Monday, January 08, 2007

Festival of Stocks 18

We are very proud to host this marvellous festival

Mr Juggles presents Sharper Image: Nerd CEOs Destroy Shareholder Value posted at Long or Short Capital. This is the infamous life size Superman sculpture farrago.

Matthew Paulson presents Gold: A Bad Investment posted at Getting Green. For the gold bears...

H.S. Ayoub presents Vertex Hepititis C Candidate May Be a Success Story posted at BioHealth Investor. Who else remembers this excellent Barry Werth title about a struggling start-up?

EDITOR'S CHOICE: George presents the extraordinary outperforming Fat Pitch Financials Portfolio 2006 Performance posted at Fat Pitch Financials.

Leon Gettler presents Is Steve Jobs untouchable? posted at Sox First.

tjp presents Chinese Stocks to Watch in 2007 Series , a series including the inscutable CHL, posted at Investor Trip.

Frugal presents Important Update for the Precious Metal Market posted at My 1st Million At 33. Did you think we'd forgotten the gold bulls?

Izual presents Brederode : Stock on Euronext Brussels posted at Investing in Euro. The Belgian Warren Buffett? Who knew?

Wednesday, December 13, 2006

FreightCar America - another value to avoid

FreightCar America (RAIL, $53.40)

Here at StockReply we are quick to bring you news of stocks to hesitate over. So when we read that Amaranth was liquidating its position in RAIL and this piece from the increasingly shrill Fool we thought we'd ride the rail, jump the tracks etc etc.

RAIL makes specialised aluminum railroad cars, mainly used to transport coal, and has done since 1901. How picturesque, pre-internet and manly can you get? There is little competition, partly because all of its competitors have died or merged and partly because the cars are too heavy to import cheaply.

The major issue in valuation, and what makes this an interesting case, is the cyclicality of demand. We might even use this as a proxy case before tackling something similar but more meaty, like the housebuilders. The 10-K sets out clearly the drivers but the easiest number to latch onto is the new railcar backlog. At the end of 2005 it was over 20,000 and right now it is over 12,000. The worst year in the most recent cycle was 2002 when it was 1,000.

This ratio of worst to (presumably) best is mirrored in the turnover, which was $225m in 2002 and will likely be close to $1.5 billion this year. Management looks pretty good but inevitably there is an even bigger swing in profitablity. This year EBIT looks like it will turn out at c.$200m but in 2002 it was next to zero.

RAIL is churning out cash at the moment and had $185m net at the last quarter end. There are no other net operating assets. The interesting question is how to value the operating cashflows. What would you pay for a cashflow that fluctuates between zero and (a fully taxed) $135 million per annum? Unlikely to be above ten times peak, or $1.35 billion, or below zero.

One approach would be to take the average cashflow over the cycle and capitalise it. This might be worth $675m. In fact, RAIL didn't make very much in 2003 and 2004 so this would probably turn out an overestimate.

Still, sticking to the $675m and using the current cash as a base gives a minimum value per share of $13.40 and maximum of $62.32, which is not so far above the current price. We would be interested in comments and some alternative methodologies for valuing this one.

Tuesday, December 12, 2006

Liberty Series 4 Making Capital

Part IV - Making capital out of Liberty Media

Liberty Capital (LCAPA, $93.91, LCAPB $93.71)

We come closer now to the heart of the mysterious Malone empire. The main Liberty company is called Liberty Media Group. But because that was too easy, two sets of tracking stocks were created - Liberty Capital (LCAPA, LCAPB) and Liberty Interactive (LINTA, LINTB). By popular demand and the press of events, in this part we shall consider Capital.

Like William James's universe, Liberty Capital turns out to be a turtle resting on an infinite array of other turtles. The bits of Liberty it tracks are various, if not quite infinite. We start at the bottom, its impressive holdings in other traded securities. These are valued at $18.3 billion and include big chunks of Time Warner (TWX), Sprint Nextel (S) and Motorola (MOT).

The largest security holding, and the one in the news, is the $10.3 billion in News Corp (NWS, NWS-a) stock. The heavily trailed but somewhat elusive announcement will apparently lead to a swap of this stock for Murdoch's all but controlling 38.6% stake in DirecTV (DTV), the satellite broadcaster. This is a sweet deal, and let's count the ways:

- Malone was never going to get control of News without assassinating Murdoch and his ever expanding brood.
- The DTV stake, on the other hand, brings de facto control, including a number of board seats.
- While Murdoch may have hit a sweet spot with MySpace, the rest of his group is rather mouldy except, ironically, his satellite interests. Moreover, he is fantastically entrepreneurial on his own behalf but perhaps not the best partner.
- News Corp has rather agressive accounting and looks like it is trading at thirty times underlying earnings whereas DirecTV is at more like twenty, so it's a value swap.
- No taxes.
- Liberty manages to secure the distribution pipeline for its content.
- Possible upside if the Echostar (DISH) merger is revived.

There are additionally some wholly owned operations, most materially the Starz movie channels and content creation unit. However, as best we read the dense and unrewarding SEC filing, the earnings of all the subsidiaries are just about sunk by corporate overhead, so we are attributing no value here. The rest of the picture is as follows, as of September but adjusted for the likely swap (assumes DTV @ $11.8bn):

..............................................Value ($ bn)

Equity stakes..........................19.8
Net debt..................................0
Net derivatives......................(1.7)


The debt numbers are not at all clear in the last 10-Q, so these numbers could be out. But with 140m tracking units outstanding, this gives $129.29 in value per share, a 38% premium to the current stock price. Even without further work to establish floor prices for Time Warner and the rest this looks a good value.

For more background, check out part one, part two and part three of this enthralling story!

Disclaimer: We have a position in nearly all stocks mentioned in this series.

Stocks mentioned in this post: LCAPA, LCAPB, LINTA, LINTB, TWX, S, MOT,

Sunday, December 10, 2006

Discovery Channeled - Liberty Series III

Discovery Holding (DISCA, $15.91, DISCB $15.85)

While we realise regular readers are keen to get to the end of this series and find out all about News Corp (NWS, NWS-a), DirecTV (DTV) and the great tax swap saga we prefer to take things in order here at StockReply. Thusly, part one :overview, part two : Liberty Global (LBTYA, LBTYB) and now Discovery Holding (DISCA, DISCB).

This glob of Liberty was spun off in July 2005 although Malone owns 5.5% of the outstanding shares (regrettably controlling 31% of the votes) and the two elements have wide-ranging service and tax sharing agreements.

Discovery wholly owns two business that make no money and $203m cash. It is also in the fortunate position of controlling 50% of Discovery Communications. This media titan runs the Discovery Channel, TLC, Animal Planet, BBC America and many other properties around the world, although three quarters of revenues are earned in the US. The Discovery channels earn over three quarter of a billion dollars a year in operating cash flow. Hurray!

Boo! There is the pesky nuisance of depreciation (with capital expenditures more than keeping pace), interest payments (on $2.6 billion indebtedness at the associate level) and tax. Figuring all this out, and dividing by two since Discovery Holding owns only half, leaves at best $128m attributable to this slice.

Since the market cap is $4.47 billion and enterprise value $4.27 billion, this implies a weighty p/e of 33 for the TV businesses. Too weighty, you might think. We do hold, at the moment, but rather weakly.

Disclaimer: We have positions in nearly all stocks mentioned in this series of posts.

Stocks mentioned: LBTYA, LBTYB, DISCA, DISCB, NWS, NWS-a, DTV

Tuesday, December 05, 2006

Liberty Series 2

Part II - Liberty Soup

Liberty Global (LBTYA, LBTYB)

In part one
of this series about John Malone's empire we referred to his spaghetti of interconnected companies and tickers. Now we're ready for the soup.

Liberty Global spun off from the rest of the group in June 2004 but, as we indictated last time, it is under a great degree of common management and ownership still. It operates cable, broadband and programming business in seventeen countries, principally in Europe but also in far flung Japan, Chile and elsewhere. It is a so called triple play supplier but has so far avoided mobile - the potential next move?

In terms of capital allocation it is aces. Organic customer additions are fairly strong (10% year-on-year in the most recent quarter), it is buying back stock in a self-tender and buying and selling small pieces where it makes sense.

What about the financials? Gene Marcial points out in this interesting piece
that Liberty Global trades at a far lower multiple than its American facing peer Comcast (CMCSA). But which multiple? Ay, there's the rub for Gene, in common with most analysts and the company itself, uses price to EBITDA, which Liberty calls OCF. Annualised this is c.$2.4bn, compared to the enterprise value of c.$21 billion. But is that good or bad in absolute terms, Comcast notwithstanding.

It's bad. As any starter accountant would tell you EBITDA, without an eye to interest payable and capital expenditure is meaningless. Now by using enterprise value you are already taking care of the interest payable part. But capex here is huge - $372m in the most recent quarter and over $1bn in the three quarters to date. Free cash flow is currently negative!

This does not kill Liberty Global as an investment idea but, for our money, severely limits its appeal at a time when there are so many telecom/new media properties available at fairly low price to true (i.e. free) cash flow. So we'll park this one in the negatives for the time being.

Disclaimer: We have positions in nearly all stocks mentioned in this series of posts.

Stocks mentioned: LBTYA, LBTYB, CMCSA

Monday, December 04, 2006

The Two Warrens

As this video linked from TheStreet.Com
points out there is an odd fellowship between Warren Buffett, Chairman and CEO of Berkshire Hathaway (BRKa, BRKb) and the hero of About Schmidt (released by a subsid of Time Warner (TWX)). Said hero is also called Warren and works in insurance...and lives in Omaha.

Are they related? Turns out the writer/director of the movie, Alexander Payne, grew up a few streets from our hero, Buffett that is.

Disclosure: We have a position in Berkshire
Stocks mentioned: BRKa, BRKb, TWX
The lucky 13th Festival of Stocks has arrived

and we are very happy to be featured again by the discerning

Sunday, December 03, 2006

The Liberty keiretsu

Liberty companies and associates:

Liberty Global (LBTYA, $27.30)
Discovery Holding (DISCA, $15.14)
Liberty Media Capital (LCAPA, $88.46
Liberty Media Interactive (LINTA, $22.84)

In trying to create a clear story at Liberty, the telecoms/cable wizard John Malone has messed things up. The proliferation of spin-offs, dual class shares, associated companies and tracking stocks has been nearly impenetrable. Until now, that is...

As a special holiday season gift to our readers we are today starting a multi-part series of posts which will attempt to cover all the angles on this out-of-control empire. The aim is to establish which bits are value plays.

Part One: Spaghetti

John Malone's TCI cable giant was merged into and then spat out by AT&T (T) around the turn of the century. Malone emerged as boss and major shareholder of the (relatively) simple Liberty Media Group, effectively his holding company. Through a series of deals Liberty had and has collected an impressive range of operating companies, still primarily in the cable and broadband areas, and a no less impressive array of passive stockholdings in some major media and internet groups.

Liberty Media Group suffered from a lack of respect for its eclectic tastes. There appeared to be a holding company discount and Malone tried to tackle this with some dish-of-the-month corporate finance ju-jitsu. The spin-offs came first -

Liberty Global (LBTYA, LBTYB) came loose in June 2004. It is a holding company for a smorgasbord of European and Japanese partially and wholly owned broadband and cable interests.

Discovery Holding (DISCA, DISCB) came next, in July 2005. This owns bits and bobs but is primarily the holding company for 50% ownership of the drool worthy Discovery channels.

While these appear to be clean breaks from the mother ship, they aren't. This is principally because Malone has large chunks of voting shares in each and is Chairman of one and CEO of the other. Hence our use of the keiretsu tag - it is the Japanese name for a loosely bundled group of companies with managers and shareholders in common.

Liberty Media (LCAPA, LCAPB, LINTA, LINTB) remains the major centre for Malone's operations, but as that Scrabble of tickers suggests, it has a number of moving parts. There are two sets of tracking stocks (all of the Malone vehicles partake in the melancholy business of dual classes with different voting rights). LCAPA/B is called

Liberty Media Capital. It tracks the Starz Entertainment cable and satellite channels, TruePostition (a cellphone location tracker (sounds exciting!)), On Command (which supplies movies to hotel rooms) and others. Perhaps more juicily, it includes Malone's pirate's chest of minority stakes in other media companies, namely News Corp (NWS, NWSa)), Time Warner (TWX), Sprint Nextel (S) and Motorola (MOT). Meanwhile LINTA/B is called

Liberty Media Interactive. It tracks the rest of Liberty Media, which are mainly interactive commerce businesses, most notably QVC but also owns significant stakes in IAC/Interactive (IACI) and Expedia (EXPE).

Both sets of trackers have their own allocations of debt and cash to boot. To whet your appetite we should say that in addition all Liberty associates employ some of the most obscure accounting imaginable to present their operations in a flattering light; so we shall be burning expensive midnight oil on your behalf in the posts to come! Here is a small table of the current market caps of the Liberty/Malone controlled stocks mentioned herein, to give you an idea of relative scale:

Name..............................................Market cap ($ billions)

Liberty Global...............................11.0
Discovery Holding.........................4.2
Liberty Media Capital...................12.4
Liberty Media Interactive.........16.0

Disclaimer: We have positions in nearly all stocks mentioned in this post.