind.

Lets talk about MPG

With the summer driving season just around the corner and prices at the pump already inching up, its a good time to take a closer look at one of the biggest things people consider about a car, MPG. Once an afterthought, MPG is now an important factor in car buying, as evidenced by all the car ads on tv that proudly announce the vehicle’s thirst for gas. To get a feel for what kind of MPGs are common, here’s a list of the top selling cars and their MPG ratings:

Top Selling cars in the US (Based on Feb. 2010 sales)
Rank Vehicle Mileage split 50/50 Hwy & City
1 Ford F-150 19 mpg Hwy/14 mpg City 16
2 Honda Accord 31 mpg Hwy/22 mpg City 26
3 Chevy Silverado 20 mpg Hwy/15 mpg City 17
4 Toyota Corolla / Matrix 35 mpg Hwy/26 mpg City 30
5 Toyota Camry / Solara 33 mpg Hwy/22 mpg City 27
6 Honda Civic 31 mpg Hwy/24 mpg City 27
7 Ford Fusion 31 mpg Hwy/22 mpg City 27
8 Nissan Altima 32 mpg Hwy/23 mpg City 27
9 Ford Escape 28 mpg Hwy/22 mpg City 25
10 Chevy Malibu 30 mpg Hwy/22 mpg City 26
11 Chevrolet Cobalt 35 mpg Hwy/25 mpg City 30
12 Ford Focus 35 mpg Hwy/24 mpg City 30
13 Honda CR-V 28 mpg Hwy/21 mpg City 24
14 Chevy Impala 29 mpg Hwy/18 mpg City 23
15 Nissan Sentra 31 mpg Hwy/24 mpg City 28

Whether your MPG is important to you to save the environment, reduce fuel expenditure or cut your dependence on foreign oil, here is some analysis on MPG you might want to consider.

Annual fuel expenditure by MPG
Assumptions
Miles driven: 15000
Fuel Cost : $3
MPG Annual Fuel Cost Incremental Diff. Diff. from mean
10 4500 -1500 2250
15 3000 -750 750
*20 2250 -450 0
25 1800 -300 -450
30 1500 -214 -750
35 1286 -161 -964.29
40 1125 -125 -1125
45 1000 -182 -1250
55 818 -68 -1431.82
60 750 -1500

*The DOT estimate for avg. mpg for current vehicles on the road is 19.6mpg

The main thing to note from this table is the rate of diminishing returns in annual fuel savings as MPG goes up. For example, switching from a 15 mpg Ford 150 to a  20 mpg Chevy Tahoe saves you $750 in fuel, but  switching from a 25 mpg Ford Escape to a 30 mpg Toyota Corolla only saves you $300 a year in fuel. The takeaway here is that the higher up the mpg ladder you go, the less money and fuel you save, so not all mpg gains are equal. If your vehicle gets less than 20 mpg, you have more to gain by improving your mpg than someone with an mpg higher than 30. Here are some ways to improve your mpg, regardless of what you get now, but particularly important if you’re on the low end of the mpg spectrum.

Ways to improve MPG (along with maximum improvements)

Habitual Improvements:

  • Drive sensibly – 30%
  • Remove excess weight from car- 2%
  • Turn off ignition if idling for more than 1 min
  • Park with the front end facing out
  • Limit A/C use
  • Wash & wax regularily for improved aerodynamics

Vehicle Improvements:

  • Replace clogged air filter – 10%
  • Proper air pressure – 6%
  • Replace worn spark plugs – 5%
  • Fuel additives to clean injector

I was able to achieve 40 mpg on my 2006 Toyota Corolla, here’s proof. Primarily highway driven at or near the speed limit.

Raising Profits

The busiest restaurant during lunchtime in Sulphur, La is Louisiana’s own fast food chain Raising Cane’s. And from what I can tell, Raising Cane’s is absolutely raking in profits.

Raising Cane’s, a 15 year old fast food restaurant chain with over 70 locations and $100 million in revenue, began as a business class project by founder & former LSU student Todd Silvey, for which he received a C-.

The Business Model

A fast food restaurant that serves only chicken fingers as a main course.

Competitive Advantage 1: Standardization

Zero order variability, the production process is essentially an assembly line that churns out the same thing over and over. Even the sides are standardized; you get fries, a slice of Texas toast and a cup of coleslaw. Having a limited product offering means it’s; easier to make (learning curves, etc.) & plan for (demand forecasting, etc.) while reducing costs (reduced inventory, economies of scale, reduced set-up times, etc.).

Competitive Advantage 2: Product margins

Chicken fingers are ubiquitous on restaurant menus because they are simple & easy to prepare. Compared to burgers, sandwiches and pizza, which require an assortment of ingredients and numerous cooking steps, chicken fingers represent the cash cow of product offerings in the restaurant industry. Additionally, high volume production would furthur drive down the marginal cost.

Competitive Advantage 3: Economy of scope

French fries are the principle side order and the cooking process for French fries is very similar to that of chicken fingers [load a batch into a deep fryer]. Since the two biggest product offerings are essentially cooked the same way & with the same equipment, there’s a certain synergy in the production environment.

Other Notes:

Even the way the food is served is standardized; customers who dine-in receive their food in the same packaging (a styrofoam box) as the take-out and drive-through orders.

Location, Location, Location

Started in 1996 in Baton Rogue, Louisiana, the chain now has 70+ locations, with 50 in the state of Louisiana. Anyone who’s lived in the South would tell you that Southerners love their fried chicken, the map below shows the states where Raising Cane’s has a presence, note how the South is well represented.

In addition, the majority of Raising Cane’s restaurants are located in college towns, with operating hours that run past midnight on the weekends. Presumably because college students don’t cook, and/or crave food at odd hours.

The Fast Food Model:

The fast food model relies heavily on the efficiencies gained by producing in high volumes . Having a large product offering can hurt a fast food restaurant by leading to poor order fulfillment rates and long lead times (ever been asked to pull into the parking lot while going through a Burger King drive through?).

The Bottom Line

The ‘Burger, Fries & a Drink’ model helped put McDonald’s on the map because it can be easily mass produced. Today’s McDonald’s menu has a dizzying array of product offerings, which is harder to mass produce. Raising Canes goes back to the original idea that made fast food so successful, a mass produced product aimed at target market segments. Pleasing all of the people all the time, is hard, pleasing some of the people all the time, will lead to raising profits.

The Promise of High Speed Rail

Riding on a high speed train is among my favorite European experiences, so when President Obama announced an expansion of funding for High Speed Rail projects around the country, I was ecstatic. As a mode of transportation, train travel is unmatched in the joy and exhilaration it brings its riders, cars may allow for more flexibility, and planes are faster, but I want to believe that there is a place for train travel in the US.

Recent Developments:

President Obama announced an $8 billion investment boost to high speed rail projects as part of the Recovery Act. The grants will go to the creation of thirteen passenger rail corridors that cut across 31 states.

Definitions:

High speed rail is defined by the Federal Railroad Administration (FRA) in three ways:

1.)    Express High-Speed Rail: Frequent service with few intermediate stops between major population centers 200-600 miles apart and a top speed of 150 mph.

2.)    Regional High-Speed Rail – Infrequent service with many stops between major and moderate population centers 100-500 miles apart and top speed of 110-150 mph.

3.)    Emerging High-Speed Rail: Developing corridors, slower speeds, shorter distance.

The European standard of high speed rail is 200 km/h or 120 mph.

HSR currently in the US:

Amtrak currently operates a profitable high speed rail service in the Northeast called Acela Express from Boston to Washington, DC. The Acela averages a speed of 68 mph and reached a top speed of 150 mph.

The opportunity of HSR in the US:

While cars and airplanes currently monopolize the personal transportation market, there have been some issues with over utilization that may threaten their holds on the transportation industry.

Airplane problems: Traveling by air has become notoriously problematic, whether its delays, long set-up times, re-bookings, cancellations or lost luggage and on top of it all the airlines are seeing razor thin margins on their flights so its unlikely to get any better.

Traffic congestion: While highways are the life line of a city, major urban areas are experiencing gridlocked traffic that hurts worker productivity.

Other issues: Pollution, cost, land usage, etc.

Value Proposition:

Even if the items mentioned above represent an opportunity for a different kind of transportation to gain prominence, high speed rail still has to offer a good value. The 13 corridors shown on the map represent highly populated areas of the country with urban centers separated by distances that some might consider too close to fly and too far to drive. My guess is that this niche travel distance for train travel to gain prominence in is between 200-500 miles.