- 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
- 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.
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.
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
“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.
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.
- Tuck-in acquisitions and organic growth, i.e. NFM Texas store
- 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%.
- Stakes in publicly traded companies
- An occasional whale (this may be aided by 3G Capital)
- “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.
- 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.