Finding the Next Apple

Featuring Lutts’ Logic:

Turning Problems into Solutions

Turning Off Analog Television
The Next Apple

The city fathers of Salem recently announced that the trash contractor would no longer pick up cardboard boxes.  All cardboard boxes must now be cut down to flat sheets, no larger than 3 feet by 3 feet, and bundled so the recycling contractor can take them away.

I’m not a big fan of cutting down cardboard boxes; it’s a bit dangerous, and it takes time.  So the boxes started to pile up in my garage.  And then this past weekend, I had a brainstorm.  I took a smaller cardboard box, filled it with crumpled newspaper and kindling, and voila! . . . an instant self-contained portable fire-starter.  I popped it in the fireplace, lit it, and achieved two goals at once: starting a fire and disposing of a cardboard box.

I turned a problem into a solution (at least for the winter).

Larger problems can become solutions, too.  For example, the sky-high gasoline prices of the summer, which were universally viewed as a huge problem, actually became the long-awaited catalyst that pushed Americans out of gas-guzzling SUVs and cars and into fuel-efficient cars.  At the Detroit auto show, manufacturers are now tripping over themselves to promise fuel-efficient vehicles that Americans will buy in the years ahead.

Another problem that could actually turn out to be a solution is the impending shut-off of analog television signals by full-power broadcasters on February 17, an event that’s been on the calendar since 2005 but that is not going as well as planned.

If you’re a typical Cabot Wealth Advisory reader, the analog shutoff probably won’t affect you.  You’ve got cable, or a satellite dish, or a new digital TV … or two or three.

But for a certain segment of America, it’s a big deal.  While there are some 250 million televisions in this country in 112 million households (that’s an average of 2.2 televisions per household), approximately 19 million of these households are still relying solely on analog broadcast signals, while another 19 million rely on analog signals for a portion of their programming.  Generally, these people are the poor, elderly and minorities, and while it would be nice to simply keep on broadcasting analog for their benefit, it’s financially irresponsible to ask broadcasters to support two systems.  Furthermore, it would defeat the whole purpose of the switch, which is to use the bandwidth currently devoted to analog television for the far-more-efficient digital TV signals … and more.

Among my acquaintances, there’s been literally no discussion of the issue, but David Rehr, president and CEO of the National Association of Broadcasters, has commented that the transition from analog to digital television will be “the most significant advancement of television technology since color TV was introduced.”  Maybe so.  But maybe he got carried away.

After all, America is not leading the way here.  Many countries have already completed the switch successfully, and it doesn’t seem to have made a big difference for them.

The first country to make the switch was little Luxembourg, back on September 1, 2006.  That’s one virtue of being small . . . and rich.

The Netherlands moved to digital on December 11, 2006.

Finland stopped analog broadcasts on September 1, 2007, though cable TV viewers continued to receive analog broadcasts until the end of February 2008.

Andorra completed its switchover on September 25, 2007.

Sweden’s analog switch was completed on October 15, 2007, though cable distributors are allowed to continue broadcasting analog signals.

Switzerland completed its analog shutdown on November 26, 2007.

And even in America there’s been a test case; Wilmington, North Carolina switched on September 8, 2008.  And Hawaii was scheduled to switch at noon today.

Looking ahead, Canada’s switch will be complete on August 31, 2011, though many Canadian citizens will switch sooner because they depend on the signals of U.S. broadcasters.

Japan has planned its switch for July 24, 2011.

The UK has already begun the switch and will complete it in 2012.

So what’s the problem?  Well, if you’re relying on an old-fashioned analog television and you’re not paying for cable or satellite service, after February 17, you’ll only get low-power analog broadcasts, the ones that show local programming like bowling tournaments and tractor pulls.

The solution: you can pay for cable or satellite service, or buy a new digital television that will receive the digital broadcast signals (all televisions sold since March 1, 2007, have digital tuners) … or you can buy an analog-to-digital converter box, which costs between $40 and $80.

In a recent study of analog users, 10% of respondents said they would opt to pay for television services, 20% said they would abandon television altogether and 70% said they would get a converter box.  And of course our federal government generously offered to help them do that.

So, since January 1, 2008, the Department of Commerce, via its National Telecommunications and Information Administration (NTIA), has been giving out (for free) two coupons per household (each coupon is worth $40 toward a converter) to anyone who asked.  (Anyone!)  Congress appropriated up to $1.5 billion for coupons … $160 million of which was budgeted for administration.  About 40 million coupons have been requested, but to date only 16 million have been redeemed, compared with an estimated 35 million televisions that will lose a signal.  By some calculations, that leaves 24 million televisions that won’t work after February 17.  (I’m guessing it’s fewer, simply because I don’t trust the government’s numbers … and I believe in people’s ability to adapt.)
And now the money allocated to the program has run out!

So the NTIA is building a waiting list.  Only after unused coupons expire (after 90 days) will new coupons be issued.  Oh, and it takes four to six weeks for the coupons to arrive in the mail!  Yes, they’re using the U.S. Postal Service, so that four to six weeks is mainly due to slow processing by the people taking $160 million to give out coupons.

In my opinion, any major electronics retailer, from Amazon to Best Buy to Wal-Mart, could have done the whole job faster and cheaper.  Even individual states could have done it better.  Note: There are plenty of converter boxes out there.  Electronics manufacturers know how to supply their markets.  But the federal government, even with years of lead-time and practice in one metropolitan area, has failed to do its part as planned.  (Shades of what we’ll face when/if universal health care is implemented.)

So now some people, including Massachusetts Representative Ed Markey (head of the House Energy and Commerce Committee’s telecom committee) and representatives of the Barack Obama transition team, are calling for an extension of the shut-off date, thinking that 90 more days (until May 17) will help solve the problem.

Interestingly, AT&T, which spent more than $6 billion to buy some of the current analog spectrum at an early 2008 auction, is supporting the extension.  At the same time, Verizon, which spent more than $9 billion for a large portion of the spectrum in partnership with Vodafone, opposes the extension.  Both entities are scheduled to take ownership of their portions of the spectrum next month.

Also opposing the extension are the broadcasters, many of whom have been paying to maintain two systems for several years now, and also using precious airtime to broadcast notices about the switch instead of running revenue-generating ads (or, in the case of nonprofits, appeals to viewers for contributions).  They ask why they should have to suffer more for the government’s inability to do a job it chose for itself.

Here’s my recommendation.  First, don’t extend the ill-conceived coupon program.  Every day this program runs past February 17, it gets less effective.  The law of diminishing returns says it’s time to stop.  Finish it up by mailing coupons to people on the waiting list as soon as possible, and then shut it down.  Stop wasting our money.

Then let the broadcasters drop analog transmissions as planned and get on with the business of modernizing our communications network.  Let the electronics manufacturers and retailers sell converter boxes as they wish, and then focus on digital as the old analog market dries up.

And what about the poor people who still won’t have digital televisions or cable or satellite or a converter box?  What will they miss?  Well, these were the top 10 television programs watched in America last week.

College Football: Oklahoma vs. Florida
NFL Football: Arizona vs. Carolina
AFC Division Playoff Post-Game (Sunday)
The Mentalist
College Football: Texas vs. Ohio State
60 Minutes
Golden Globe Awards
Grey’s Anatomy
Desperate Housewives

Since we’re in playoff season, the list is heavy in football, both college and pro.  Normally, it would be heavier in sitcoms and reality shows.  That’s entertainment, and that’s how the average American spends four hours per day.  That’s 28 hours per week, five days per month, or 61 days per year.  In a life of 65 years, that’s the equivalent of almost 11 years!

Yet there’s precious little in these programs that will improve the life of anyone watching them.  So why is our government spending over $1 billion (that we don’t have) to enable this behavior?

And here’s where the problem becomes a solution.

Has anyone in Washington ever thought that disenabling television viewing would actually be good for people?

Let’s start with the obesity epidemic, which some sources claim costs America more than $100 billion dollars per year.  (The numbers are questionable, but no matter; they’re really big.)  It’s well documented that increased television viewing correlates with increased obesity.  Helping people watch less television would thus be one small step toward better health.

And what will they do if they don’t watch television?

Read a book, take a walk, talk to the members of their family/household, meditate, go fishing, paint a picture, go to a gym or health club, paint the house, click the “random” button on Wikipedia and learn something new, take a bicycle ride, do a crossword puzzle, read to a child, find a new recipe and cook a healthy dinner, play basketball, play chess, checkers or solitaire, build something, go back to school and learn something, volunteer, go swimming, learn to knit, make a video and post it on YouTube, teach a dog a trick, visit the library … or even visit with neighbors who do have digital reception.  I guarantee that time spent in these activities will be far more productive than sitting at home watching television.

On a related note, also espousing more traditional values and virtues is this email from a female reader in Florida.

“[Recent correspondent H.S.] sounds just like one of my schoolmates or cousins.  Our teacher, gray-haired Mrs. Foster, came early in her little gray coupe to build a fire and pump enough water so we did not have to go outside except to the outhouse.  She taught 8 grades. (She had a good system–she taught eight grade and those students taught seventh graders what they had learned the year before and so on.)   Mrs. Foster passed out the tests and they were simple to grade.  She called out the answers and we graded each other.  We only had some 30 students, and sometimes someone had to move to another grade, just to get two in that grade.  Every day started with our hand over our hearts saying the Pledge of Allegiance and we sang songs like “America” and “Onward Christian Soldiers.”  It worked well.  I do not know if anyone went past high school.  I know I learned enough to keep learning and so did my brother and three sisters.   My mother was the other best teacher.  She did not take time to teach us anything, except by example.  She taught me: Rely on God (you will always have a helper).  Always tell the truth (it will stand the test of time).  A garden space is better than welfare (if you are willing to work).  Do not ask anyone to do for you what you can do for yourself.  And, unless you are starving, do not spend your last dime.  Her motto was “Make do” and it is still mine.  If you ever have an extra, help someone else.  Never, ever waste food, or anything else. Because I was blessed to be born American with a hard-working, honest mother, at a spectacular time, I have had every dream, with the icing too, come true.  Her five children are still alive, with the youngest now 66.  We knew America was the best, and still is.  God Bless America.”

P.B. from Florida

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And now for an investing idea.

Last week I wrote a long piece about Steve Jobs, Apple and AAPL, saying, “AAPL’s best days as an investment are over.  In fact, AAPL is likely to underperform the market in the years ahead.”  Today, the stock plunged on big volume through technical support, following the news that Steve would take a nearly six-month medical leave.  So my timing was lucky.  And my conclusion is unchanged.  Remember, it’s all about changing levels of perception.

Your job–and ours–is to find the next AAPL.  One way to do that is to ask, “What company serves a mass market, is profitable, has terrific prospects for growing revenues and earnings rapidly, can ride a wave of societal evolution, and is not yet loved by the majority of investors?”

One candidate is AeroVironment (AVAV), a company with a solid business today and especially bright prospects for the future, as Americans shift toward electrically powered vehicles.

Dr. Paul MacCready, a visionary aeronautical engineer who devoted his life to developing more efficient transportation vehicles that could “Do more with less,” founded the company in 1971.

A champion glider pilot, he was the U.S. National Open Class Soaring Champion three times.  He was also the first American to become World Soaring Champion.

He created the first practical human-powered plane, the Gossamer Condor, in 1977, with Dr. Peter Lissaman.

Two years later, his pedal-power Gossamer Albatross was successfully flown from England to France.

In 1981, his Solar Challenger set records for highest, farthest and longest solar-powered manned flight.

In 1985 he built a flying, remote-controlled pterosaur (the animal commonly called a pterodactyl) for an IMAX film.

And in 1987, his Sunraycer, created in partnership with General Motors and Hughes Aircraft, won the world’s first solar-powered car race, traveling across Australia (north to south) in 5.2 days.  The second place car arrived two days later.

All five of these creations can be seen in the Smithsonian.

Sadly, Dr. MacCready passed away in 2007.  But his spirit lives on in AeroVironment.  Today, the company’s bread-and-butter comes from the design and manufacture of Unmanned Aircraft Systems (UAS), the remote-controlled, hand-launched planes that survey the skies over war zones of Iraq and Afghanistan while our soldiers remain safe on the ground.  The U.S. Army accounts for 62% of revenues, while other U.S. government agencies account for 22%.  And that business is golden; AeroVironment has won all four known projects for such aircraft put up for bid by the Pentagon.

But the future of AeroVironment lies in the children of Sunraycer, the vehicle that led to the creation of the GM Impact and then the EV-1.

As Brendan Coffey, editor of Cabot Green Investor, wrote recently, “Perhaps most exciting is AeroVironment’s systems for testing and charging electric vehicles. The company makes a system called PosiCharge, basically a fuel pump to recharge an electric battery. Since electric systems are making inroads into industrial uses, such as forklifts, PosiCharge is finding early acceptance there. In December, the company sold a system to electric truck maker Balgon (BLQN) to be used with its trucks in the Port of Los Angeles, which mandates that on-site equipment be electric powered. In September, AeroVironment reached a deal with heavy equipment dealer Toyota Material Handling USA to market the system. With the U.S. government now starting to discuss incentives for electric car infrastructure, there is potential for business to get very interesting this year. Financially, AeroVironment is in excellent shape. It’s free of debt with $120 million in cash on hand and its main client–the U.S. government–is the most reliable payer around.”

I think the company’s recharging business has the potential to make AeroVironment the next Apple.  It could eventually serve a mass market.  It’s been profitable since 2002, so it’s well managed.  It has terrific prospects for growing revenues and earnings as electricity and solar slowly muscle in to the energy industry.  It can ride a wave of societal evolution.  And it’s not yet loved by the majority of investors.

In fact, AeroVironment came public in January 2007 at 17, and now it’s 34.  It’s been doing well, especially considering the horrible market of the past year.  But the stock is still not expensive.  It trades at roughly three times revenues, or a P/E ratio of 28.  In the latest quarter, revenues grew 22% to $65.8 million while earnings soared 71% to $0.41 per share.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Cabot Wealth Advisory

Editor’s Note: AeroVironment may never be mentioned here again, but it will certainly be followed closely by Brendan Coffey, editor of Cabot Green Investor.  If you’re looking for an investment advisory to keep you abreast of all the best Green investments, I highly recommend it.  Brendan uses the time-tested Cabot growth investing system, while focusing on earth-friendly investments, and with a new environmentally friendly administration coming to Washington, you know there are some great investments in this sector.  Sign up for a no-risk trial subscription and see for yourself.  Click below for details.


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