Friday, October 29, 2010

A Mansion With A Motor

It is not too often that I am speechless and/or starstruck, but it does happen. Several years ago, while visiting some friends in Nashville, I was invited to tag along with them to a charity benefit being held at a place called Green's Grocery in historic Leiper's Fork, TN. Kim Carnes ("Betty Davis Eyes") was the headliner, and she would be backed by various Nashville-area session players.  It sounded like a great time to me. 

Green's Grocery is just what the name implies–an old grocery/country store.  Over the years it had become a place where local musicians and Nashville bigshots would gather for the informal picking sessions for which country music is famous. Someone in the music business eventually bought the place and made music–not groceries–the focal point.  It's a small place that probably holds no more than 100 people, but it attracts some world-class talent.

It was bitterly cold on this particular December night, with intermittent snow. Dinner was part of the deal and was being served in a tent out behind the store. There was a roaring fire going in an outdoor fire pit, and the heat it generated was more than sufficient to chase away the cold.  This had all the makings of a great evening.

We staked out our table in the little store-turned-performance hall and went outside to the tent to get our supper.  As we were moving through the buffet line, I scanned the crowd.  I didn't expect to see anyone I knew, but I did see someone who looked decidedly different from the rest of this well-heeled crowd. He was a big ol' fella wearing sweatpants and looking a little disheveled.  "Hmmm," I thought, "he must be Kim Carnes' roadie or something."  He was about five or six people ahead of me in line and I couldn't see his face, but when he turned the corner and I got a good look at him, I was dumbstruck.  "Holy s**t, that's Al Anderson!" I thought to myself.  

Now, I have met and been around people who are a whole lot more famous than Al Anderson and I have never had a heart-stopping reaction to any of them like I had when I found myself in close proximity to the man described as "300 pounds of smokin' steel and sex appeal."
Big Al!
Al Anderson was a  longtime member and lead guitarist for NRBQ, easily my all-time fav-o-rite band.  Billed as "The World's Greatest Bar Band," NRBQ for five decades explored all the nooks and crannies of rock and roll before formally disbanding earlier this decade. While active they attracted a cult-like following and garnered the respect of every musician who ever heard them play. NRBQ's demise began when Anderson, tired of life on the road and eager to develop his songwriting talents, left the band after a New Year's Eve show in 1993.  However, he was for twenty-two years the Q's big man on guitar.

I couldnt begin to guess how many times I saw NRBQ play live in bars all over the East Coast.  Anderson was always there, set up on the left side of the stage with a huge fan blowing on him in a hopeless attempt to keep his Big Al body cool. 

And now here he was, ten feet away from me, literally and figuratively larger than life.  A scan of the crowd indicated to me that no one else seemed to have any idea that this music legend was amongst them.  Maybe these Nashville people were so used to having music royalty in their midst that this was nothing out of the ordinary, but I would rather talk to Al Anderson than just about any other musician I can think of.  I could not let this opportunity pass.

What to say?  I didn't want to be a dork or have him think me an obsessed fan because it has always been my opinion that famous people like nothing more than being treated normally.  If I were going to say something, I would have to be cool about it.

By this time the dinner line had split so that people could attack the buffet from both sides. He was directly across from me.  If didn't say something right then I would regret it for the rest of my life.

"Al?", I said shakily. 

He looked up, eyed me warily, an uttered a very noncommital, "Hey."

"Please don't think I am a nutjob or anything, but I just wanted to say hello and ask you a question if that would be alright." Unfortunately, I hadn't really had much of a chance to rehearse this conversation in my mind, so even though I told him that I had a question, I didn't exactly have one queued up. 

After a few seconds of silence I managed to think of something.

"I am a giant NRBQ fan (TOTAL DORKINESS) and I wanted to ask you about a song I heard you guys play but that I have never found on any of your albums."  I lived in Washington DC in the late 80s and NRBQ used to make a regular stop at a place in Georgetown called The Bayou, which was located on K Street under the Whitehurst Freeway. It was a dingy old spot but it was to D.C. what the Fillmore was to San Francisco.  It was an integral part of the District's music scene. 
D.C.'s own Nighthawks pose on the roof of the late, great Bayou music club.
One night at the Bayou I heard them play a song called "Hotel Coupe deVille."  I loved it and looked for it on every new NRBQ album.  I never found it.  This was my chance to find out about that song.

"I heard you guys play a song called 'Hotel Coup deVille' at the Bayou one time but have never heard you play it since and have never seen it on any album you ever released.  Was that song ever recorded?", I asked, realizing that asking him about an obscure song I had heard them play once almost twenty years ago might reinforce the notion that I could be a candidate for a restraining order.

Now it was his turn to be dumbstruck. Al, fairly or not, has something of a reputation for surliness so I half expected him to blow me off. 

"You know," he said, "I wrote that song and we only played it live one time. I guess it was that night.  I can't believe that you remember it."

I explained to him that I loved the story of the guy living in his car–a Coupe deVille– but what made the song memorable to me was the line that the car was a "mansion with a motor."   I loved that line and have used it many times since then to describe overly-roomy sedans.
1974 Cadillac Coupe deVille, large enough indeed to be a "mansion with a motor."
He went on to tell me that the song had been recorded by various artists and that, thanks to my reminder, he might just play it that night. Sweetness!  I wished him well and left him to eat his dinner in peace, at the same time mentally flogging myself for my failure to be cool and indifferent. 

Kim Carnes was great, but Al Anderson–even in a subordinate role–was better.  Kim would sing a song or two and then one of her backing musicians–all respected session players–would grab the mike to sing one of their songs.  When one of these guys got his turn at the mic, his first words were not a thank you to Kim but instead this:

"My brother is not gonna believe that I shared the stage with Al Anderson tonight!" 

Poor Kim Carnes.  She never had a chance.  

A few songs later, former Doobie Brother and current Leiper's Fork resident Michael McDonald popped out of the crowd to sing a few songs.  Finally, Kim gave us her signature song, closing the evening with "Betty Davis Eyes" in that great smoky voice of hers.  We hung around the bonfire for a little bit afterwards and relived the night's fun.  In the parking lot we ran into Big Al.  He hadn't played my song, but it didn't matter.  We wished each other Happy Holidays and as he drove off into the snowy night, I thought to myself, "How cool was that?"

He still occasionally takes the stage, but mostly spends his time writing hit songs for others.  Like NRBQ itself, Al Anderson is unknown to most of the public.  To his musician brothers and to my fellow NRBQ fans however, he is a titan.
"Three hundred pounds of smoking steel and sex appeal."

P.S. For those of you who might care, "Hotel Coupe deVille" can be found on iTunes.  A band called the Riptones recorded a more "countrified" version of the song, but the lyrics are all there with the exception of the "mansion with a motor" line.  Dang it.

Friday, October 15, 2010

Apple's Valuation Conundrum

If CNBC's Mark Haines asks one more pundit if Apple's valuation is a "tad bit bubbly," I am going to have a mind snap. Apple, as is too well known by now, is second only to Exxon in market capitalization among U.S. companies. Market capitalization is derived by multiplying the number of shares outstanding by the stock's current price. It is not rocket science. Much was made of the fact that Apple recently surpassed Microsoft in market cap and now that the gap between Exxon and Apple is narrowing every day, Apple's market cap is once again naysayer news.

To these naysayers, Exxon is an industrial giant and a vital cog in the machinery that propels our economy while Apple seemingly is nothing more than a maker of electronic curiosities and other consumables that are nice to have, but certainly not vital to our collective economic wellbeing. Using that rationale, Apple, they say, could not possibly be more valuable than venerable stock titans General Electric, Pfizer, or IBM.

Stock prices are comprised of many components, but two that are central to any stock price valuation metric are earnings and expected earnings growth. Investors generally are willing to pay for a share of stock a multiple of earnings that roughly is equivalent to the future growth of earnings over a projected period of time. This is where the valuation gets tricky. No one, of course, can precisely project future earnings.

So, back to Apple. Apple has something like 910,000,000 million shares outstanding. While this is a large number, it is less than 1/8 the amount of shares that Microsoft has (8.6 billion) and 1/5 Exxon's 5 billion shares outstanding. If Apple reports $4 per share in earnings on Monday, it will have earned $14.51 per share in FY 2010. Divide that by the current stock price of $310 and you get a price-earnings ratio of 21.36. Does that p/e ratio make Apple an expensive stock? Well, let's look at the other component–the earnings growth rate. In FY 2009, Apple earned $9.08 per share. The FY2010 number will be known Monday, but let's just say it comes in at $14.50. At $14.50, Apple will have increased its FY2010 earnings by 60%.

The "science" of stock price valuation, however, does not place as much emphasis on past earnings as it does on future earnings. I have seen earnings estimates of anywhere from $18-22 per share of Apple for the 2011 FY. If Apple were to earn $20 per share next year, this would represent FY2011 earning growth of 38% over FY2010. If you believe that Apple can earn $20 per share next year, you will use that as the "e" in your p/e calculation. Doing so reveals that Apple currently trades at 15.5X expected 2011 e.p.s. of $20 per share. In other words, you would be paying 15.5X earnings to buy a company that is exhibiting a growth rate of at least 30%. That, my friends, is not only GARP (Growth At a Reasonable Price) but also borders on being an outright "value" in the Growth vs. Value investing debate. (Standard and Poors pegs Apple's future three-year compound-adjusted earnings growth rate at 33%, by the way.)

People–Mark Haines included–just can't seem to get their minds around this fact. If Apple were a small company boasting such a growth rate, investors would most likely be paying a hefty premium for this type of growth because they would expect that a smaller company could maintain this prodigious growth rate for an extended period. Because Apple is a market cap behemoth however, the prevailing wisdom is that it should not be able to show–much less sustain–such a growth rate.  

This "law of large numbers," as it is referred to,  is at the center of every argument against Apple's current valuation. For a company this size still to be growing at this rate is unheard of and that is the conundrum.  Despite Apple's 50% gain so far this year, investors continue to play defense with this stock. Apple is not being accorded the valuation it deserves because the market cannot believe what Apple is doing. Every new Apple product is met with skepticism, every earnings announcement is met with disbelief.

Those who are waiting for the inevitable cessation of growth are missing out on one of the greatest corporate success stories of all time. Apple's growth eventually will stall, and when it does these critics will proclaim that they were right all along, even if they were several years and a couple hundred stock points early with the call. This—and the concern over Steve Jobs' health—are the main reasons why Apple trades at a discount to both its current growth rate and its projected long-term assumed growth rate of 30+%.    

Yes, Apple is a huge company, but its valuation is completely in line with its fundamentals. Someone astutely pointed out the other day that Apple is a small player in two HUGE businesses–computing and telecom. There are other companies that have much more market share in each of these industries than does Apple and thus Apple has a significant opportunity to both increase that market share and by extension increase its earnings. To do so, the company will have to continue to differentiate itself from the competition through innovation and the delivery (at an acceptable price point) of products that consumers didn't know they needed but find intensely useful once they do.

The valuation argument would be compelling if Apple's P/E was 50 or more, but because Apple is trading at a P/E that is both in line with the market's overall P/E and at a significant discount to its own earnings growth rate, the valuation argument is nonsensical. To me, anyway.

Respected non-professional Apple analyst Andy Zaky has written that you will be disappointed if you expect the investing community to have an epiphany and suddenly be willing to pay for Apple a price that is commensurate with its earnings growth rate. He says that one should instead play the "e" side of the p/e equation. Apple's earnings estimates get ratcheted up regularly, as professional analysts come to realize that Apple is not going to sell 2-3 million iPads in 2010, but instead more like 8 million, and perhaps as many as 40 million next year. Play that side instead. If the investment community is only willing to pay 15X earnings for Apple, that's just the way it is. However, every dollar that analysts tack on to Apple's projected earnings means another $15 to the target price if 15X is indeed the threshhold above which Apple investors will not go.

While Apple is not "stupid cheap" like it was earlier in the year, it is my supposition that the stock price is supported by the company's fundamentals. Claiming that Apple is expensive merely because of its market cap ranking seems to me to be overly simplistic. We all will know much more about this story at 5PM on Monday.

Monday, October 11, 2010

Wayback Machine

What a difference a decade or two makes. Last night the wife and I went to see a band called the Spazmatics, in town to play as part of the two-week-long celebration of the World Equestrian Games being held here in Lexington.  "Nerds that rock," the Spazmatics are the creation of a group called Perfect World Entertainment.

According to its website, "Perfect World Entertainment is the industry leader in musical era tributes, cover bands and themed party bands."  Yes, they are.  For lack of a better term, the Spazmatics are a franchise.  There are different versions of the Spazmatics all over the country.  The band we saw last night hails from Cleveland, home of the Rock and Roll Hall of Fame but an underrated music city nonetheless. There are many music purists who decry the rise of these formulaic bands, but these guys are talented and the act works.  Crowds go crazy for these would-be nerds.

I first stumbled across the Spazmatics a few years ago when I ran into the L.A.-based act at the Belly Up in Aspen.

Until that night I was unaware that 80s music was in the midst of a renaissance.  My buddy and I were astounded.  The place was packed and the vast majority of the patrons were dressing the part, wearing the neon-hued ski apparel that was the essence of fashion during the decade of Duran Duran, Eurthymics, Madonna and all of the one-hit wonders who contributed to the rise of MTV.  "These people are making fun of us," I exclaimed, not yet in on the joke. My indignation lasted for all of three songs before I clued in.  The band and the crowd were not mocking the 80s, they were embracing it!  The 80s were back, baby!

I read once that everything moves in twenty-year cycles, especially music and fashion.  Music, much more so than fashion, is a bridge to another time.  Nothing can capture of the essence of a moment in time as crisply as a song does. Music is a marker. Music is participatory. Music is life's bookmark.  

Not long after the Aspen experience I had the opportunity to suggest the Spazmatics as entertainment for a mid-winter party.  While a funk band would have been the safe choice, I loved the crowd's reaction to the Spazmatics' show.  We were able to book them and despite my fear that what worked for a besotted crowd of twenty-somethings in Aspen would not work for an older crowd in a country club setting,  I needn't have worried.  The party was a grand slam home run.

Whip it good! 
So, last night the Spazmatics were back in town.  Our schools are on fall break, it was a beautiful evening, and downtown was filled with revelers.  The elements for a good time seemed in place. They cranked up shortly after 8 PM.  As at the party with which I was involved, the crowd at first seemed unsure what to make of these guys and their polyester pants, big black glasses, and pocket protectors.  For those unfamiliar with the band and the concept the music itself seemed a strange choice. 80s music?  Really? 
So, the crowd, which I estimated at 5000+, hung back for a couple of songs.  But then the combination of music, alchohol, and memories kicked in.  For the crowd, the majority of whom had come of age in the 1980s, it was time travel.  It never fails.  People danced, sung, played the air guitar, and lost their inhibitions in the good time that a great band makes possible.  The Spazmatics ate it up.  It was perfect–the crowd loved the band and the band loved the crowd.

After they finally dragged themselves off the stage to catch the flight home, I was talking to a friend and she made a salient comment.  "I didn't even like most of those songs in the 80s," she said, "but tonight I was screaming the lyrics to every song they played."   Yes, indeed.  Journey, Wang Chung, Def Leppard, Tears For Fears, Dexy's Midnight Runners were all famous 80s bands that didn't really resonate with me then. In the 80s I was–true to form–listening to the 60s.   However, the passage of two decades and the identification of these bands as being central to the culture in which I came of age, makes it my music now.  "Safety Dance" anyone?  Who's with me?

"We can dance if we want to..."


Wednesday, October 6, 2010

Densensitization Nation

My son Jack is football crazy.  When he was younger and showed no interest in sports, I worried that my genetic code was buggy .  Every father who ever lived knows what I am talking about.  Now, however, Jack can't get enough football.  Carson Palmer lives in his room with him (as a Fathead).  He has two (that I know of) fantasy football teams.  He is a student of the game and I genuinely believe that he would love to be the general manager of the Cincinnati Bengals some day.  We watch alot of football together on Sundays.

There is just one problem with spending this Sunday quality time with my fifteen-year-old boy.  Erectile dysfunction.  What in the hell is up with all of the ads for this condition that run during the day on Sunday?  I understand that the target audience is right in front of the television at this time, but so is my child.  So, we both have to pretend not to be paying attention while these actors discuss with us the method by which they can become once again the men they are supposed to be.  Poor Jack, he must think that ED is an unavoidable condition. 

"Am I coming over there or are you coming over here?"

  Apparently I am not the only one who feels this way. In April of 2009 Rep. Jim Moran of Virginia introduced H.R. 2175, a bill which would ban all ED advertising between the hours of 6am-10pm.  As I write this the bill languishes in committee, undoubtedly because opposition to ED advertising has had to take a backseat to the global economic implosion.

That got me to thinking about the concept of desensitization.  I remember a Seinfeld episode in which Jerry prosetylized that men's fascination with breasts is due to the fact that they are hidden from us.  If women wore no shirts but instead covered their heads, he said, men would be fascinated with women's heads. I agree. 

"I must know what is under that hat!"
Do you think that the aboriginal tribes of the Amazon are as enamored with breasts as are we?  Of course not, and it has nothing do to with the fact that their women lose the fight against gravity at an early age.   It's because the women make no effort to conceal them.  If you see something often enough, you got desensitized to it.  That was Seinfeld's point. 

Poop used to disgust me but after having three kids and changing my umpeenth diaper, poop lost its power to frighten. Do you think blood and gore has any effect on Emergency Room personnel?  To them, splattered blood is nothing more than what a ketchup stain is to you and me.  Remember when everyone was terrified of gay people?  Gay people eventually figured out that if they made everyone else deal with their gayness, the non-gays would eventually find something else to be terrified about.  When Ellen DeGeneres kissed another woman on primetime tv however many years ago that was, it caused a national furor.  Now, open displays of homosexual affection are so commonplace in the media that it is hardly even worthy of note anymore.

Our fears are the result of ignorance.  As a child, the thought of getting on an airplane was enough to cause incontinence.  Now I am asleep before we even pull back from the gate.  The physics of flight have not changed, but my perception of the danger has.

So, until Congress comes to the rescue and consigns these ads to late night television where they belong, Jack and I will continue to pretend to be occupied by something else when the ED ads intrude on our Sunday bonding.  I daresay that if as much effort and research was put into curing the common cold as is put into hyping the benefits of Cialis, Levitra, and Viagra, I could stop being a compulsive hand-washer during cold and flu season.  Thank God my twelve-year-old daughter and nine-year-old son don't like football or like Ricky Ricardo was famous for saying, I would have "some 'splainin' to do."