- Relative performance of industry (Is Mr. Market presenting an opportunity?)
- Recent performance of industry
- Nature of the industry
- History (brief) of the company
- Advantages of the company
- Growth – track record
- Growth – future prospects
- market opportunity
- competitive advantages
- Relative performance vs. industry peers
- Capital structure
- use of cash
- shares outstanding
- senior executives
- stock ownership
- Normalized earning power
- Formula 1: great international sports franchise; 400 million+ TV audience; many parts of the business are under-exploited such as sponsorships.
- Chase Carey is a great manager who has brought on some top-tier talent to round out the management team.
- Race calendar is locked in for 2017 and probably 2018. Sponsorship has the most potential for near-term improvements.
- The races need to be more interesting. This will take some time.
- They think the opportunity is bigger than they first thought.
- Teams have an interest in a more balanced league will make the product more compelling.
- Best TV deal is in the U.K. There is a lot of potential to improve the TV deal in the U.S.
- Liberty Sirius XM.
- Pandora is way under monetized. The subscription streaming business does not have very good economics. The free radio market is still a $16 billion market. Perhaps Pandora could help Sirius to go after some of that money.
- Future of connected car. In some ways, this will threaten Sirius because there will be more options in the car. But the two-way connectivity can help Sirius provide a better service.
- The Agero platform has signed up a number of car manufacturers.
- Liberty Broadband.
- Lots of M&A discussion. The current administration is positive for more consolidation. There are not many cable targets left. Charter is very bullish on future prospects. They have a great management team and the comp structure is well aligned.
- Charter is confident on the mobile offering. There is upside here.
- Has grown for the past 30 years. Only a couple periods of no-growth. There were distractions around the election which persist. There are some green shoots. Some positive trends.
- Liberty Broadband sells at discount. That will go away when Broadband is merged into Charter or Charter is sold. They have borrowing capacity to take advantage of the discount to juice the returns.
- Howard is locked up for quite awhile. No other content provider stands out as a big threat.
- Important stat is penetration rate in new cars; this is now in the 70-75% range.
- this builds a double acquisition chance: new and then used
- have invested heavily to monetize used car channel
- the conversion rate on used cars is not as high as on new. it is not just about income levels.
- the used market may be a little more sensitive to price.
- it is critical to get the trial started early – this matters.
- they try various offers to see what will move the needle. they also test their cadence. this has become more sophisticated.
- 1/3 of used cars are sold by new dealers; 1/3 by independents; 1/3 are private transactions. they are nailing it in the first group.
- they are now moving into the channel where you go to get your vehicle serviced. they also continue to work with insurance and finance companies. this is harder given privacy issues.
- the car industry changes slowly. they are coming out with the 360L product. Meyer does not care how people get the product, i.e. via sat, IP, etc. they are not wedded to satellites.
- it is not just compelling content. it must also be easy to use. 360L is a very easy to use interface. you should not care how you’re getting the signal. 360L is two-way which allows Sirius to enhance the offering. also, it will make it easy for customers to renew and get information.
- there are 40 vehicles on the road running tests. they have learned a lot and they are excited about its prospects.
- 360L should make content discovery easier.
- they are deep in discussions with all OEMs on the rollout of 360L. The first car should be on the road Q1, 2018.
- they should have been more aggressive in their IP offering. they now have hundreds of people working on it. They have a highly rated app that works well. they fixed a lot of stuff and it can now roll out on any device. This should expand. It is all about getting the service more easily outside the vehicle.
- in-home engagement drives down churn.
- they do not need an acquisition to do IP. Radio is a $25 billion business. Sirius comprises 25%. A lot of the balance is free radio. Should Sirius pursue that space? They are looking at it but have not found anything. Some of the business models look weak.
- They are guiding 1.3 million net ads this year. They beat guidance last year because of churn performance. this may be the best indicator of customer satisfaction.
- the year started well. the economy is good. they watch home starts because it correlates to the truck market. they are looking for 17 million new cars. this would be great.
- they think churn rates should be steady but it is early in the year.
- churn performance last year was better a result of a lot of blocking and tackling. the marketing organization is expanded. the elasticity of product was strong last year as they worked through a price increase. They worry when they raise prices. they do not assume they can keep raising prices but were pleased to rate hike in 2016.
- they are in 100% of luxury cars. car companies do not want Sirius in all standard models. Penetration in this segment will probably not change much.
- they are spending more time on packaging. they are not in the ARPU business; they are in the cash flow business. they are testing a lot of things to improve this. they do not see ARPU going down. number one reason for churn is customers who do not want to pay.
- there will probably need tailored offerings to reach lower income households. this needs to be done without cannibalization.
- car business changes slowly. they just signed off on the 2022 year model for connected vehicles. After 2020 most vehicle makers will have an embedded modem to own the relationship with the customer and get more data to do that.
- 360L should future proof their product to be competitive with new connectivity offerings.
- They are looking hard at opportunities in the connected vehicle space.
- There will be more Agero rollouts in 2017.
- Satisfaction levels with Sirius content are strong. People pay for great content. They must evolve as the population ages. Biggest opportunity in next 3-5 years is Generation Y. Millenials don’t pay. They look at many content opportunities. Howard is somewhat unique. They would love to find another.
- Most of the big content renewal deals are done.
- Music labels don’t think Sirius pays enough; they think they pay too much. this will be settled by the Copyright Royalty Board. Meyer is optimistic that they can reach a reasonable rate.
- The popularity of country channels is off the chart. the labels need Sirius to create country stars. relationship with content providers is strong.
- Leverage target is 4X. they are below that. this is still the target, they have lots of firepower. they returned $500 million in Q4 2016. they have repurchased $8 billion of stock; this has been expanded by the board to $10 billion. they are funding the growth opportunities. they are looking at acquisitions but they will not be distracted.
- They initiated the dividend to reach a class of investors who only buy stocks that pay a dividend. They are reviewing if this is the case. They like their capital allocation strategy.
- Vast majority of capital will go towards buybacks.
- Meyer has met with Ted Weschler 3 or 4 weeks ago and other times in the past. They are thrilled to have Berkshire Hathaway as an investor.
- Sirius’s royalties are not related to streaming royalty rates. it is a different dynamic.
- 2017 outlook calls for accelerated OCF growth of 6-7%
- Topline drivers: New builds such as Project Lightning in UK, B2B growth, expanding mobile business
- They are working to accelerate growth to 7-8%
- Goal is to keep costs as flat as possible over next two years
- Project Lightning is on track with regards to penetration and ARPU
- Looking for 30% unlevered returns on new builds
- Targeting 40% penetration after 3 years in new builds
- Quad play: still early days but ahead of U.S.; fueled by an incumbent in every market. Liberty has mobile launched in every market; the economic benefit is churn reduction. Each market is treated differently.
- Preference is a full MVNO that maximizes control over customer relationship. They want to own the SIM card.
- They have invested in making the WiFi experience in the home very good. This is very important to the customer.
- 5G will take a while to be market ready. Not a priority for Liberty.
- Video: Invested to make a multi-screen, beautiful interface available. Churn rate on Horizon is lower. Provides replay TV back seven days on TV and mobile devices. Apps like YouTube and Netflix run on the device.
- No home runs in content in Europe. They look for smaller incremental content investments.
- Guiding to $1.5 billion of FCF in 2017; this is the trough. More vendor financing in 2017. They expect FCF will grow in 2018 and beyond.
- They have a lot of flexibility to scale back new builds if returns do not materialize making it low risk.
- Project Lightning has not seen much of a response from BT.
- There is recent progress in turning around Ziggo.
Warren Buffett famously uses four filters when selecting an investment.
- Does he understand the business?
- Does it have a competitive advantage?
- Does it have able and trustworthy management?
- Can it be purchased at an attractive valuation (margin of safety)?
In Amazon.com’s 2014 Letter to Shareholder, Jeff Bezos begins with his own set of criteria for a “dreamy business offering”.
- “Customers love it,
- it can grow to very large size,
- it has strong returns on capital, and
- it’s durable in time – with the potential to endure for decades.”
Bezos writes that, “When you find one of these, don’t just swipe right, get married.”
Bezos makes no mention of valuation.
In my estimation, there are not many businesses that meet these criteria. Finding one a year and buying right would be more than enough.
In 1999 Warren Buffet wrote, “In Ajit, we have an underwriter equipped with the intelligence to properly rate most risks; the realism to forget about those he can’t evaluate; the courage to write huge policies when the premium is appropriate; and the discipline to reject even the smallest risk when the premium is inadequate. It is rare to find a person possessing any one of these talents. For one person to have them all is remarkable.”
It is interesting that these qualities parallel those required to be a successful investor.
A successful investor must:
- properly assess the future prospects of a business;
- quickly pass on those businesses he cannot understand;
- have the courage to make a large bet when the odds are in his favor;
- not invest if the margin of safety is too small.
You can infer from Buffett’s comments that finding (or becoming) an investor with these traits is difficult.
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
- Horizon TV
- 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
- 1.) scale in core markets
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.
- Does the provider deliver better quality of care than someone could get anywhere else?
- Does the company deliver a net savings to the healthcare system?
- 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.
“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 2010 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.