tag:blogger.com,1999:blog-69619574923223501022024-03-08T05:57:56.843-08:00StockReplyFinance, Stocks and Other ThingsStockReplyhttp://www.blogger.com/profile/18272403973857168713noreply@blogger.comBlogger22125tag:blogger.com,1999:blog-6961957492322350102.post-26634150572973995102007-01-08T03:09:00.000-08:002007-01-08T04:42:16.391-08:00Festival of Stocks 18We are very proud to host this marvellous festival<br /><br />Mr Juggles presents <a href="http://longorshortcapital.com/sharper-image-nerd-ceos-destroy-shareholder-value.htm">Sharper Image: Nerd CEOs Destroy Shareholder Value</a> posted at <a href="http://longorshortcapital.com/">Long or Short Capital</a>. This is the infamous life size Superman sculpture farrago.<br /><br />Matthew Paulson presents <a href="http://getting-green.blogspot.com/2006/12/gold-bad-investment.html">Gold: A Bad Investment</a> posted at <a href="http://getting-green.blogspot.com/index.html">Getting Green</a>. For the gold bears...<br /><br />H.S. Ayoub presents <a href="http://biohealthinvestor.com/2007/01/vertex-hepititis-c-candidate-may-be.html">Vertex Hepititis C Candidate May Be a Success Story</a> posted at <a href="http://biohealthinvestor.com/">BioHealth Investor</a>. Who else remembers<a href="http://www.amazon.com/Billion-Dollar-Molecule-Companys-Perfect/dp/0671510576/sr=1-7/qid=1168259877/ref=sr_1_7/103-0280906-5636657?ie=UTF8&s=books"> this excellent Barry Werth title </a>about a struggling start-up?<br /><br /><span style="font-weight: bold;">EDITOR'S CHOICE: </span>George presents the extraordinary outperforming <a href="http://www.fatpitchfinancials.com/485/fat-pitch-financials-portfolio-2006-performance/">Fat Pitch Financials Portfolio 2006 Performance</a> posted at <a href="http://www.fatpitchfinancials.com/">Fat Pitch Financials</a>.<br /><br />Leon Gettler presents <a href="http://www.soxfirst.com/50226711/is_steve_jobs_untouchable.php">Is Steve Jobs untouchable?</a> posted at <a href="http://www.soxfirst.com/">Sox First</a>.<br /><br />tjp presents <a href="http://www.investortrip.com/2006/12/29/chinese-stocks-to-watch-in-2007-series/">Chinese Stocks to Watch in 2007 Series</a> , a series including the inscutable CHL, posted at <a href="http://www.investortrip.com/">Investor Trip</a>.<br /><br />Frugal presents <a href="http://www.1stmillionat33.com/2007/01/important-update-for-the-precious-metal-market/">Important Update for the Precious Metal Market</a> posted at <a href="http://www.1stmillionat33.com/">My 1st Million At 33</a>. Did you think we'd forgotten the gold bulls?<br /><br />Izual presents <a href="http://investingeuro.com/archives/12">Brederode : Stock on Euronext Brussels</a> posted at <a href="http://investingeuro.com/">Investing in Euro</a>. The Belgian Warren Buffett? Who knew?StockReplyhttp://www.blogger.com/profile/18272403973857168713noreply@blogger.com2tag:blogger.com,1999:blog-6961957492322350102.post-49025047061087743302006-12-13T09:44:00.000-08:002006-12-14T03:21:28.694-08:00FreightCar America - another value to avoid<span style="font-weight: bold;">FreightCar America (RAIL, $53.40) </span><br /><br />Here at StockReply <a href="http://stockreply.blogspot.com/2006/11/contact-shot.html">we are quick</a> to bring you news of stocks to hesitate over. So when we read that <a href="http://biz.yahoo.com/ap/061006/amaranth_liquidations.html?.v=1">Amaranth was liquidating</a> its position in RAIL and <a href="http://www.fool.com/news/commentary/2006/commentary06101312.htm?source=eptyholnk303100&logvisit=y&npu=y">this piece</a> from the increasingly shrill Fool we thought we'd ride the rail, jump the tracks etc etc.<br /><br />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.<br /><br />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<a href="http://yahoo.brand.edgar-online.com/fetchFilingFrameset.aspx?dcn=0001193125-06-060993&Type=HTML"> 10-K</a> 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.<br /><br />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.<br /><br />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.<br /><br />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.<br /><br />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.StockReplyhttp://www.blogger.com/profile/18272403973857168713noreply@blogger.com2tag:blogger.com,1999:blog-6961957492322350102.post-20079126184969318012006-12-12T09:30:00.000-08:002006-12-12T10:43:05.014-08:00Liberty Series 4 Making Capital<span style="font-weight: bold;">Part IV - Making capital out of Liberty Media </span><br /><br />Liberty Capital (LCAPA, $93.91, LCAPB $93.71)<br /><br />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.<br /><br />Like <a href="http://yogateacher.com/text/essays/fall2001.html">William James's universe</a>, 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).<br /><br />The largest security holding, and the one in the news, is the $10.3 billion in News Corp (NWS, NWS-a) stock. The <a href="http://media.seekingalpha.com/article/21929">heavily trailed</a> 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:<br /><br />- Malone was never going to get control of News without assassinating Murdoch and his ever expanding brood.<br />- The DTV stake, on the other hand, brings de facto control, including a number of board seats.<br />- 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.<br />- 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.<br />- No taxes.<br />- Liberty manages to secure the distribution pipeline for its content.<br />- Possible upside if the Echostar (DISH) merger is revived.<br /><br />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 @ $11.8bn):<br /><br />..............................................Value ($ bn)<br /><br />Equity stakes..........................19.8<br />Net debt..................................0<br />Net derivatives......................(1.7)<br /><br />Total.......................................18.1<br /><br />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.<br /><br />For more background, check out <a href="http://stockreply.blogspot.com/2006/11/liberty-keiretsu.html">part one</a>, <a href="http://stockreply.blogspot.com/2006/12/liberty-series-2.html">part two</a> and <a href="http://stockreply.blogspot.com/2006/12/discovery-channeled-liberty-series-iii.html">part three </a>of this enthralling story!<br /><br />Disclaimer: We have a position in nearly all stocks mentioned in this series.<br /><br />Stocks mentioned in this post: LCAPA, LCAPB, LINTA, LINTB, TWX, S, MOT,<br />NWS, NWS-a, DTV, DISHStockReplyhttp://www.blogger.com/profile/18272403973857168713noreply@blogger.com0tag:blogger.com,1999:blog-6961957492322350102.post-13219110717556885402006-12-10T11:39:00.000-08:002006-12-10T11:55:26.522-08:00Discovery Channeled - Liberty Series III<span style="font-weight: bold; color: rgb(0, 0, 0);">Discovery Holding (DISCA, $15.91, DISCB $15.85)</span><br /><br /> <h3 style="color: rgb(0, 0, 0);"><span style="font-weight: normal;">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 <a style="color: rgb(51, 51, 255);" href="http://biz.yahoo.com/ap/061206/liberty_directv.html?.v=2">great tax swap saga</a><span style="color: rgb(51, 51, 255);"> </span>we prefer to take things in order here at StockReply. Thusly, <a style="color: rgb(51, 51, 255);" href="http://stockreply.blogspot.com/2006/11/liberty-keiretsu.html">part one</a> :overview, <a style="color: rgb(51, 51, 255);" href="http://stockreply.blogspot.com/2006/12/liberty-series-2.html">part two</a> : Liberty Global (LBTYA, LBTYB) and now Discovery Holding (DISCA, DISCB).<o:p></o:p></span></h3> <h3 style="color: rgb(0, 0, 0);"><span style="font-weight: normal;">This glob of <st1:city st="on"><st1:place st="on">Liberty</st1:place></st1:city> 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.<o:p></o:p></span></h3> <h3 style="color: rgb(0, 0, 0);"><span style="font-weight: normal;">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 <st1:country-region st="on"><st1:place st="on">US</st1:place></st1:country-region>. The Discovery channels earn over three quarter of a billion dollars a year in operating cash flow. Hurray!<o:p></o:p></span></h3> <h3 style="color: rgb(0, 0, 0);"><span style="font-weight: normal;">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.<o:p></o:p></span></h3> <h3 style="color: rgb(0, 0, 0);"><span style="font-weight: normal;">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.</span><o:p><br /></o:p></h3> <p style="color: rgb(0, 0, 0);">Disclaimer: We have positions in nearly all stocks mentioned in this series of posts.<br /><br />Stocks mentioned: LBTYA, LBTYB, DISCA, DISCB, NWS, NWS-a, DTV</p><span style="font-weight: bold; color: rgb(0, 0, 0);"><br /><br /></span>StockReplyhttp://www.blogger.com/profile/18272403973857168713noreply@blogger.com0tag:blogger.com,1999:blog-6961957492322350102.post-1434616839644831552006-12-05T04:39:00.000-08:002006-12-05T05:04:34.500-08:00Liberty Series 2<span style="font-weight: bold;">Part II - Liberty Soup </span><br /><br />Liberty Global (LBTYA, LBTYB)<br /><br />In <a href="http://stockreply.blogspot.com/2006/11/liberty-keiretsu.html">part one </a><br />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.<br /><br />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?<br /><br />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.<br /><br />What about the financials? Gene Marcial points out in<a href="http://biz.yahoo.com/bizwk/061201/b4013086.html?.v=1"> this interesting piece</a><br />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.<br /><br />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!<br /><br />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.<br /><br /> <p>Disclaimer: We have positions in nearly all stocks mentioned in this series of posts.<br /><br />Stocks mentioned: LBTYA, LBTYB, CMCSA<br /></p>StockReplyhttp://www.blogger.com/profile/18272403973857168713noreply@blogger.com4tag:blogger.com,1999:blog-6961957492322350102.post-31738155715560207192006-12-04T11:37:00.000-08:002006-12-04T11:45:12.836-08:00The Two WarrensAs this<a href="http://www.youtube.com/watch?v=NBb_T9lKZnI"> video</a> linked from <a href="http://www.thestreet.com/_yahoo/newsanalysis/investing/10325625.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA">TheStreet.Com</a><br />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.<br /><br />Are they related? Turns out the writer/director of the movie, Alexander Payne, grew up a few streets from <span style="font-style: italic;">our</span> hero, Buffett that is.<br /><br /><br />Disclosure: We have a position in Berkshire<br />Stocks mentioned: BRKa, BRKb, TWXStockReplyhttp://www.blogger.com/profile/18272403973857168713noreply@blogger.com0tag:blogger.com,1999:blog-6961957492322350102.post-15577393736370789242006-12-04T04:28:00.000-08:002006-12-04T04:32:18.623-08:00The lucky <a href="http://www.1stmillionat33.com/2006/12/festival-of-stocks-13/">13th Festival of Stocks has arrived</a><br /><br />and we are very happy to be featured again by the discerning 1stmillionat33.com.StockReplyhttp://www.blogger.com/profile/18272403973857168713noreply@blogger.com0tag:blogger.com,1999:blog-6961957492322350102.post-72574692846581902402006-12-03T11:07:00.000-08:002006-12-03T11:43:33.923-08:00The Liberty keiretsu<span style="font-weight: bold;">Liberty companies and associates: </span><br /><br />Liberty Global (LBTYA, $27.30)<br />Discovery Holding (DISCA, $15.14)<br />Liberty Media Capital (LCAPA, $88.46<br />Liberty Media Interactive (LINTA, $22.84)<br /><br />In trying to create a clear story at<span style="font-weight: bold;"> Liberty</span>, 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...<br /><br />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.<br /><br /><span style="font-weight: bold;">Part One: Spaghetti</span><br /><br />John Malone's TCI cable giant was merged into and then spat out by <span style="font-weight: bold;">AT&T </span>(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.<br /><br />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 -<br /><br /><span style="font-weight: bold;">Liberty Global</span> (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.<br /><br /><span style="font-weight: bold;">Discovery Holding</span> (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 <span style="font-weight: bold;">Discovery</span> channels.<br /><br />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.<br /><br /><span style="font-weight: bold;">Liberty Media</span> (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<br /><br /><span style="font-weight: bold;">Liberty Media Capital</span>. It tracks the <span style="font-weight: bold;">Starz Entertainment</span> 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 <span style="font-weight: bold;">News Corp </span>(NWS, NWSa)), <span style="font-weight: bold;">Time Warner</span> (TWX), <span style="font-weight: bold;">Sprint Nextel</span> (S) and <span style="font-weight: bold;">Motorola</span> (MOT). Meanwhile LINTA/B is called<br /><br /><span style="font-weight: bold;">Liberty Media Interactive</span>. It tracks the rest of Liberty Media, which are mainly interactive commerce businesses, most notably <span style="font-weight: bold;">QVC</span> but also owns significant stakes in <span style="font-weight: bold;">IAC/Interactive</span> (IACI) and <span style="font-weight: bold;">Expedia</span> (EXPE).<br /><br />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:<br /><br />Name..............................................Market cap ($ billions)<br /><br />Liberty Global...............................11.0<br />Discovery Holding.........................4.2<br />Liberty Media Capital...................12.4<br />Liberty Media Interactive.........16.0<br /><br /><br />Disclaimer: We have positions in nearly all stocks mentioned in this post.<br /><br />Stocks mentioned: T, LBTYA, LBTYB, DISCA, DISCB, LCAPA, LCAPB, LINTA, LINTB, NWS, NWSa, TWX, S, MOT, IACI, EXPEStockReplyhttp://www.blogger.com/profile/18272403973857168713noreply@blogger.com2tag:blogger.com,1999:blog-6961957492322350102.post-67958405822649419022006-11-29T12:33:00.000-08:002006-11-29T13:05:40.794-08:00Contact Shot<span style="font-weight: bold;">1-800 Contacts (CTAC) $16.16 </span><br /><br />As noted in <a href="http://www.thestreet.com/_yahoo/newsanalysis/investing/10320660.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA">TheStreet</a> and <a href="http://13dtracker.blogspot.com/2006/11/lagrange-capital-raises-stake-in-1-800.html">StreetInsider</a> LaGrange Capital has disclosed a12.6% stake in 1-800 Contacts as well as taking a board seat at the direct contact lens supplier. We have followed events at this company for some years on the basis that a direct low-cost player ought eventually to create value.<br /><br />Sadly, it hasn't panned out that way. CTAC has been hampered by a lack of product as the major lens manufacturers are not keen to supply it and annoy the retail opticians who are their main customers (and CTAC's high cost competitors). The main manufacturers are Johnson & Johnson (JNJ), Novartis (NVS), Bausch & Lomb (BOL) and Cooper (COO). There are also new legal restrictions that make it more difficult to supply lenses without a prescribing relationship. Moreover, CTAC's results have been dragged down by huge losses at its ClearLab manufacturing subsidiary.<br /><br />The up news is that CTAC has decided to part company with ClearLab in a way that has not yet been decided but which will presumably stem the red ink. It is therefore possible to see if there is value in a sum-of-the-parts exercise. Best case is that they get rid of ClearLab at no cost, (which is optimistic). The remaining operations have an operating profit of $22m, forecast by the company to grow to $23-26m next year. Deducting interest and tax nets the common shareholders c.$14.6m or or $1.09 eps. So the best case p/e is 14.8 on next year's clean earnings.<br /><br />We would leave alone until the ClearLab situation is costed and capped, and standalone growth is proven.<br /><br />Disclaimer: No positions held<br /><br />Stocks mentioned: CTAC, JNJ, NVS, BOL, COOStockReplyhttp://www.blogger.com/profile/18272403973857168713noreply@blogger.com0tag:blogger.com,1999:blog-6961957492322350102.post-85709046986298026262006-11-28T16:37:00.001-08:002006-11-28T16:37:32.263-08:00Automotive WarsThe airlines are famous as shareholder value destroyers. But the automotive industry must rank not far behind. With Toyota generating buzz recently as it anticipates becoming the largest car producer in the world we thought we'd take a look at the top three players - General Motors (GM), Toyota (TM) and Ford (F) . Here's a useful table:<br /><br />........Production..Revenue..Operating...Assets/Equity..Stock price<br />........millions.......$billions....margin %...............................Rise % p.a.<br />GM..9................193..............0......................31.7..................4.3<br />TM..7.1.............181..............9.......................2.7...................11.4<br />F......6.4.............177..............4......................20.7..................2.9<br /><br />Note: Stock price appreciation April 1993 (date of TM's New York listing) to present adjusted for dividends and splits but not spin offs.<br /><br />Toyota is the low cost producer. Although Ford's operating margin looks half way decent, bear in mind that this excludes interest expense which is very high for Ford. The assets/equity ratio is key here. The American producers are struggling under a triple liability burden. The pension and healthcare benefits explosion has been much written about, but far worse is the effect of their financial indebtedness.<br /><br />Toyota's overall leverage is about ten times less than its rivals'. GM and Ford have effectively been subsidising their customers with cheap credit and this has further worsened their inferior competitive position in that it overstates their already low operating margins.<br /><br />Toyota vs GM or Ford would make a classic hedged pair trade. Toyota on its own does not look that cheap or expensive at around 16 times their own forecast for this year's earnings.<br /><br />Disclaimer: We do not hold any positions in stocks named.<br /><br />Stocks mentioned: GM, TM, FStockReplyhttp://www.blogger.com/profile/18272403973857168713noreply@blogger.com1tag:blogger.com,1999:blog-6961957492322350102.post-91168473989766212382006-11-23T14:23:00.000-08:002006-11-23T15:05:02.940-08:00Or is it Google $100?<span style="font-weight: bold;">Google (GOOG) $508 </span><br /><br />Worried lest our last post on the topic (<a href="http://stockreply.blogspot.com/2006/11/google-1000.html">Google $1,000</a>) might become a Blodget-style self-fulfilling prophecy, here is the other side of the argument. Succinctly Google is not Microsoft (MSFT).<br /><br />Microsoft makes all of its money from its operating system and office tools (actually over 100% since its entertainment biz is not yet profitable). These both benefit from the celebrated network effect: for every product sold all existing customers benefit - the more Windows PCs there are, the more programs will be developed for it.<br /><br />Google makes all of its money from search related advertising (actually over 100% since it gives away lots of software, including the hosting of this blog, in the hope of revenues to come.) But search is not a beneficiary of the network effect and neither are the advertising programs Google inserts. Your search is not easier because other people have searched before you. The amount advertisers pay per keyword is, if anything, higher because of Google's dominance. The service is used because Google built a better mousetrap. But another, better algorithm is just around the corner. Ask.com (IACI) could be to Google as Google was to Yahoo (YHOO), for example. And as Yahoo was to AOL (TWX). Google has not developed sticky applications <span style="font-style: italic;">or</span> given up so much margin that it has economies of scale. The reverse is true. Google's margins are so high, it is easy to see how smaller rivals could come in to its markets. And we would all switch again. Why wouldn't we?<br /><br />Current search market shares are roughly as follows:<br /><br />Google........44% <br />Yahoo.........29%<br />Microsoft...13%<br />AOL .............6%<br />Ask...............5%<br /><br />Were Google to switch places with Microsoft in these rankings its revenues would fall by at least two-thirds, to c.$3 billion and its earnings per share to, say, $3. Even with the market growth forecast in our last piece the stock would find it hard to go north of $100 for some years to come.<br /><br />Disclaimer: We have a position in IACI.StockReplyhttp://www.blogger.com/profile/18272403973857168713noreply@blogger.com2tag:blogger.com,1999:blog-6961957492322350102.post-96139520695226442006-11-22T06:20:00.000-08:002006-11-22T07:09:55.043-08:00The (James) Bond PortfolioWe have taken in our Christmas movie early and been to see <span style="font-style: italic;">Casino Royale</span>, the 21st official Bond entry.<br /><br />The Bond Portfolio contains<br /><br /><span style="font-weight: bold;">Gambling.</span> Baccarat, the game in the novel, has given way to the more contemporary pleasures of poker. A belated boost for PartyPoker (PRTY.L), Cryptologic (CRYP) and the rest of that benighted sector.<br /><br /><span style="font-weight: bold;">New Media</span>. Sony (SNE) has the most egregious product placements, of computers, cellphones and other dinky toys. An early warning sign for Apple (AAPL), normally the king of movie technology?<br /><br /><span style="font-weight: bold;">Banking. </span>The plot turns (uninteresting plot spoiler ahead) on a series of slimy Swiss and Albanian bankers who are variously financing terrorism, laundering money and - in an interesting twist - facilitating short sellers. We don't see much fall out for the Albanian financial services sector, but watch out Credit Suisse (CS) and UBS (UBS).<br /><br /><span style="font-weight: bold;">Foreign Exchange</span>. Both the American and British governments lose $5 to $15 million in poker related shenanigans but this is unlikely to hurt their currencies.<br /><br /><span style="font-weight: bold;">Pharmaceuticals</span>. Bond ingests an amazing array of drugs and this is bound to help the hard pressed drug majors in this cold Democratic season: Pfizer (PFE), Johnson & Johnson (JNJ) and Merck (MRK).<br /><br />Daniel Craig is a hard Bond. He has tucked away the feminine side he displayed in <span style="font-style: italic;">The Mother</span> and which started to disintegrate in <span style="font-style: italic;">Sylvia</span>. Even compared to the unfortunate Ted Hughes, this Bond sets a personal best in the evisceration of women he meets - murdered, suicided, loved and destroyed - he is clearly channeling Henry VIII.<br /><br />Disclosure: We have a position in CryptologicStockReplyhttp://www.blogger.com/profile/18272403973857168713noreply@blogger.com1tag:blogger.com,1999:blog-6961957492322350102.post-56660442813011938502006-11-22T01:55:00.000-08:002006-11-22T02:04:45.308-08:00Great Sites for IdeasWe have been linked to by the two sites that are our most read daily. Kudos.<br /><br /><a href="http://internet.seekingalpha.com/article/21032"><span onclick="BLOG_clickHandler(this)" class="blsp-spelling-error" id="SPELLING_ERROR_0">SeekingAlpha</span></a> syndicates cracking financial writers. It also publishes the only free, comprehensive conference call transcripts around; indispensable for those of you cannot bear sitting through the <span onclick="BLOG_clickHandler(this)" class="blsp-spelling-corrected" id="SPELLING_ERROR_1">longueurs</span> of the real thing.<br /><br /><a href="http://www.thestreet.com/_tscs/newsanalysis/investing/10323471.html">James <span onclick="BLOG_clickHandler(this)" class="blsp-spelling-error" id="SPELLING_ERROR_2">Altucher's</span> Daily Blog Watch</a> consistently pulls out the best or most idiosyncratic posts on a daily basis. Hard work <span onclick="BLOG_clickHandler(this)" class="blsp-spelling-corrected" id="SPELLING_ERROR_3">professionally</span> executed.StockReplyhttp://www.blogger.com/profile/18272403973857168713noreply@blogger.com0tag:blogger.com,1999:blog-6961957492322350102.post-9160857928023931102006-11-21T02:26:00.000-08:002006-11-21T02:29:05.959-08:00Featured at Festival of StocksWe are the Editor's Choice at the always discerning <a href="http://www.fatpitchfinancials.com/443/festival-of-stocks-11/">Festival of Stocks</a> !StockReplyhttp://www.blogger.com/profile/18272403973857168713noreply@blogger.com0tag:blogger.com,1999:blog-6961957492322350102.post-85109025205674473032006-11-20T04:56:00.000-08:002006-11-21T11:02:30.317-08:00Google $1000<span style="font-weight: bold;">Google (GOOG) $499</span><br /><br />It is easy to see how Google gets to $1,000. The tricky bit is when. We did some projections, with no inflation or time value of money included, and got to the result by posing and answering the following questions:<br /><br />1. How big is the world advertising market? This should have been the easiest question to answer but, of course, all estimates vary. Our number is $650 billion, a blend of what the largest advertising agencies and investment banks say. Fortunately, this is the least sensitive number in the analysis since we are more interested in market share. Our forecast leaves this number constant, since there is no inflation and we are not assuming advertising itself grows as a sector relative to others;<br /><br />2. What is the internet share of this market? The blended guess at this point is that internet advertising is around $23 billion or 3.5%. Our assumption is that this could peak at 25%. The argument is a familiar one, but convincing - advertising is a hit-and-miss business which could do with targetting and the internet is excellent and virtually unprecedented in its ability to deliver this (the advertiser knows far more about the specifics of its viewers than they would on TV, radio or even direct mail). Furthermore, it is early days: only one sixth of the planet's population is wired, revenue per viewer/customer is low, the largest advertisers are underrepresented in the buy etc. We find this assumption not too heroic;<br /><br />3. What about Google's market share? Google is annualizing over $10 billion in revenues right now, to give a share on our numbers of 45%. Most of their business originates in the US. That's an early adopter thing but may also reflect Americanocentric bias in their model. Moreover, while there is a positive network effect in AdSense and Search, there are plenty of uncertainties in how ads will be delivered in the future. We have plumped for a future share of 35%, which would be unprecedented in the media markets. This is the most sensitive assumption;<br /><br />4. What does this do for Google's revenues and net? The global market in internet advertising, in today's dollars, peaks at $163 billion in this model. Google's share is $57 billion (eight times bigger market, market share off ten points). Their net margin is currently 30% and we let that grow to 40%, allowing for the (considerable) benefit of operating efficiencies but the continuing drag (somewhat considerable) of partner payouts. Google has also been pretty dilutive since the IPO but we are not including the cost of acquistions in this model, taking stock outstanding from 311m to 400m. Earnings per share goes from $10 this year to $57 at peak (we are ignoring the extra couple of dollars earned on the cash pile generated).<br /><br />5. What is the valuation? If Google reaches this mighty summit - undisputed king of the best advertising medium in history - it will be at maturity valued at some twenty times earnings, we believe, like a mature monopoly newspaper or TV station ten or twenty years ago.<br /><br />Bingo! <span style="font-weight: bold;">Price per share is $1140,</span> easily breasting the catchy Google $1,000 slogan. The question we posed up front was when? The only time driver in this model is the size of the addressable market. Given the conservative nature of ad buys this looks like a seven to ten year migration. So the good news is that if Google remains top the tree and isn't knocked off by a better algorithm, Yahoo (YHOO) or Microsoft (MSFT) getting their groove back, bad execution, the emergence of a new ad paradigm (etc etc) you can expect 8-12% growth in the stock price (over inflation) in the next decade. That's also the bad news.<br /><br />..................................2006 .....Peak<br />Ad Market............. 650 ........650........ $billions<br />Internet share....... 3.5% .....25% <br />Google share .........45% .......35% <br />Google revs ...........10.2 .......56.9 <br />Net income .............3.1 ........22.8 <br />Shares out............ ..311 .......400 ........ millions <br />EPS ..........................9.88 .....56.88 ..... $ <br />Stock price .............499 ......1140 <br />7 year compound <br /> appreciation........................ 12.3% <br />10 year .................................8.6% <br /><br /><br /><br />Disclaimer: The authors hold no position in any stock mentioned in this postStockReplyhttp://www.blogger.com/profile/18272403973857168713noreply@blogger.com2tag:blogger.com,1999:blog-6961957492322350102.post-50963080196096450932006-11-19T15:40:00.000-08:002006-11-19T16:14:19.979-08:00BBI Bye Bye<span style="font-weight: bold;">Blockbuster Inc (BBI) $4.75 </span><br /><br />We are not usually fans of short ideas at StockReply but a clever friend of ours has brought this one to our notice.<br /><br />BBI is the spin off from Viacom (VIA , VIAB) that, as the world knows, rents out and sells media from its 9,000 stores, principally in the States. It is having its lunch eaten every which way as alternative (and easier and cheaper) ways of viewing entertainment at home proliferate (cable, satellite, internet, telephone). If that weren't enough Netflix has way outclassed and outrun it in the fast growing home postal market.<br /><br />Much recent comment has focussed on the Netflix rivalry but this really misses the point, which is this: <span style="font-style: italic;">there will be no physical home video rental market in ten years time in all of Blockbuster's principal markets</span>. These are 100% digital media; in other words, this is bit shifting and this will all done via tubes or wirelessly more cheaply and faster and without getting off your couch. No need for Blockbuster (and bad news for Netflix fans too, we think).<br /><br />But listen to the next bit carefully. The above is not enough to clinch the short thesis. A declining business can make a shrewd investment. What sinks Blockbuster is all the above <span style="font-style: italic;">plus</span> its capital structure. BBI has $700m or so in net debt and capital leases and, deep breath, minus $130m in tangible net worth. Moreover, it has lost money in each of the last three calendar years, 2003-2005. Admittedly, it has produced positive free cash flow this year and has reduced its debt but this has been at the cost of cutting advertising expenditure.<br /><br />This is a race to the bottom between fleeing customers and shareholders and time will eventually be called by the bankers.StockReplyhttp://www.blogger.com/profile/18272403973857168713noreply@blogger.com0tag:blogger.com,1999:blog-6961957492322350102.post-20873522849494302142006-11-15T12:16:00.000-08:002006-11-15T12:36:29.511-08:00LindenflationThis is a <a href="http://www.thestreet.com/_yahoo/newsanalysis/second-life/10318938.html">nice review of Linden supply</a> issues in Second Life. The bet is whether this will be a Weimar Republic inflation or a Nineties style Japanese deflation; if the former, buy land, if the latter, hoard currency. Since this is a closed economy, ruled by an absolute power (Philip Rosedale as dictator with Mitch Kapor as Grand Vizier) we vote for deflation. But obviously not with real cash.<br /><br /><br /><a href="http://www.thestreet.com/_yahoo/newsanalysis/second-life/10318938.html"><br /></a>StockReplyhttp://www.blogger.com/profile/18272403973857168713noreply@blogger.com0tag:blogger.com,1999:blog-6961957492322350102.post-9683945077128417332006-11-15T03:16:00.000-08:002006-11-16T03:19:09.036-08:00REIT Delete<span style="font-weight: bold;">Equity Residential (EQR) $51.77<br /><br />Fellow Investor</span>, the strangest stocks in the US market are REITs. Property companies traditionally traded at a discount to book but, with a wave of the tax wand, they have outperformed the market greatly in the past seven years. This is going to be somebody's big mistake. Don't let it be yours.<br /><br />I am using EQR as an example only. A quick look at other REITs suggests a similar story. EQR is big and widely held. Fidelity, for example, owns 7.8% and Vanguard 5.7% so its probably well represented in a portfolio near you.<br /><br />The first suprise is the yield - it is, against expectations, only 3.5%. Even grossed up for tax that is not automatically compelling. But the real problem needs some deep digging. Let's have a look at the latest 10-K, for the year to December 2005.<br /><br />EQR owns 926 residential properties in 31 states and D.C., all valued at $13.7 billion. It finances these assets with $8.1 billion of debt/prefs and $4.9 billion in equity. In 2005 EBIT was $512m compared to c.$370m in interest and pref coupons. In other words, ignoring the whole slew of one-offs and after deducting further for minority interests, net income available for the common was only about $70m; peanuts - a return of less than 2% on book. The dividend was $496m, way higher. How come?<br /><br />Defenders of REITs make two points, one good, one bad. The good one is that net income doesn't capture all of the gain, there is capital appreciation, too. The bad is the notorious FFO, funds from operations. This is a <span style="font-style: italic;">special measure</span> for REITs that adds back depreciation to income. Like all of these non-GAAP treatments it should be viewed sceptically. Depreciation is a real expense, or a real estimate of future expense. In this case it is a provision for future works necessary to maintain the buildings and fixtures on the estate. If there is over depreciation then they should change their depreciation policy.<br /><br />Happily, there is a way to measure the true value created that takes on board both these arguments and gives an idea of what the sustainable dividend might be. From year end 2002 to 2005, common shareholders' equity grew from $14.3 to $15.7 per share. In addition, the common received $5.2 in dividends. This equates to a compound growth per year of 13.4%, the equivalent of being able to pay $655m on last year's book.<br /><br />So the good news is that the common dividend is covered, but barely. The bad news is twofold. If capital growth slows or, as seems more likely, reverses, the dividend would be uncovered. More fundamentally, this $655m or so is <span style="font-weight: bold;">the total increase in value</span>. There is nothing else to play with, no FFO, no other magic pockets. To value EQR you must focus only on that amount and its effect on the book value of $4.9 billion.<br /><br />So we come to the crunch. What would you pay for that book and that ability to grow (or not)? The tax benefit is nice but it doesn't make the 3.5% dividend grow any faster. The surprising answer, for the current market at any rate, is $15 billion or over three times book. That is absurd. The capital growth providing most of the dividend/valuation support is far less secure than a third subordinated bond from a highly leveraged buy out. A 13.4% yield for such a bond might give you par or slightly over. But would you pay three times par?<br /><br />Common shareholders are conniving to keep the stock price up - against themselves.<br /><br />Here is a handy table showing the largest constituents of each other REIT subsector and their price-to-book values:<br /><br />REIT Sector Name Ticker Price-to-Book<br /> <br />Diversified Vornado Realty VNO 3.65<br />Healthcare Health Care Property HCP 3.93<br />Hotel Host Hotels HST 2.43<br />Industrial ProLogis PLD 2.72<br />Office Equity Office EOP 2.51<br />Retail Simon Property SPG 6.96StockReplyhttp://www.blogger.com/profile/18272403973857168713noreply@blogger.com5tag:blogger.com,1999:blog-6961957492322350102.post-73907357656599757732006-11-14T21:10:00.000-08:002006-11-15T02:51:44.368-08:00Warren Buffett is my slave<span style="font-size:130%;">USG Corp. (USG) $51.65<br /><br /><span style="font-weight: bold;">Fellow Investor</span>, Why do gurus suddenly appear, every time I draw near? I see that Berkshire Hathaway has been nibbling at my cheese. Not for the first time, we established a position in a company and found that the Great Man of the Plains had muscled in. Or perhaps he was there first this time.<br /><br />USG was a victim of the great asbestos clambake of the last decades. Plaintiff lawyers across the States, claiming en masse for peritoneal mesothelioma and the like, shook the company into bankruptcy. It emerged this past June owned by assorted parties but with a contingent damages liability capped at $3.05 billion and a friend in Warren Buffett, who underwrote a massive rights issue. Annualised EBIT is about c.$1.2 billion and the net earnings per share will depend on whether the contingent liability is called. This itself depends on legislation passing in the newly Democratic Congress.<br /><br />However, even if the maximum claim is made I estimate the fully diluted, indebted and taxed eps as $7.32. This leaves one problem. USG's business is somewhat geared to housing and construction activity, currently taking a long vacation, address unknown, forward no mail. Our in price is around $47 and at the implied maximum p/e of 6.4 we were happy to take the cyclical risk.<br /></span>StockReplyhttp://www.blogger.com/profile/18272403973857168713noreply@blogger.com2tag:blogger.com,1999:blog-6961957492322350102.post-72976842835678147522006-11-14T21:00:00.000-08:002006-11-15T12:37:58.872-08:00BeardsWhat is it with them? Coming up the hill to the High Village yesterday afternoon I saw the second badly dressed, swivel eyed, pullover sporting, elderly hairy chinned man of the day.<br /><br />Once a sign of divinity (-2000), then sagacity (-500), then liberality (-50), the beard is now virtually proof of a dissipated life. Academics, once the curliest of all professions, shun them. So do political candidates, PRs, pundits and priests.<br /><br />Best (true) beard story: GB Shaw, perhaps the most famous bearded modern, as a child used to watch his father shave. Once he asked him why he did it. His father took the razor from his face, considered the question and asked himself 'Yes. Why do I shave?' Then he threw the razor out of the open window and never shaved again.StockReplyhttp://www.blogger.com/profile/18272403973857168713noreply@blogger.com1tag:blogger.com,1999:blog-6961957492322350102.post-70430933196652070052006-11-14T20:39:00.000-08:002006-11-14T21:00:05.180-08:00Stock Pick<span style="font-size:130%;"><span onclick="BLOG_clickHandler(this)" class="blsp-spelling-error" id="SPELLING_ERROR_0">RHD</span> <span onclick="BLOG_clickHandler(this)" class="blsp-spelling-error" id="SPELLING_ERROR_1">Donnelly</span> (<span onclick="BLOG_clickHandler(this)" class="blsp-spelling-error" id="SPELLING_ERROR_2">RHD</span>) $60<br /><br /><br /><span style="font-size:100%;"><span style="font-weight: bold;">Fellow Investor</span>, I wanted to start with something as close to a no-<span onclick="BLOG_clickHandler(this)" class="blsp-spelling-error" id="SPELLING_ERROR_3">brainer</span> as possible; this is it. We bought the predecessor Dex Media on its <span onclick="BLOG_clickHandler(this)" class="blsp-spelling-error" id="SPELLING_ERROR_4">IPO</span> and took stock in the takeover. We have added consistently ever since.<br /><br /><br /><span onclick="BLOG_clickHandler(this)" class="blsp-spelling-error" id="SPELLING_ERROR_5">RHD</span> is one of the largest Yellow Pages publishers</span></span> in the US. It is a fantastically high margin (44% cash operating profit), high repeat media format. It has two risks. The debt, accumulated over a number of mergers, is over $10 billion on a negative tangible book. Cash interest cover is, however, almost 2:1 and I think this is acceptable given the stability of the business. Secondly, there is a long term obsolescence risk because of the <span onclick="BLOG_clickHandler(this)" class="blsp-spelling-corrected" id="SPELLING_ERROR_6">Internet</span>. This is somewhat mitigated as <span onclick="BLOG_clickHandler(this)" class="blsp-spelling-error" id="SPELLING_ERROR_7">RHD</span> is itself a key provider of local search online; the physical Yellow Pages also likely have many years in them yet. There is a very clever tax structure which allows the <span onclick="BLOG_clickHandler(this)" class="blsp-spelling-corrected" id="SPELLING_ERROR_8">massive</span> but utterly <span onclick="BLOG_clickHandler(this)" class="blsp-spelling-error" id="SPELLING_ERROR_9">unecessary depreciation charge to be deducted from taxable income.<br /><br />The</span> question, as ever, is what you might pay for the <span onclick="BLOG_clickHandler(this)" class="blsp-spelling-error" id="SPELLING_ERROR_10">cashflow</span> which, on the one hand, may fall off with growing migration online but, on the other, is bound to grow as expensive debt is repaid. Free <span onclick="BLOG_clickHandler(this)" class="blsp-spelling-error" id="SPELLING_ERROR_11">cashflow</span> will be over $735 million this year.<br /><br />The market cap is currently $4.2 billion, so the pleasant answer is 5.8 times. This is a steal.StockReplyhttp://www.blogger.com/profile/18272403973857168713noreply@blogger.com1tag:blogger.com,1999:blog-6961957492322350102.post-53118741596670784192006-11-14T18:21:00.001-08:002006-11-14T18:27:04.222-08:00The first post...<span style="font-weight: bold;">Fellow Investor, </span>welcome to this new blog covering the rewarding world of stocks. I am a deep value investment manager and writer. Share insights into financial analysis, investor behaviour, creativity and all subterranean linkages between. Good hunting.StockReplyhttp://www.blogger.com/profile/18272403973857168713noreply@blogger.com0