Scale, organic growth, levered equity driving Liberty Global

Notes from Liberty Global Annual General Meeting of Shareholders – Thursday, June 26, 2014

  • Value creation drivers (all thriving in Europe)
    • 1.) scale in core markets
      • benefiting from fragmented market
      • favorable regulatory environment
      • winning share from larger telco incumbents
      • scale aids technology procurement (set top boxes), content acquisition, leveraging services & human resources
      • Virgin Media and Ziggo acquisitions were based on building scale
        • substantial synergies to be realized
    • 2.) organic growth
      • targeting mid-single digit growth in revenue and operating income
      • Europe has low penetration of advanced services
      • Liberty’s bundles are attractively priced and over best-of-breed offerings in video, broadband
      • 1ooMbps broadband speeds anchor bundles and organic growth
      • declining video losses from advanced digital platform
      • growth will require continued innovation
        • Horizon TV
          • Horizon generates 30% more ARPU
          • 20% less churn (vs. avg. digital customer)
        • mobile and B2B businesses
          • expects increased demand for quad plays
          • Wi-Fi hot spots and Wi-Fi calling technology
          • SOHO segment growing over 20% annually
      • content
        • with large video and broadband base makes sense to evaluate how select investments in content can help maintain and grow customers
        • All3Media JV partnership with Discovery Communications
        • 50% stake in De Vijver Media, Belgian free-to-air station
        • More content deal/investments to come, particularly in the OTT space
        • SVOD services, such as MyPrime, designed to get ahead of rising OTT threat (Malone is on record as thinking U.S. cable industry was slow to respond to SVOD threat.)
    • 3.) Committed to growing FCF per share (levered equity capital structure)
      • managing capital intensity
      • optimizing balance sheet
      • using excess cash to repurchase shares
        • asset they know the best (circle of competence)
      • best way to drive equity returns for shareholder
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A Peek into Ted Weschler’s Thought Process

On March 3, 2014 on CNBC’s Squawk Box, Ted Weschler discussed Berkshire’s investment in DaVita Healthcare Partners.

Weschler listed three broad filters he uses for investing in healthcare stocks.

  1. Does the provider deliver better quality of care than someone could get anywhere else?
  2. Does the company deliver a net savings to the healthcare system?
  3. Do you get a high-return on capital, growth and a shareholder friendly management? Presumably, Weschler looks for these same characteristics in other industries.

Weschler began studying the dialysis industry right out of college. Therefore he knows the industry well. The lesson here is to look for insights by studying an industry deeply over a sustained period of time. This echoes lessons from Warren Buffett.

Finally, Weschler is long-term oriented. He has no idea how DaVita will do in the short term (two years out) but he is confident that in five years it will be a more valuable franchise.

The takeaway: a value-oriented rational framework applied consistently over time will deliver (very) satisfactory results.

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Links of Interest – 03/06/15

The Brooklyn Investor: Berkshire Hathaway Annual Report 2014

DLD15 – The Four Horsemen: Amazon/Apple/Facebook & Google–Who Wins/Loses (Scott Galloway) – YouTube

Charter Is Ready To Go After Time Warner Cable If Comcast Deal Falls | Deadline

How Buffett Is Changing The Future Of Berkshire’s Float – From Insurance To Uncle Sam – Berkshire Hathaway Inc (NYSE:BRK.A) | Seeking Alpha

What’s the Best Way to Value Berkshire Hathaway? – Morningstar

The Brooklyn Investor: 10x Pretax Earnings! Case Studies: KO, BNI etc.

The Brooklyn Investor: JPM Investor Day 2015

Warren Buffett’s Hurdle Rate

Warren Buffett: Berkshire’s railroad BNSF ‘disappointed’ in 2014 – Fortune

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Berkshire Hathaway: an 80 cent dollar?

“It is better to be roughly right than precisely wrong.”

- John Maynard Keynes

“Intrinsic value is an estimate rather than a precise figure.”

- Warren Buffett

 $243 billion – Berkshire Hathaway’s total shareholder equity on December 31, 2014.

+ $20 billion – Adjustment for GEICO’s economic goodwill. This is roughly consistent with the 97%-of-premium-volume valuation yardstick Buffett established in the 201o shareholder letter. Paul Lountzis, founder of Lountzis Asset Management and a respected investor, suggested in a March 2, 2015 WSJ article that GEICO could be worth as much as $25-$45 billion.

+ $50 billion – Adjustment to properly value BNSF. BNSF comprises approximately $51 billion of Berkshire’s equity, per BNSF’s 2014 10-K. Stripping out $15 billion of accounting goodwill leaves $36 billion of tangible equity. At 3x tangible book, BNSF would be worth approximately $108 billion. Union Pacific, a good comp with similar revenue and assets, has a market cap of about $100 billion and sells at 4.9x book, according to Morningstar. Union Pacific’s 5-year average price/book is 3.1.

+ $37 billion – Adjustment to properly value Berkshire Hathaway Energy (BHE). Berkshire’s Railroad, Utilities, & Energy segment had assets of $159 billion and liabilities of $71 billion, as of December 31, 2014, leaving equity of $88 billion. Netting out $51 billion for BNSF leaves $37 billion of equity for BHE. Here I assume a valuation of 2x book which I based on industry valuation figures maintained by NYU. BHE deserves at least a market multiple given 1) the quality of it’s assets, 2) it’s growth rate, 3) it’s access to and capacity to reinvest capital and 4) it’s management’s skill.

+ $84 billion – Adjustment for Berkshire’s float. Buffett is on record as saying that $1 of float is worth more than $1 dollar to Berkshire. Investors will need to make their own assessment of whether this adjustment overstates the float’s true economic value as Buffett has recently commented that float could decline in the future, albiet at a slow rate. At the 2010 Markel breakfast in Omaha, Tom Gayner was asked if insurance float should be treated as a true liability. Gayner argued that if you’re given $1 to hold and you never need to give it back it should be worth more than $1.

+ $30 billion – Adjustment for half of Berkshire’s deferred tax liabilities. Although GAAP accounting treats deferred taxes (both from unrealized capital gains and investments in fixed assets) as a liability, from an economic standpoint (and using the same logic Markel’s Gayner applied to insurance float), they function as an interest-free loan for Buffett to invest. This approach is consistent with Berkshire’s Owner’s Manual and comments made by Charlie Munger in Wesco’s annual reports, although neither gives a precise valuation formula. This figure may be low given Berkshire’s massive core permanent equity holdings and continued and increasing capex spending in the Railroad, Utilities, & Energy segment. Each investor will need to make their own estimate of when and how much of Berkshire’s capital gains will be realized and when the deferred taxes on Berkshire’s massive investments in BNSF and BHE will reverse, if ever, given Buffett’s characterization of their future opportunities/requirements for substantial amounts of capital. I think the present value of this float in the hands of Buffett and his successors is large.

Total – $464 billion*. This equates to a price/book ratio of 1.9 or a value per A share of $282 thousand. This is broadly consistent with Buffett’s comment in the 2014 shareholder letter, “If an investor’s entry point into Berkshire stock is unusually high – at a price, say, approaching double book value, which Berkshire shares have occasionally reached – it may well be many years before the investor can realize a profit.”

The reasonableness of this estimate can be crosschecked against the two-column valuation of Berkshire. Assuming an intrinsic value of $282 thousand per share and netting out the current $140 thousand per A shares in investments leaves a value of $142 thousand. This is about 13x Berkshire’s pre-tax earnings per share of $10.8 thousand. This figure would appear fully valued but not unreasonable, considering the quality of Berkshire’s businesses and that it does not include any earnings from insurance underwriting ($24 billion pre-tax over the past twelve years).

According to this estimate, at $220 thousand per A share, Berkshire is trading at approximately 80% of intrinsic value.

I remain long Berkshire Hathaway.

* this estimate of intrinsic value did not make an adjustment for noncontrolling interests. This amount is immaterial given the relative small size of the interests and the huge size and imprecision of the above adjustments.

* No attempt was made in this estimate of intrinsic value to assess whether the economic goodwill of Berkshire’s other businesses – insurance operations ex-GEICO, IMC (Iscar), Lubrizol and Marmon et al. – exceeds that of their accounting value, but this seems likely given the success of these businesses along with Buffett’s unwillingness to overpay when they were acquired.

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A review of Guy Spier’s new book “The Education of a Value Investor”

“The unexamined life is not worth living” – Socrates

“We have met the enemy and he is us” – Pogo

Guy Spier has written a very thoughtful book about investing and about life. Fans of value investing may initially be disappointed that the book does not dispel more valuation techniques or models. But alas anyone who has seriously taken up the task of becoming a skilled value investor eventually realizes that the value investing framework per se is relatively straightforward. Ben Graham and Warren Buffett have already provided these and there are no secrets. The real challenge is the emotional and psychological discipline required to actually implement this proven investing framework.

Some investors such as Warren Buffett and Mohnish Pabrai display a kind of natural virtuosity in this regard that can make it look easy (this may indeed be their greatest genius). Yet, anyone who has seriously undertaken the task of becoming a skilled investor who can add real value – whether measured in relative terms (beating the S&P 500) or in absolute terms (doubling your money every X years) – is sooner or later disavowed of the notion that it is easy.

Fortunately, to quote one of Guy’s mentors, Tony Robbins, “Biography is not destiny. The past does not equal the future.” This is where Guy’s book shines. It is a book-length memoir of one man’s journey to overcome his mistakes and limitations and become a successful investor. Along the way, he discovers much more about life and relationships and important values that we all need to learn or be reminded of.

Charlie Munger has taught us to learn from other peoples mistakes. Here Guy has been remarkably candid and generous in his self-revelations, and there is much to learn from them. It can be a catalyst to look at our own foibles and blind spots and work to overcome them.

In case all this sounds too fluffy and devoid of real meat, I want to assure you that the book contains plenty of useful and actionable investing information, from how to set up an environment that supports rational behavior, to rules of thumb for countering your psychological biases, to how to research a stock, to the importance of checklists and how to construct one that adds value, to a first-rate reading list.

I commend this book to you and look forward to using its many lessons myself to become a better investor and, hopefully, along the way, a better person.

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Buffett & Munger’s Four Investing Filters

A few takeaways:

  1. (Filter #1) The most important thing is to understand the business.
  2. (Filter #2) Look for a business with an enduring competitive advantage.
  3. (Filter #3) Invest with able and trustworthy managers.
  4. Filter out most prospective investments through inversion, i.e. businesses you don’t understand, businesses with lousy economics, etc.
  5. (Filter #4) Pay a price that makes sense and affords a margin of safety.
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Mohnish Pabrai at Google

A few takeaways:

  1. There is a big difference between risk and uncertainty.
  2. When you own a stock you own part of business. Learn to think like an owner.
  3. Compounding is a powerful force.
  4. Don’t seek false precision.
  5. Try to isolate the handful of key variables that drive the business.
  6. You should be able to state your investment thesis in a few sentences.
  7. Patience is essential.
  8. Stay within your circle of competence.
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Links of Interest – 08/01/14

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Links of Interest – May 23, 2014

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A few thoughts from Omaha on Berkshire Hathaway’s future ($BRK.A, $BRK.B)

I came away from the Berkshire Hathaway meeting generally reassured about its future as a sound investment.

The results will not be spectacular going forward. Berkshire is simply too big for that. However, the result are likely to be quite satisfactory. I think it is rational to assume (as Buffett himself believes) that Berkshire can still beat the S&P 500 over a complete business cycle, something few managers can do. Moreover, in Berkshire’s case you have a high probability of selecting the manager BEFORE you invest, a rarity.

Buffett has put together a collection of businesses that are not only highly profitable, but also remarkably immunized from creative destruction, which provides a margin of safety. It is not a stretch to assume that one hundred years from now BNSF will still be riding the rails, BH power will be providing energy in one form or another and BH insurance companies will be underwriting. This also is rare.

The key question that will drive Berkshire’s results going forward is whether Buffett or his successors will be able to intelligently put to work the enormous capital the company generates.

For now, Berkshire has shown that it still has this capacity to do this given the following options.

  1. Tuck-in acquisitions and organic growth, i.e. NFM Texas store
  2. Large cap-ex investments in rails and energy. Tens of billions can be put to work here over time at satisfactory returns, i.e. 11%-12%.
  3. Stakes in publicly traded companies
  4. An occasional whale (this may be aided by 3G Capital)
  5. “Special Deals” (such as those done with Goldman, GE, BOA, etc.) – Buffett thinks these will still be available after he is gone, based on Berkshire’s reputation and its ability to write a huge check.
  6. Something we are not thinking about. This may seem a bit of a stretch (and certainly not something to count on) but Buffett is an investing genius who has surprised many times in the past by coming up with new ways to deploy capital.

Another positive is that Berkshire is one the few companies that will have both the firepower – cash, operating profits, borrowing capacity, liquid securities – and investing philosophy to exploit Mr. Market when he goes into a future depressed state. Moreover, confidence is growing that Todd Combs and Ted Weschler are skilled investors who could have a long and successful run ahead of them at Berkshire.

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