Category Archives: growth vs value

Disney(DIS)/ESPN: from growth to value

May 26, 2017 By in from growth to value: the life cycle, growth vs value, Uncategorized Tags: , , , , , , Leave a comment

the maturing of ESPN

In the 2016 DIS fiscal year (ended in October), earnings from the Media Networks segment, which is basically ESPN, decelerated from its fiscal 2015 +6% pace to a slight year-on-year decline.

Two problems:  increasing costs for sports rights; and “cord cutting,” that is, consumer reluctance to pay increasing fees for cable service and cancelling instead.

Part of the issue is the proliferation of new sports content generated by individual teams.

Part is the high cost of ESPN programming to consumers:  SNL Kagan estimates that by the year after next, ESPN will be charging $9.17 per cable subscriber for its services, up from what I think is around $8 now.

Part is also ESPN’s preferred position in the basic packages offered by cable companies.  I’ve read analyses, which I’m not sure are correct, that maintain that although all cable subscribers pay for ESPN, at few as 20% actually use the service regularly.  If so, $100 per year per subscriber translates into $500 per year per user.

In addition, as a sports fan I’m offended by the faux debates and shouting matches that ESPN has begun in an attempt to woo viewers.  Covering WWE as if it were a real sport   …Really?

the move from growth to value

It seems pretty clear to me that ESPN is no longer a growth business.  Gathering realization of this by investors is the reason, I think, that DIS has underperformed the S&P over the past two years by about 25%–despite its movie and theme park success.

The important question for investors is how much deceleration at ESPN is factored into today’s DIS quote.  Is the worst that can happen already priced in?

worst case

I think I understand the worst-case scenario.  It’s that pricing for ESPN ultimately shifts from per subscriber to per user.  This most likely means a substantial decrease in ESPN revenues.  The big question is how much “substantial” is.  If it’s correct that only one in five cable subscribers actually uses ESPN, then revenues could be cut in half by the change, even if users are willing to pay double what they are laying out today.

That outcome may be extreme, but it’s certainly not priced into DIS stock, in my view.

I’m not sure what the right calculation is.  However, while the outcome of this important issue is so up in the air, I find it hard to imagine DIS outperforming.

 

 

 

back to talking about value investing

May 8, 2017 By in book value, growth vs value, two flavors of value, Uncategorized Tags: , Leave a comment

badly-managed companies

A highly-skilled former value colleague of mine used to say that there are no bad businesses–there are just bad companies.  What he meant was this:  let’s call any revenue-generating activity as a business; when revenue generation establishes a desire for a product or service, there is always a way to make a profit.  What stands in the way is most often bad management, although it might also be a poor configuration of assets.  (There are also highly cyclical firms, which are typically viewed through lenses that are too shortsighted, and firms that have temporarily stumbled.  Let’s put cases like those aside for now.)

 

In the US, it is legally and culturally acceptable to call bad companies into account.  This is usually done either by replacing management or by causing the company to be sold and returning the proceeds to shareholders.

Because of these factors, it makes sense to hold the shares of firms where the share price is substantially below asset value, even if the company is doing poorly.

As reader Alan Kaplan points out in a comment to last Thursday’s post, however, change is occuring at such a rapid rate in the current globalizedl and Internet-connected economy that it’s more difficult to make an assessment of how much assets are worth than it was when the tenets of value investing were being laid down almost a century ago.

a plummeting stock

Anyway, I recently noticed a holding that was sinking like a stone in a fund I’ve recently taken a small position in.  The stock is down about 60% over the past year in a market that’s up by 16%.  The portfolio manager, who doesn’t seem to have had much of a plan where this company is concerned, managed to lose two-thirds of his (i.e., my) money before kicking the stock out.

Seaspan?

The stock in question is Seaspan (SSW), a container ship leasing company.

My first reaction was to think the stock should never have been in a portfolio, based on the industry it’s in.  My experience of shipping is that it’s a snake pit of public subsidy and private double dealing in which an outsider like me will be lucky to escape with any of the clothes on his back.

On the other hand, my experience is also that people who are as horribly wrong about buying a stock as the pm I mentioned above end up also being horribly wrong again when they sell it.  I used to console myself when I was in this position by thinking that the stock would never bottom as long as I held it, so, yes, I was helping new buyers by selling–but I was helping my portfolio as well.  In any event, the last bull capitulating is usually an important positive sign.

SSW is now trading at $6.67.  Book value is $16+.  The dividend has recently been cut but the stock is still yielding 7%.  By the way, that’s not a good thing, in my view.  My preference would be for the payout to have been eliminated entirely, but I’m willing to give management the benefit of the doubt.

I’m still working myself through the financials.  There are potential issues with new ships now being built that SSW has contracted to buy but has as yet found no one to lease them.  There’s also the worry that existing customers will return ships before charters end and simply refuse to pay amounts still owed.  On the other hand, there’s some chance SSW will be able to refinance its existing debt.  And to some degree–not a great degree, but some–book value for older vessels is underpinned by the ability to sell them for scrap.

In sum, this is high-risk deep-value stuff that I would never recommend anyone else should consider.

Still, I’m surprised and intrigued to find a–to me, at least–plausible value story in such an unlikely place.

 

 

 

 

revisiting (again) value investing

May 4, 2017 By in book value, from growth to value: the life cycle, growth vs value, Strategy, Uncategorized Tags: , , , 2 Comments

As regular readers will know, I’m a growth stock investor.  That’s even though I spent my first six years as an analyst/portfolio manager using value techniques almost exclusively–and then worked side by side with a motley crew of value investors for a ten-year period after that.

One way of describing the difference between growth and value is that:

–growth investors know when potentially price-moving news will happen (that is, when quarterly earnings are announced) but are less sure what that news will be

–value investors know what the news will be (if they’ve done their job right, they’re holding stocks where the market has already priced in every possible thing that could go wrong.  All they need is one thing to go right).  However, they may have little idea when good news will occur.

 

Each style has an inherent problem:

–for growth, it’s hard to find rising earnings during an economic downturn

–for value, it’s possible that a long time (say, two years) may pass before any of a portfolio’s diamonds in the rough are discovered by the market.  In that case, the manager will likely be fired before the portfolio pays off.  His/her successor will either reap the rewards of the predecessor or will dismantle the portfolio before any good stuff can occur.

 

At times, I do buy what I conceive of a value stocks.  Intel when it was $19, trading at 8x – 9x earnings and yielding almost 4% (I’ve since sold most of what I own) is an example.  But deep value investors would scoff at the notion that this is truly value.

 

For some time, I’ve been maintaining that value investing has lost its appeal in the 21th century.  Two reasons:

–the stronger one is that the shelf life of physical plant, traditional distribution networks and brand names is no longer “forever” in a globalized, Internet-driven world.  So buying companies that are rich in such assets but not making money is much, much riskier today than it used to be.  Such assets can erode in the twinkling of an eye.

–a weaker claim would be that while there are still value names, it’s hard/impossible to fill out a portfolio of, say, 100 of them, which is the traditional value portfolio structure, in today’s world.

 

I’m rehashing the growth/value debate here because I’m thinking the stronger position isn’t as unassailable as I’ve believed.

More tomorrow.

 

United (UAL) and overbooking

April 13, 2017 By in operating leverage, Uncategorized Tags: , , , Leave a comment

overbooking

Overbooking itself is an airline industry staple.  It’s also a sensible practice.

That’s partly because there’s always someone who doesn’t show up for a flight.  For example, business people who travel often may book seats on three or four different flights to their next destination on a given day.  No matter what time their morning client meeting ends they’ll be able to get away easily.  They just cancel the ones they won’t use as the day develops.

operating leverage = large profit for the last seats sold

A plane that takes off with unused seats is a lost revenue opportunity.  Like unused hotel rooms, there’s no way to sell them later on.  And both hotels and airlines have a ton of operating leverage–there’s maybe $10 in marginal cost associated with an incremental seat/room.  So the profit contribution left on the table from non-use is immense.

UAL’s overbooking algorithm

I’ve noticed with UAL, which I’ve used regularly for years, that all of the last half-dozen or so flights I’ve been on recently have been overbooked.  That’s after seeing maybe one overbooked flight in the prior year.

My (unscientific) guess is that UAL tweaked its overbooking algorithm a few months ago in an effort to squeeze a bit more profit out of its flights.

My experience is that when companies begin to operate by trying to figure out where the the line is that marks the minimum a customer will accept–and then tries to get as close to that line as possible without crossing it, disaster inevitably happens.

I first encountered this phenomenon with a former management at Marriott that later went on to wreak havoc at Disney and at Northwest Air.  Their idea was that no one would notice if they lowered the room ceilings on newly-constructed hotels by an inch or two and shrank the room square footage by, say, 5%.  Yes, construction costs were a bit lower.  But I remember those rooms as being vaguely unsettling when I entered.  Business customers, the heart of a hotel chain’s profits, fled in droves.

If I’m correct, the remedy for UAL is simple.  Just go back to the former algorithm.  If, however, the corporate culture at UAL is to provide customers with the minimum acceptable service–and, to be clear, I don’t know that it is–more trouble is likely brewing.

 

momentum investing

February 28, 2017 By in growth vs value, Speculative stocks, Stock ideas, stock market, two flavors of value, Uncategorized Tags: , , , , 1 Comment

what it is

Momentum investing is a style, if one can call it that, of buying and selling securities based simply/solely on recent price momentum.  If a given stock is going up, buy some.  If it continues to rise, buy more.  If a stock begins to decline, sell it   …or, for very aggressive players, sell it short.  No fundamental data counts.

Day traders and very short-term-oriented algorithmic players are the main people who use this simple buy-if-they’re-going -up, sell-if-they’re-going-down rule.  In my career, I’m only aware of two “professional” investment groups who have practiced momentum investing as their main strategy:  Wood Mackenzie trading oil stocks in the early 1980s, Janus trading tech stocks in the late 1990s.  The former was an almost immediate disaster; the latter had a surprisingly long period of success before going down in spectacular flames.

recent use

The term has come into recent vogue in the financial press as a description of growth investing.

It isn’t one, although it may reflect the jaundiced view a few (narrow-minded, in my view) value investors have of their growth colleagues.

To be clear, growth investors try to make money by finding companies that are expanding faster than the consensus expects.  This is not momentum investing.  Nor is the style of value investing that requires that a company not only be bargain-basement cheap but that there be a catalyst (reflected in positive price momentum) for change before buying.

why write about this?

A few days ago, a regular reader, Small Ivy, characterized my speculative dabbling in Tesla as momentum investing.  Maybe so, maybe not.  More tomorrow.