Project Titan(ic)

In 2014, Apple was rumored to have approved Project Titan, Apple's development of an electric car. In 2015, Apple formally introduced the new project. At its height in 2018, Project Titan employed 5,000 people. Now, nearly a decade later after it started, Apple announced that it is shutting down Project Titan, thereby exercising the option to abandon. With shrinking demand for electric cars, Apple must have believed that spending more money on the new car isn't worth the payoff, even though Apple had reportedly already spent more than $10 billion on the project. We will likely see a write off announcement in the next several months detailing the total spent on the project. Apple has utilized another option as it also announced that many of the Project Titan employees would begin working on AI technology. Fortunately for Apple, it doesn't appear the money spent on this project will sink the company.

Furniture Hedging

Although many people may not consider sports gambling as a hedge, a Houston furniture store owner successfully did just that. Jim McIngvale offered purchasers of more than $3,000 in furniture double their money back if the Houston Astros won the World Series. McIngvale has offered similar promotions on other sporting events in the past, but to date, none have worked out for customers. However, when the Astros won the World Series on Saturday, McIngvale was obligated to pay customers back. To hedge his risk, his first bet on the Astros was a $3 million bet in May at 10-to-1 odds. He added about $7 million more in bets over the summer at average odds of +750. Because the Astros won the World Series, he received $75 million from various sports books to offset the refunds payable to customers. 

Zillow Abandons Flips

On September 13, Zillow Chief Operating Officer Jeremy Wacksman stated that ''We, over time, believe this can be a service that is offered to the majority, to over 50 percent of the housing stock." Wacksman was referring to Zillow's foray into house flipping. Given Zillow's unique data, it should have inside data for the housing market. Instead, Zillow has decided to abandon house flipping, laying off 25 percent of the workforce. Zillow wrote off $304 million in losses due to house flipping in the third quarter, with another $240 million to $265 million in losses to follow.

Convertible Issues At Record Pace

There have been 97 convertible bond issues totaling $54.3 billion so far this year, a record pace. The average coupon on these bonds has been 1.41 percent, with 28 convertibles issued at a zero coupon rate. And the average conversion premium is 39 percent. One issue with convertible bonds is that dilution may occur if the bonds are converted. Companies often pay $10 million or more to protect against dilution. Some of the biggest issues and conversion premiums occurred in February and March, before interest rates rose. For example, in February, Expedia issued $1 billion in convertibles with a conversion premium of 72.5 percent, and Airbnb issued $2 billion in convertibles with a conversion premium of 60 percent. The large conversion premiums to indicate a high level of confidence by bond buyers.

Volkswagen's Option To Abandon

Volkswagen recently announced that it would discontinue production of the iconic Beetle, which was first manufactured in the 1930s. The Beetle was produced until 1978, when Volkswagen first dropped the car from production in Germany. The car was reintroduced in 1997. With sales of only 60,000 cars per year, evidently the NPV of continuing to produce Beetles was negative. Remember, the option to abandon exists with any project, although as the previous reintroduction of the Beetle shows, the abandonment need not always be permanent.

Chipotle's Vanishing Options

In 2015, Chipotle stock hit its peak price of about $758 per share, and executives owned stock options worth millions. Since then, the stock has plunged more 60 percent and executives have lost millions. For example, CEO Steve Ells lost $37.5 million worth of stock options, CFO Jack Hartung lost $34.8 million, and CMO Mark Crumpacker lost $10.7 million. In total, the four top executives at Chipotle, including former co-CEO Montgomery Moran, lost $225 million during the stock price plunge. These options were all granted before 2014 as Chipotle stopped issuing stock appreciation rights after shareholders criticized them as being too large and not linked to performance.

Loonie Taking Flight?

Since 2012, when the Canadian loonie reached parity with the U.S. dollar, the currency has taken a nose dive, dropping to a low of C$1.46 in early 2016. One benefit for Canada is that the cheap loonie created a trade advantage, helping that country's exports and benefiting the economy. With a better economy, whether the loonie will once again take flight is an important consideration for U.S. companies doing business in Canada. Strengthening of the loonie will increase the cost of goods imported to the U.S. from Canada, thereby reducing profits. These companies can lock in costs with forward contracts for commodities, or by hedging currency risk with futures, options, or swaps.

Delta Loses Big On Fuel Hedge

Companies with significant risks, such as currency or commodity risks, often hedge exposure to that risk. An industry with a a history of hedging is the airline industry, with companies often hedging fuel prices. However, not all hedges make money. For example, Delta Airlines recently announced that it lost $450 million on its fuel hedges in the second quarter of 2016 as it closed all of its hedges for the year. Delta is not alone as other airlines such as U.S. Airways and United have abandoned fuel hedges, citing lower fuel prices. We would like to point at that lower prices are not a good reason to eliminate hedges. By eliminating its hedges, Delta is now subject to the risk of increasing fuel costs. A hedge is designed to reduce volatility, so a reason to not hedge is the lack of volatility, not low prices, a fact often missed. Looking at the quote in the article from CNN Money: “Fuel prices are up 60% from their January lows, but they’re down 20% from a year ago. So, even with the cost of canceling its fuel contract, Delta will save money on fuel … in the second quarter.” While we agree that Delta will make more money with lower fuel prices compared to January, if fuel prices increase, Delta will not make as much as they could have going forward.

Spinoffs And Bondholders

In 2014, there have been 57 spinoffs by nonfinancial companies, an increase from 44 and 33 in 2013 and 2012, respectively. Many spinoffs are done for the benefit of stockholders. On average, a company that undertakes a spinoff sees its EBITDA increase by one percent between the announcement and the end of the next fiscal year. But the news for bondholders isn't as good. For one-third of the spinoffs since August 1, 2013, S&P has lowered the credit rating or put the company on a negative creditwatch. S&P notes that in spinoffs, there is often a decrease in cash flow without a corresponding reduction in debt. And, in the case of Symantec, S&P has the company on a negative creditwatch due to diminished business diversity (read diversification, or the coinsurance effect.)