Wednesday, March 12, 2014


So here is another ripple from the recent flurry of Buffett stuff on this blog (from the letter to shareholders to the 3T's etc. OK, so two posts does not a flurry make).

A lot of people look at Buffett's holdings for investment ideas, but for most of the recent ten or twenty years, he has invested in large cap or super cap names.  Buffett's pool where he can fish is just the top 100 or so market cap companies.   With a $100+ billion equity portfolio, he really can't be looking at smaller names.  So we often wonder, if Buffett was managing a lot less, what would he be investing in?  For example, if he was only managing $100 million, it's almost certain he would not own Coca-Cola or even Wells Fargo.

We can't really ever know that.  But he did pick two investment managers who do fish in a smaller pond.   So isn't that the next best thing?   Buffett and Munger have screened and vetted these two managers for us and they are managing $7 billion each (and they outperformed both the S&P 500 index and Buffett by a wide margin for two years in a row).

So we really have to drill down and focus on what they own, right?  That's a totally rational thing to do.  I've already looked at Davita Healthcare Partners (DVA) and really like it (see post here).

Let's take a look again at Berkshire Hathaway's large stock holdings from the recent annual report:

Out of this, I think the only non-Buffett stock is DIRECTV (DTV).  The table shows that they own 22.2 million shares, but this excludes shares held in the pension funds.   The 13-F shows that BRK owns 36.5 millions shares.  That comes to $2.9 billion at the current $79/share.  Buffett says that Weschler/Combs each manage around $7 billion, and they both own DTV (one or both said that it was the first stock they bought upon joining BRK).

Between the two of them, they manage $14 billion.   So this $2.9 billion position in DTV is around a 21% position.  (BRK owns 36.5 million shares of DVA which is worth, at $69/share, $2.5 billion which makes it a 36% weighting in Weschler's BRK portfolio).

So that's pretty astounding.  They both own DTV, and combined, it's 21% of their portfolios. Obviously, we have to take a closer look.

Actually, I have looked at this a few times in the past and always thought that satellite TV will be more vulnerable to new trends such as over-the-top TV and things like that.  Cable companies can get around that as they have a fat two-way pipe that goes into the home.  So even if you give up on the TV/video business, you can generate some good cash flow on the broadband business (like Washington Post does; Graham said that they have given up completely on the video business).   I always wondered about satellite TV because they don't have that two-way pipe.  They really do just distribute video.

Focused Investing
OK, so going off on a tangent for a second.   Both Buffett and Munger have often talked about focused investing.  Greenblatt said in his genius book that you only need six to eight stocks in a portfolio to get the benefit of diversification.  But very few people actually do that.  Most of this is due to size; many funds just become too big to do this.

But check this out.  When Todd Combs appeared on CNBC with Buffett the other day (see here), he mentioned Tom Bancroft as a money manager that he would recommend.  Bancroft runs Makaira Partners.  He worked for Lou Simpson for 13 years before striking out on his own.   Of course, like any attentive value investor, I immediately went to the SEC website to pull up Makaira's 13-F:

So check it out.  Nine names in the portfolio.  That's focus.  Of course I did take a quick look at Wesco Aircraft and CDW Corp and think they are very interesting (maybe a future post).

No Bonus for Originality
And by the way, one great thing about investing is that there often isn't a bonus for originality.  Well, if you dig deep and find an overlooked gem, obviously you can get great returns.  And yes, you can't do well doing what everyone else is doing.   But what I mean is that if you see or hear of a good idea and jump on it, it doesn't matter where the idea comes from.

If someone owns an interesting looking stock that has a 10% free cash flow yield, you don't have to say, gee, that looks great but I'm going to go look for my own 10% free cash flow yielding stock.  If 10% free cash flow is good for you, then just buy that stock!   Of course you still have to do the work to understand the business etc.

In many other areas, you can't do that.  Private equity guys can't do that.  If you are a composer and you hear a great melody on the radio, you can't go, gee, that sounds great.  I'm gonna use that melody for my own song!   But in the investing world, if you buy a stock that Buffett owns, you are going to get the exact same return on it that he will.  Someone owning a stock doesn't preclude you from enjoying the same benefits.  And unlike the Olympics where only one person is going to get the gold medal, in investing, one person doing well doesn't preclude others from doing well too.  But then again, we can't all be above average either.

Back to DTV
One thing you will notice when you read the DTV annual reports is that they are really well written and they are very shareholder oriented.   They had their investor day in December 2013 and it's really detailed and good.  If you are interested at all in DTV, I highly recommend going to the DTV website and listening to the whole thing.  The presentation slides are good too, which I will cut and paste from.

December 2013 Investor Day
Just to get your attention, I will put one of the last slides up front.  Here is one of the biggest reasons, probably, that both Weschler and Combs likes DTV:

Just like outsider CEO's do, they are aggressive in their share repurchases.  Since 2006, DTV has repurchased 65% of their shares outstanding (based on float).  That's astounding.  You would think that the satellite TV business is capital intensive, like cable.

But first, let's just take a quick look at what DTV is all about.  Here is a nice slide from the presentation that gives you a snapshot of DTV:

The basic story is that DIRECTV in the U.S. is pretty mature (but can still grow) and a lot of growth can come from their Latin America business.  The growth potential there is very large due to the increasing penetration of pay TV and the rise of the middle class there.  The region is facing a lot of headwinds in the past couple of years driven by the slowdown in China, but they still manage to be growing.

Despite the competitive challenges / maturation in the U.S. and problems in Latin America (macro), they have managed to grow revenues and earnings at a nice clip.

Of course EPS is not going to grow 31% over the next few years, but as we'll see, DTV does expect some decent earnings and free cash flow growth going forward.

Competitive Advantages
There is a lot more in the presentation but here's a slide that shows some of the competitive advantages that DTV has.   My biggest question with DTV is what their edge is compared to alternatives.

The outstanding customer service is curious as if you google DTV Yelp, you will only find one star ratings with many comments like, "DTV doesn't even deserve one star; there should be a zero star option" or some such.  But I understand that there is a bias in some of these things as people will generally speak up more often when they have a problem rather than when they have a good experience.  With 20 million subscribers, a few negative Yelp reviews may not mean much.  And besides, if you look at cable companies, you won't see much difference.

So here is what we investors have to worry about:

DTV U.S. is obviously in a mature market with increasing competition.  The increasing rates for content sort of reminds me of the pharmaceutical and branded goods industry in the 1980s and 1990s.  It can keep going until at some point the system can't take it anymore and the model blows up.  The pharmaceutical industry may be a little different as they didn't keep raising prices on the same product over the years, but it is similar in that things got more and more expensive until the system couldn't handle it anymore.

The Point
So here is the most important slide (for many of us) that gets to the point.  What can we expect from DTV over time?  Their outlook to 2016 is for 15%/year growth in EPS and 25%/year growth in FCF/share, both of which would get to $8/share by 2016.

DTV Latin America / SKY Mexico
There is a lot of detailed information on the non-U.S. DTV business, but here are just a few slides that show what it's about.   They are growing despite some serious macro headwinds:

Emerging markets do tend to have cycles, and we seem to be in a big growth down cycle in emerging markets, largely due to the slowdown in China, Fed tapering and some geopolitical problems.  So I am not so concerned with that as cycles do eventually turn.

There seems to be plenty of room for growth despite the macro headwinds.

DTV U.S. Performance Despite Competition
Despite competition from FiOS and cable triple play (and others), DTV U.S. seems to be doing well versus other pay TV providers:

Managing Churn
Of course managing churn is critical in sustaining and growing the subscriber base.  This chart is interesting.  DTV U.S. is focusing on higher end DTV subscribers as they add more value to DTV (as shown in later slides).  But the higher end users also have lower churn.  The more they pay DTV, the stickier they are:

Revenue and OPBDA Growth versus Peers
And DTV U.S.'s revenue and OPBDA growth is better than peers (again, despite the intense competition in recent years):

How Do They Do It?
So how do they grow earnings and revenues in a mature market with such intense competition?

Quality over Quantity?
Going for higher end users seems to add more value to DTV (and they have lower churn too as seen in the above chart).

And despite TV provider complaints of rising content cost, DTV has managed to increase programming margin.  Of course there is nothing wrong with passing on higher costs to the consumer.  But at some point people will start to balk and content providers will have to think about further price hikes or abandon this model altogether (which would be highly risky too).

And obviously, cost management is key:

New Businesses
So DTV is looking at new business opportunities (U.S. business).  There are details in the presentation, but here's just one slide.

Commercial is offering DTV to restaurant/bars, hotels, gyms and things like that.  DTV says they have an edge in home security due to their current customer base and installation staff.  Ad sales is targeted ads for advertisers; much more efficient than broadcast advertising, for example.  SVOD is subscription-video on demand, EST is electronic sell-through (like iTunes store) and OTT is of course over-the-top business.

But this will only be $1 billion or so in revenues in 3-5 years, versus $25 billion in revenues for DTV U.S.

Some Financial Stuff
So here are some financial slides:

Valuation versus Peers
And here's an interesting slide comparing DTV's valuation versus peers:

DTV closed around $67/share on December 11 and 12 (investor day was on the 12th) and is now at around $78/share.  As of December, DTV was trading at a very attractive level given growth trends there versus the S&P 500 and peers.

2013 Results
Just to fill in some figures that came out after this presentation, DTV had full year 2013 adjusted EPS of $5.42/share, better than the 2013 target set back in 2010.  Free cash per share was $4.76.  So currently, at $78/share, DTV is trading at 14.4x 2013 EPS and 16.4x free cash per share (on a trailing basis).

2014 Outlook
On the 4Q 2013 conference call, DTV said they expect DTV U.S. to have mid-single digit revenue growth based on ARPU growth and modest subscriber growth and OPBDA growth in the mid-single digit range.  Programming costs per sub is expected to increase 7-9%/year in each of the next three years.  EPS will grow in the mid-teens from the reported $5.22 and free cash flow will grow 10% in 2014.

Assuming 2014 EPS of $6.00 (+15%) and cash flow per share of $5.24 (+10%, on the conference call I think they said free cash flow will grow +10%, not free cash flow per share.  But let's just call it +10% to be conservative.  It may be higher on a per share basis due to share repurchases).  With DTV trading at $78/share, that's a 13x p/e and 14.9x free cash per share.

Their 2016 goal is $8/share in both EPS and free cash flow per share, so DTV is trading at less than 10x that.  If they get to the more normal looking 15x valuation, that would put the stock at $120/share.  That leads to a 15%-ish return over the next three years.

But of course, the big question is what would the outlook for DTV be in 2016?  Pay TV in the U.S. will be more competitive.  Latin America and Mexico will probably do well over time as those markets get through their macro down cycle (cycles do turn, eventually...).  Better performance there and an increased valuation of those businesses can boost DTV over time.

Significantly Undervalued
On the 4Q2013 conference call, Michael White (CEO) said that DTV stock "remains significantly undervalued".  The conference call was on February 20, 2014 and DTV was trading at $75 at the time.  He said they will be buying back another $3.5 billion in stock.

This is very interesting.  We have a stock here that:

  • both of Buffett's handpicked investment managers have in their portfolios with a collective 21% weighting which is pretty big
  • A really great looking business in terms of ROIC, growth and other metrics, 
  • Trading at a reasonable price, cheaper than the market and peers given the growth rate
  • A shareholder friendly management that buys back tons of stock (having bought back 65% of float since 2006)
  • The CEO says that the stock is significantly undervalued
So how can you not be excited?  I think DTV is an incredible company.  My concern is the same as most other people, I suppose, who don't own DTV.  

Malone's rationale for buying Charter (CHTR) was that they own a fat two-way pipe into people's homes.  Even if the current pay TV model ceases to exist (and he thinks it won't exist in five years), CHTR has a broadband connection; people will still need broadband to get TV/video into the house.  Malone feels that he can package his broadband internet service with some other TV/video service and have a good business.  As for competition from FiOS and other broadband service providers, he feels that cable can get to fiber-optic-like speeds and capacity with much lower cost (and capex). 

When thinking about DTV, satellite TV providers don't have that.  Satellite is one way so what will they do when the current pay TV model starts to fall apart? 

It may not be two way, but they still do have very low cost one-way connection and that may become more important as we get more HD and super-HD (and who knows what comes after that).  The combination of satellite and cloud is interesting because much of the really heavy traffic might be just one way (which the satellite can provide), and the other way traffic (user input to DTV) over the cloud may be light (and therefore can be handled by various forms of internet access) so wouldn't cost too much.  

So there is a lot of potential competition, but at the end of the day, it's going to boil down to cost.  Fiber optics may threaten cable, but what is it going to cost to build it out and will people pay for it?  I suppose the same can be said for DTV.  Other forms of competition can come in (internet TV, over-the-top), but what is it going to cost? 

Having thought this through a little bit, even if the current pay TV model blows up completely, DTV will still have a pretty fat pipe going into homes so the model may be different but they can still be a major player given their cost competitiveness; the hybrid satellite/cloud will provide interactivity. 

I think one of the fears is that content providers will eventually just go direct to the customer over the internet and eliminate the middle man (cable and satellite TV operators).  But this ignores the cost, both in terms of lost revenues (will Discovery Channel actually make more money going directly to viewers over the internet?  I wonder about that) and total cost to the end user (broadband connection and possible tiered pricing?).

On a personal note, we recently bought a Samsung SmartTV (internet enabled).  I only bought it, actually, because some of the prices I saw during the holiday season (Amazon versus Best Buy price war) looked ridiculous.  I was convinced they were losing money on the deal so I ordered a TV, and sure enough, after the heavily promotional time period, prices shot right back up again (so I got to buy the low tick! Once a trader, always a trader, I suppose).

And this SmartTV is amazing.  It connects directly to the internet (via my wifi, which goes through cable broadband) so I can get Netflix, Amazon Prime (movies), YouTube and whatever else right on the TV.  There are even some full length HD movies on YouTube for free.  The picture quality is good (HD) and it streams way better and smoother than when we hooked up an iBook to our old TV.

So this is scary.  With this stuff (Netflix, Amazon Prime, YouTube), I don't think I'll ever pay for a premium movie channel ever again.  Why would anyone?  But would I cut the chord completely?  No.  I think Netflix more or less replaces the old premium movie channels and of course the local video rental shops.  Plus, surprisingly, Netflix doesn't have all that many movies streaming.  Their DVD catalog is great, but the streaming catalog is very limited, still.  I think as long as the basic TV package is reasonably priced, I will keep some sort of pay TV going even though we don't really watch a whole lot of TV here.

With Americans watching TV for five hours a day on average, it's hard to imagine a whole lot of chord-cutting happening any time soon.  But who knows.  Maybe I'm too lazy, but I would find it hard to watch five hours of TV a day online.  I don't watch all that much TV, so I am not the best judge of these things.

Having said all of that, DTV looks really good but I don't think I could put 20% of my portfolio into it (but then Weschler/Combs did it much cheaper and they are already sitting on some decent gains!).   Buffett said that both of these managers not only performed well, but have the ability to see things coming that never happened before (in terms of risk), so they have no doubt thought through all of these issues.  One bummer from their recent CNBC appearance is that they were asked about DTV but they never had the chance to talk about it.  Oh well.  That will have to wait for the annual meeting, I suppose.


  1. brooklyninvestor ever look at GM, i believe that s another one of the T's stocks

    1. Yes, I've looked at it before but not recently. GM was cheap, but financials were cheap too and I was more comfortable with those. GM is also an Einhorn stock and he does deep research.

      So this whole recall problem is very, very interesting. These big companies do tend to get through these things; Toyota had a problem recently too. So this could be a great buying opportunity.

  2. Great post, always enjoy your blog. Thanks!

    Have you looked at ADT? I believe they're very similar to DTV, except they operate in different industries. They may overlap in the future as DTV might jump into the security business. Who knows, But yeah, ADT is doing a massive share buy back, around 50+% of the current market cap. Since their spin-off in 2012 they've repurchased 20% of outstanding shares. 90+% of their revenue is recurring so they're able to leverage to buy back more shares like DTV. With their non-compete contract expiring soon with Tyco, ADT will then be able to enter new markets. Plus, the stock is cheap. Company is around $29-ish per share, so $6.0-ish billion market cap. Management has around $1 billion of free cash flow to deploy. Half of that goes to acquiring customers though. ADT has a really nice investor day presentation on their site too, good stuff.

    Hope you have time to take a look at ADT and provide some more insight. Cheers! =)

    1. Not in a long time. I think I looked at it after the spinoff. My impression was that it was a business in decline or soon to go into decline as new technology replaces their system. But I have no idea about that so I'll take a look. Thanks for the tip.

    2. i looked at adt a while ago. my biggest concern was the competition from cable companies like timewarner. where i live twc just recently started to offer security service on top of their traditional broadband/tv space.

    3. The short thesis on ADT is most certainly related to competition and new entrants into the market. As you said Anonymous, cable companies and telecom's are getting into the business. Barron's has an interview over the weekend with a value manager who is currently short the stock (Barron's themselves have been bulls). He does make a good point in that new entrants are willing to take a lower breakeven costs because adding an additional service to the bundle decreases the overall breakeven on a customer. More bundled products = stickier revenue = higher longer term profit.

      ADT's latest yearly results do show increased attrition (how many customers are lost per year) and I take the sell-off in the stock was related to the market believing that newcomers are in fact taking share. However, if you dig a little deeper into the attrition number you'll see that most of the attrition is not related to "lost to competition", especially cable and telecom. In fact their increasing attrition rates are related to 1)relocation (people moving) and 2) Higher non-pay customers.

      Competition however does have an impact on the cost to acquire new customers in order to replace the attrition. Due to competitive advertising, the company saw an increase in subscriber acquisition costs (SAC). ADT had to spend more on marketing and advertising to maintain share. Also, higher SAC were related to higher Pulse take rates, which are generally more expensive to install but provide higher recurring monthly revenue in the future.

      ADT is progressing in a massive repurchase effort, $3b by the end of 2014 since their spin out. I peg their average cost at around $40 (40% above current prices - ouch). They will have more do to in 2015 and beyond, mentioning that have about $1b in steady state free cash flow to allocate to M&A or shareholder returns. ADT is the 800 pound gorilla in the home security space, with about 25% of the market share, 6x larger then it's next competitor. This bodes as ADT, a recognized name in home security, has become the buyer of choice for acquisitions.

    4. I view ADT as a service provider, so as technology advances they're able to offer customers a better product, thus benefiting ADT. Similar to the railroads, all they do is transport goods from point A to B If rail cars improve then great, it'll make transporting goods more efficient. I think the same concept applies to ADT. ADT is there to provide security. So as the technology improves then ADT's offerings will improve. Home automation is becoming more widely available and ADT was able to benefit from such advancements in that technology.

      And as for telecoms and cable companies entering ADT's market, I find that rather puzzling. It makes sense that it'll compliment the telecoms/cable companies business model. Since their entrance, ADT's market share has been really stable. The teleco and cable companies are mainly taking market share from local businesses. According to ADT, the addressable market size is around $15-20 billion. So companies like AT&T, Comcast, etc. aren't really moving the needle on revenue by entering the security and home automation market. And they're customer service is already awful so why I trust them to monitor my house, just a personal opinion. ADT has a 90% brand recognition.

      ADT's stock is at an all time low since their spin-off. There's bad news surrounding the business such as new entrance, high attrition rates, high debt leverage, etc. So yeah, only time will tell. I just think 10 years from now people will still need home security monitoring. And someone is going to charge you for calling the police/firefighters when there's an emergency.

    5. Great discussion. I haven't taken a close look at it, but this may be one of those things where people are afraid of "ghosts", and maybe ADT does OK over time. I really have no idea.

      But one thing I would consider is the cost of each service. Of course, just because DTV or someone offers something cheaper doesn't mean people will switch over right away. There is some stickiness that comes from laziness (look how many people still have earthlink and email accounts that they are probably still paying for in this era of free gmail), but there is also a real cost of switching.

      As Weschler said describing his checklist for healthcare stocks, the big question is does ADT offer the best product out there for the best price etc... If not, then even if there is very little attrition due to competition, it will eventually come. If they do have a competitive product (price and performance), then they should be OK over time.

      Anyway, this is certainly an interesting situation. I noticed that there is a short writeup over at VIC too.

    6. I thought I would point out (due to the interest in Liberty Media, etc on the blog) that John Malone has a substantial interest in Ascent Capital Group, which was spin out of Discovery Holding Company in 2008 (Discovery itself spun out from Liberty Media in 2005). Ascent sold off all of it's media assets and bought Monitronics from ABRY Partners, a media focused private equity shop, in 2010. Ascent's only business is Monitronics which has a leading industry position second only to ADT. However ADT dominates with 25% market share compared to Monitronics at only 4%.

      With ADT selling for what I believe to be extremely cheap valuations and John Malone (et al) interested in the industry, I could envision some sort of merger or consolidation occurring. ADT also appears to be a business that would attract Buffett, Combs, & Weschler. It's a bet on American growth - oddly housing activity hurts ADT in the short run, but longer term is beneficial. It has opportunities to reinvest steady state free cash flows at IRR's in the mid-teens. And is the kind of business eating itself, or Charlie Munger's cannibal company.

  3. kk,

    I think the one way pipe idea is flawed. Satellite is a broadcasting technology. Everyone is getting the same data. You can't do interactive internet.

    1. speed enough for HD video

    2. Hi,

      Yes, my comment wasn't really clear. Satellite can't do interactive. The hybrid model is having satellite + TV everywhere on your various devices and even having the 'box' hooked up to the internet so you can stream movies. So you get a ton of stuff coming down from the satellite, and you have internet streaming too, but you need a separate internet connection to do that.

      The interactivity part I was thinking about is all the stuff that DTV provides to subscribers that doesn't come down from the satellite that you do through the internet... I didn't mean that satellite can do sort of interactive thing or replace broadband...

      Thanks for reading.

    3. It feels like broadband, or even an iteration on combined wireless, is the first thing every home needs. Then if you want to watch media, you will look for what bundled verticals you like (if you have kids, perhaps there will be a netflix for kids), netflix (last season, re run), sports and so on. And then for everything fresh, singles is the best way for monetization - so amzn, itunes etc. And with netflix gaining subs globally, soon they will be the highest bidder for content in their niche, so dont worry about their catalog too much.

  4. Anecdotal evidence on Netflix is that the quantity of streamable content has declined relatively recently as the cost of streaming rights has increased. I have noticed that fewer of my viewing preferences (I may not be the typical Netflix viewer) are streamable and I would attribute it at least partly to studios charging more for their digital content. So with cable companies on one side and studios on the other both extracting financial concessions from Netflix, one might wonder about the latter's valuation support......................but that's besides the point of this thread.

  5. What were your thoughts on Wesco Aircraft? I had a look a while ago as I noticed that Abrams Capital Management owned it. Thought it was kind of expensive although very high quality, presumably I have missed something though.

    Also, it is interesting to look at the asset turns that DTV gets in the US versus LatAm. From this it seems that company is pretty much fully invested there.

    1. It sort of reminded me of Transdigm, even though it's a different business model. And I was wondering if this too is sort of roll-up business. It does look interesting but I haven't spent enough time on it yet. And yes, it might not be 'cheap', but if he worked for Lou Simpson for 13 years, then he is going to be OK with growth stock; I think Simpson owned Nike for a long, long time and that was one that I never thought was cheap either.

      As for DTV, the U.S. market is very mature so they are getting pretty much maximum efficiency now out of their assets. LatAm, on the other hand, is still in the growth phase and initial investment can be pretty high. Also their asset base costs dollars but revenues is local currency, so that can be a factor too. When looking at the total, keep in mind that SKY Mexico is not consolidated so it will be on the balance sheet but the income statement will only show equity income of nonconsolidated entities or something like that.

    2. Bought some Wesco at $13 and sold at $16+, oh well.. good business model, potentially more value-added, more sticky business, good M&A pipeline, up cycle from commercial aerospace

  6. Nice write up. On the basis of the financials and historical performance DTV looks really interesting. I've never looked at it closely because the whole industry seemed ripe for disruption. I'm in my twenties and many of my friends have cut the cord. The only reason I still subscribe is for ESPN. If ESPN were to offer its programming online for $20 a month, I'd cancel cable in an instant. This won't happen in the next few years, but who knows after that?

    Have you looked at Posco? That's another one owned by two Berkshire managers (Buffett and Munger). It has performed pretty poorly recently, but there seems to be value when (if?) the steel market stabilizes.

    1. Hi, I almost want to cut the chord because of ESPN and other things I don't watch, lol... I too know people who have cut the chord as it is getting expensive, but they are the more artsy types that don't watch much TV anyway... I think most people watch way too much TV to be able to cut completely now.

      I used to own PKX a long time ago (before BRK got into it, I think), but don't really find it that interesting now. PKX probably does have the best technology; much of this was learned from Japanese steel makers who also have some of the best technology in steel making. But the learning curve, I think, is pretty steep and China will catch up eventually, just as PKX caught up to the Japanese. So when that happens, what happens to PKX? Plus, China may easily go overboard and make too much capacity, even for high quality steel.

      So seeing how the Japanese steel companies suffered over the years, I sort of think S. Korea will go through the same cycle/process. When I think of it that way, it's not that exciting to me.

      But of course, this doens't mean you can't make money on it. If the market stablilizes, PKX can certainly do well. I haven't looked at it closely recently, so maybe there is something there on a valuation basis...

  7. Interesting Post, I have been eyeing DirectTV for a while now, though I have had trouble getting my head around the technology shift toward fiber / cable (i.e. broadband, not classic TV), thinking through fiber technology (e.g. speeds and costs on Google Fiber vs time Warner / Comcast / other traditional cable), dealing with the "last mile" connectivity issue bottle necks on any fiber / cable system, emergence of white-space spectrum in smaller cities and rural areas, etc.

    Food for thought: Citi Research put out a piece "TV is Dead. Long Live TV" in Dec. 2013. Most of it is very macro oriented, but it did have 1 paragraph on Dish and DirectTV, which I pasted in below. I am still mulling this over, but perhaps the readers of this website are able to digest it more quickly,

    "DBS firms – like DirecTV and Dish Network – do not sell broadband. As such, if
    cord-cutting accelerates, revenues could decline. However, we believe the market is
    missing a potential opportunity for these firms to deliver linear video over the web
    (rather than deploy satellite dishes and set-top-boxes to homes). The cost savings
    from this shift in distribution (from satellite to the Internet) are significant. The cost
    declines could allow these firms to nearly double their free cash flow. While the buyside
    views the DBS businesses in the early stages of structural decline (given the
    lack of broadband and rising web-based video risks), we take the opposite view: we
    think these firms may be poised to dramatically increase cash flows even if
    revenues come under some pressure from cord cutting"

    re: Latin America, note: that The Economist had a few articles on TV and Telcos in Mexico recently (1 March 2014 edition). Carlos Slim Helu is 'allied' with Dish, and has an option to buy out Dish's Mexican operations. Even so, my recollection is Dish is having a harder time in getting satellite customers in Mexico than it had expected. There are many moving parts in this industry to be sure.

    1. That's very interesting. DTV is working on developing their hybrid model and it's a great idea as most people will already have broadband connection at home. Citi's idea of DTV moving over to the internet exclusively is interesting. You would think that if they did that, they would be removing their 'edge', which is partly their satellite infrastructure. If they moved over to the internet, they would be the same as any other internet video content provider, right?

      But then again, we are seeing this happen with Netflix. Netflix is a DVD-by-mail movie rental membership business moving over to the internet. Their 'moat' was the massive infrastructure of DVD mailings/returns, physical DVDs and the subsidy from the U.S. government (low delivery cost as post office operates in the red).

      And yet they are moving away from this competitive asset onto the internet where presumably they have no 'edge'. But the 'edge' is their membership base, database of historical rentals, reviews, relationship with content providers and scale (which was largely built up with the old model).

      So looking at it that way, maybe DTV already has the subscriber base, scale and relationships like Netflix does to be a competitive internet video distributor.

      In that sense, maybe Citi is exactly right. Maybe that is the plan over the longer term for DTV.

      Thanks for posting the excerpt as I didn't really think about this until now.

    2. I am curious as to where you see the best opportunities currently?

    3. Hi,

      That's an interesting question. I still like the financials and the many companies I talk about here. Things aren't as cheap as they used to be, but I think things still look good.

      I would guess there are some great opportunities now in Europe, but I don't follow European companies. If Barton Biggs was still around, he might be looking at stuff in and around Russia/Ukraine... It's highly risky, but that's when you get interesting opportunities, right? When everyone is running scared.

    4. KK,

      I would side with Malone here. He said the cable bundle will be gone in 5 years. Even if you watch only 5 channels you have to buy all 200. The only advantage of pure-video players like DTV and DISH is their satellite network.

      As Internet speeds keep increasing, content providers will go directly to the consumer. They can take all the ad revenue too. There is no reason to have a middleman. I would sign up directly with whatever content provider I like.

      Isn't Discovery already doing this? Maybe SNI and ESPN too?

    5. Hi,

      I do too, actually. I think the model will evolve over time, but probably not overnight. The question becomes can content providers get more money from cable/satellite operators or on their own? Right now I think they probably make more through the current system. It's not the best analogy, but when Prince shunned major record labels and went direct to the consumer, he didn't sell that many records, I don't think. So there is something to be said for distribution infrastructure.

      But anyway, even if the current model blows up, DTV will still have a low cost pipe into the house and will be able to carry something there. Right now, one of the things is NFL Sunday Ticket or something like that. These guys have to give people a reason to subscribe. As long as there is a reason, they can survive.

      Most of the 200 channels don't cost much anyway.

      Also, someone posted an excerpt from a Citi report; Citi says that DTV can migrate to the internet and make tons more money. For a second, I thought, why would DTV abandon their moat? (satellite infrastructure). But then I realized that that is precisely what Netflix is doing (abandoning their moat of DVD-mailing/sorting technology/infrastructure and subsidized delivery cost (U.S. Post office).

      So I do agree with you on that. But I don't agree that this would be the end of DTV. But this to me is not as high conviction as some other ideas.

    6. ESPN is the most expensive cable channel, by far, at $5.54 per subscriber. I think the next most expensive is about half of that. And you're right, most channels are free or less than a quarter per month. Senator McCain introduced a bill to introduce a la carte programming not long ago.

      Here is an article on the true cost of a la carte.

      PS: I think DTV's greatest value is locking up the NFL ticket through 2021 for $15.2B. That, while it sounds like a lot, is nothing compared to the amount of subs it generates at $300/per.

  8. People sure are scared of Weight Watchers, despite its strong brand, steady free cash flow, and huge ROIC. Extremely high up there on the magic formula screen. There is a lot of fear out there that fitness apps like MyfitnessPAL might spell there demise. Yeah right. Just throwing in my two cents of what I've been looking at in case anyone finds it interesting.

  9. Two questions for anyone out there: One, does anyone know why they have negative stockholders equity?

    Two, where are you looking to find the stocks held by the two Buffett protege's?

    1. Hi,

      Shareholders equity is negative due to the large amount of share repurchases. Shares repurchased count as negative equity (deducts from shareholder equity).

      As for where I look for protege's holdings, I just look at what BRK owns. I only know who owns what from reading about it. I don't think there is a separate list for Weschler/Combs at this point...

    2. Thank you very much.

      On the shareholders equity, is there any reason I should be concerned that it is negative? I know awhile back (maybe 3-4 years ago) YUM had negative SE for the same reason, large share buybacks. Today its strongly positive. Is that something that bears watching?

      Thanks again.

    3. No not at all. That's just an accounting thing. Actually we should be very happy that they have bought so much stock back and will continue to do so. You have to evaluate these companies based on free cash flow, not book value.

    4. It seems that negative equity is from the retained earnings which is negative ,do you have any idea why ?

  10. This is completely off topic, but what do think of Liberty's spin of Liberty Broadband and Liberty Media tracking stocks?

    1. I think it's great. Some of these various entities require different capital structures, so having them separate might make them more efficient. This is the opposite of BRK, but BRK doesn't use debt. For a leveraged model like Malone's, it's good to separate out various businesses so they can be valued and levered accordingly.

      Plus, every time Malone does something like this, it tends to work out pretty well.

    2. Dtv had tried to buy Hulu before Disney/ Fox took it off the table. Dish just gained internet streaming rights to Disney/Espn channels and DTV is reportedly negotiating the same. Lots of options here.

      In Mexico, Slim's dominance in mobile and Televisa's dominance in broadcast tv could have ramifications for DTV. Since their SKY Mexico sub is a JV

    3. with Televisa. Mexico's president is trying to foster more competition into broadcast and mobile, as well as prevent Slim and the Azcarragas from establishing dominance in pay TV. I could see them having to divest their pay TV subs.

  11. I have a few comments about this post that are sort of tangential (sorry):

    (1) You posit that Buffett wouldn't own WFC if he was managing 100mm but Munger has a (roughly) 60% allocation to WFC in DJCO which is a (roughly) 100mm portfolio.

    (2) The point about pushing the DTV bundle IP could also be said of SIRI. I had thought of the latter option but not the former, to any degree. Kind of short sighted on my end, maybe.

    (3) I am a huge fan of your blog, Keep it up, sir.

    1. Hi, Thanks for the comment. Yes, it's a good point about Munger. But I think in that case, he just took advantage of a once in a generation opportunity. I'm not sure that Munger was 'managing' that DJCO capital in a way that Buffett would if he was managing $100 million. So I don't think he was actively looking for investments in the same way that Buffett used to do in the partnership days, for example; something happened and he just had to act.

  12. Was Buffett in his early partnership days very keen on special situations? Is that how you think he'd manage 100 mil today (in addition to having thousands of smaller companies to fish for)? I''ve heard him guarantee he could get 50% a year if he had only 1 million or something like that. You think that'd how he'd do it?

    1. Yes, and yes. You can google Buffett partnership letters and you can find them. They are posted at various websites. I think he would be looking at things that Greenblatt talks about in the Genius book (and other ideas). He said that to earn 50%/year, he would turn over a lot of rocks, and he would look far away from where everyone else is looking. So obviously, you aren't going to earn 50%/year buying BRK or buying the stocks that they own.

  13. Why is the equity negative ,it seems that retained earnings has been negative for awhile any idea why ?

    1. Share repurchases are deducted from shareholders equity. They have bought back tons of stock in the recent past so the more they buy back (above and beyond net income), the more negative that will become and that's not a bad thing. DTV has to be evaluated on a earnings, free cash flow and things like that.

  14. The "Netflixification" of the DBS players is an interesting concept. I suspect that any transition to full OTT would be very gradual though, niche and targeted at first, and assessing the revenue impact will be challenging depending on how the ultimate model/approach shakes out. To the point made above, ROIC would be much higher given lower infrastructure costs. Interestingly, a gradual approach to OTT will likely be incrementally positive to revenues as the core business hasn't and won't evaporate overnight.

    We're already starting to see the above play out with DISH's recent announced deal with DIS to carry Disney, ESPN, and ABC networks OTT through a personalized subscription service for $20-30/month aimed at 18-34 year olds, likely the highest churn cohort. A Reuters article the following day noted that DTV is similarly looking at doing an OTT streaming deal with DIS as part of their broader content negotiations. I would be very surprised if they aren't talking to other content providers as well. Full transition likely takes time though but DISH/DIS have fired the first shots. Also, at $20-30/month, I suspect DIS is getting markedly lower economics for ESPN and such. So it's important to note that this cuts both ways...

    The term "personalized" is somewhat interesting here. A read-through could be that the industry evolves towards a more data-driven and personalized approach, user-by-user, whereby each individual in a household has his/her own platform with various different ARPU levels. At some level, it will make sense to pony up for the broader multichannel product. In some high end cases, you may have a full multichannel product and a couple of personalized offerings. In some cases, you might have a single guy/girl with one personalized service for $20-30/month. It's going to be really cool to watch all this evolve. And really hard to determine the impacts to the various participants.

  15. DTV is a great company and has been well run by Mike White and Chase Carey before him. I think the US issues are pretty well addressed above, but I am primarily concerned with the quality of the Latin America business going forward. Everyone assumes LatAm is the growth "kicker" where DTV can deploy cash generated in the US. The socioeconomic trends surely are favorable across the region for the growth of pay TV and headline numbers have been really great since DTV entered the region (growth in 20-40% range). That said, competition appears to be rapidly increasing in the region (Slim, etc) and we have already seen one instance where DTV's growth strategy has backfired in Brazil. The Sky Brazil business was essentially signing up poor-quality customers to goose sub growth numbers (likely to meet incentive levels). The Sky business had to take a large charge last year after this was discovered by management. Currency has also been a headwind with Venezuela writedown, etc, but this will likely even out over time. DTVLA will soon be 1/3 of the business and considering the favorable growth prospects, should account for a massive portion of DTV's intrinsic value. Considering these issues and the already-much-discussed US risks, I think the valuation is not that attractive any longer. BRK was buying at sub 10x earnings/FCF.

    1. One thing to keep in mind when looking at DTV valuation is subscriber acquisition costs. A portion of these costs (not all since there is churn) arguably should be considered growth capex. And note that SAC accounting is treated differently in the US versus LatAm. EBITDA or levered FCF yield is probably best metrics, in which case DTV is both absolutely and relatively fairly cheap.

      On the Brazil improper credit issue, in fairness, it impacted 2% of base subs at the time and resulted in a small $25mm charge. I suppose it highlighted the challenges in growing the middle market down there, but it wasn't super material, and they've tightened credit policies. Mgmt thinks LatAm is basically like the US several years ago. That's probably a good analogy.

      They're going to repurchase another $3.5bn of shares this year, ~9% of the market cap. They're basically trading at a market-ish PE of 15x 2014 EPS. Mgmt thinks they can do $8/share of EPS/FCF by 2016, which seems doable since LatAm capex is ratcheting down and should be self funding next year, which would be a >10% yield. Consensus seems to discount that as 2016 EPS is currently sitting at $6.80.

      Plus you have option value through OTT and other non-core offerings, merger potential with Dish, etc.

  16. One of the things Buffett has said is that he does not like change and technology , here you get both.
    And potentially you could get disruptive changes in the business model.
    The question one has to ask is are you sure that ten years down the road DTV will still be there doing great.
    One can imagine a world that the only thing one pays for is broadband service and then get everything through the internet directly , that includes TV , movies , telephone calls etc.
    Also you would expect a switch to watching TV on mobile devices through tablets which works against Direct TV.
    The question is how quickly is going to happen to affect DTV and it might take time as the habits of the older generation who are used to sitting in front of a TV in the sitting room dominate less.
    It seems in LatinAmerica a) internet speed/connection is poor and b) in many rural areas there is no infrastructure for internet access or cable which gives direct TV with its satellites an advantage and given the population that is significant.
    While the mode of transmitting the content might change the content providers will not change and they seem to be able to raise the prices they charge DTV.
    Mario Gabelli has been talking about companies in the entertainment business like TIme warner,Discovery,Viacom,NewsCorp,Media General which he thinks will double in five years time. because of share repurchases and demographics.
    So the questions is should we avoid DTV where there is uncertainty and instead focus on the content providers ?

    1. For most of the time I've been involved in the markets, I have been a fan of content providers and hated that carriers. Content providers always made money and had tons of free cash whereas cable/ telecom always seemed to be needing to spend so much money on capex. I've owned DIS, CBS, VIA, DISCA and some others over the years and have sold them when I thought they got too expensive and never really looked at cable/satellite etc... precisely because of what you say.

      But these days, it seems like content prices are really starting to push the limits of what consumers can take, so content providers are not really no-brainers anymore either. For example, let's say ESPN charges $5/month. That's $60/year. With 100 million pay TV subscribers in the U.S., that's $6 billion in revenues for ESPN just on that. If EPSN goes over the top and goes direct to the consumer, are they really going to be able to get $6 billion in revenues that way?

      So that's the tricky part. It's like the newspapers when they went from print to online. Can you really make up for the lost revenues online? I think with pay TV the way it is, there is some value added in terms of distribution that content providers get that is not thought about when discussing over-the-top.

      Maybe ESPN can make up for a lot of the revenues as many hard core cable fans only have cable because of ESPN, (and I almost want to get rid of it because of EPSN; I don't watch much sports!), but many other minor channels probably won't be able to make up any of the revenues.

      And I agree, in 10 years I have no idea what the industry would look like. Masayoshi Son on Charlie Rose the other day was scary. He said that the U.S. broadband ranked #14 out of 15 in major countries in terms of broadband speed/capacity. So broadband here is priced way higher and is much slower than the rest of the world. I just read an article that said in Japan and S. Korea, you can get 1 gigabyte per second speed broadband for $33/month. Cable is 15-20 megabyte per second. He really wants to rock the boat in the U.S. with Sprint, and to do that he needs T-Mobile. This is something interesting to watch, and is really scary for everyone.

      So I admit to not knowing how things will unfold going forward. But what I do suspect is that just because the current model blows up doesn't mean that cable (ex-internet) / satellite will be finished. The model can change and they can still be a part of it. If DTV and others provide what consumers want, there is a place for them. If the bundled cable structure starts to unbundle, who knows, DTV can still provide a TV service with their own package, which would presumably include NFL Sunday Ticket which noone else has. The DTV monthly bill may go down, but so will expenses (if they pay less for content).

      The other angle discussed above somewhere is what someone called the Netflixication of DTV; they are starting to integrate satellite broadcasting with internet video. They call it the hybrid model. This hybrid model would be interesting because it would be agnostic to who provides the best broadband as they only provide the content in that case.

      Just like Netflix was able to migrate from a mail delivery service to an internet model, DTV and some others might be able to do so too because they have what Netflix has and that's scale.

      But who really knows if that works out well.

      I admit I don't have the conviction with DTV as I would have for, say, JPM or WFC.

    2. KK

      --- I would highly recommend reading "The Curse of the Mogul" by Bruce Greenwald, et al. In that book, Greenwald pretty decisively makes the case that media production generally does not create value, but distribution does.

      I think this is what bothered me about the Citi quote I posted earlier. I believe there are distribution type scale advantages associated with installing dishes and set-top-boxes with each customer. If you knock out the servicing of individuals and connecting them to the satellites, suddenly -- as you largely point out-- the 'edge' goes away. But looking through DirectTV's financials this past weekend, I noticed that the reproduction cost of their satellites is really not very high at all relative to firm value. Hence the Citi quote could be right in a near term sense, but if you iterate (/ apply second and third level thinking), if DirectTV had such high margins in a new world without dishes and set-top-boxes at homes, other firms would 'enter' the market by building or buying satellites of their own to deliver linear web video. Net result is extreme downward movement on DirectTV’s pricing.

      Maybe the FCF multiple for DirectTV is low enough, and all of this stuff takes years to play out, so perhaps DirectTV could still be a good value. But all of this, removing fixed-costs and the 'local' element of consumer business, would seem to blow up entry barriers completely for DTV. (Note: My sense is something similar has already happened with NFLX but it is very much not priced in the stock, but I am still mulling this point over.) It all reminds me of a chapter in “Curse of the Mogul” called “The Internet is not your Friend.” Great reading.

    3. I know that book but haven't read it, shame on me. But it looks like they picked some pretty awful deals to analyze. How come there are no Malone deals in there? (I only read some reviews online so actually don't know which deals he talks about). A few bad deals can skew the whole picture here, like when someone said something about the billions lost in banking included FNM and FRE and ignored good banks that make decent returns.

      But anyway, your point is a good one. If no satellite, where is the moat? If satellite is inexpensive, where's the moat? Either way it looks bad. Everyone will be on level ground at some point.

      I think the key, though, is that DTV has the package already and has the scale to do the NFL Sunday Ticket-like deals (I would hate it if that was DTV's only competitive advantage). And as you say, Netflix is going through the same thing much more quicky and we have yet to see what happens over time. At the moment, they have a lot of momentum and it is working.

      But just because Netflix gave up it's advantage (by moving away from DVD-by-mail), I'm not too sure how easy it would be for competitors to break into it's business. I suppose other 'channels' and other media companies can offer products that are similar and maybe in the distant future there will be a lot of companies like Netflix (and they may all have low, Amazon-like margins!).

      The other side of the equation is the relationship with the content providers. I think there is a reason why internet TV is having a hard time getting off the ground. Content providers want to maximize their income, so they may not just provide content freely to just anybody if it will hurt some of their biggest clients (who provide a lot of revenue dollars).

      This is why Apple and some others, apparently, are having so much trouble doing to TV/movies what they did with music.

      Anyway, this is very interesting. We'll see how it goes.

    4. Unfortunately, my copy of "Curse of the Mogul" is a hard copy, and I won't have access to it for another week. (Long story.)

      My recollection is that the authors make the claim that there are basically zero entry barriers in content. This doesn’t mean you can’t outperform in content – in the last chapter in “Competition Demystified” Greenwald does spend time discussing the value of management. The point they make is that without superb management, you actually expect sub-optimal ex ante returns in content – because minimal entry barriers and, if I recall right, there is a glamour factor that leads to too many people wanting to be involved in producing content. This also doesn’t mean that libraries have no value or that a given film series like “The Hunger Games” and its prospective sequels doesn’t have value. The basic point is sort of the inverse of your banking proposition – the content field has huge graveyards overflowing with money losing films, TV shows, etc and people forget to examine these graveyards when talking about content profitability. So from the outset this looks like a low probability of winning game. On top of all that, in the event you are successful for the first try at a new movie or tv show, frequently the talent gets major negotiating leverage and can extract the profits associated with sequels so that the blockbuster profits accrue to employees and not content owners. It starts to feel a little bit like (exploration and) production in the oil and gas business – where companies do low probability, green field exploration work in Countries A – Z, and all but say country X are duds. There is a bonanza in country X, but seeing all of the profits, country X passes a windfall profits tax or nationalizes the entire oil industry.

      As best I can tell, what Netflix is doing in content, is bringing a degree of professionalism and uniqueness to the ‘management’ of production. Put differently, they are not falling victim to the Planning Fallacy which I think the majority of the film and TV production world does. Netflix has for instance, taken something already made that has already worked and is adapting it. They adapted the British version of House of Cards to the US. (Open question I am pondering -- if the series continues to be awesome, will the gains accrue mostly to NFLX or Spacey?) They also took a great cancelled cult favorite, Arrested Development, and tried to tack on a season. (Personally I found it very disappointing but it was worth a try). Too often content is made with little to no regard for base rate information, and too much is created from scratch. And the field has a major expert problem. (“Disney Wars” is another very good book that shows much of this in action, most humorously with respect to Pirates of the Caribbean which was not well liked within Disney before its release.) Is NFLX’s approach replicable? Yes. Is it popular and market practice? No. Does it go against human nature for a lot of ‘content’ experts? Yes. So maybe the Netflix content production advantage will persist.

      In addition to some of the technology pieces, I would say the MAJOR missing thread on my end, is a rich understanding of Cap Cities and Tom Murphy. I have learned a bit through Buffett’s writings and a youtube video or two, but I need to learn a lot more.

      In any case, I thought this was great thread. A lot more thought provoking than what I usually find on the net.

    5. Thanks for the lengthy comment. That's very interesting. If they put it that way, yes, there is no real barrier to content creation. That's why I never really liked movie companies (wasn't Ron Howard's company also listed at one point?).

      The content I was thinking about is more like ESPN and the Disney channels, VIA cable channels, CBS, Discovery Channel and things like that, not so much movies. But it does seem like even the minor channels are creating their own pretty decent content so maybe the world changes there too (or the natural economics become more visible in that area).

      And yes, it's an interesting thread. Thanks for your input on it (and everyone else).

    6. First, I need to read "Curse of the Mogul" because it seems like it is going to contain a well reasoned argument that is laughably wrong based on empirical fact. Despite the fact that movies bomb and tv shows bomb, the content companies (CBS, VIA, DIS, DISC, SNI, etc.) are fantastic businesses. There are no barriers to entry in content? Sure, anyone can record some stuff and upload it youtube, but I think one should reflect on the ability of Discovery to invest large amounts of capital in very high quality content that is desirable across demographics and then amortize that cost over their global footprint. That seems to be a pretty large competitive advantage in my mind.

      Also, the reason that NFLX is generating their own content (in my mind) is due to the fact that they understand that bundling a bunch licensed movie content and selling it as a streaming service is not a viable long term business (i.e. Amazon, Apple, etc. can easily replicate this business). In order to maintain and grow subscribers, they need to offer unique content.

    7. kk,

      I also saw the interview with Masa Son on Charlie Rose. I have not felt very good about US telecom companies (for numerous reasons) and the fact that a guy wants to have a "price war" sort of exacerbates that feeling. However, I didn't get the sense that wireless ever offered gigabit service - I believe Masa Son mentioned something on the order of 300-400 mbps in Tokyo, but I could be wrong. Could you please link the article to which you referred previously. Thanks.

    8. Sorry, I meant broadband internet, not wireless. Here is a story about fast internet for $50/month:

  17. Thank you for your reply.
    It will be interesting to see how the industry plays out.

  18. You did not mention that Lou Simpson also has DTV in his portfolio, but I'm sure you know.

  19. Great posts.

    In the fast changing Telco/cable TV space, I think it's important to watch the ecosystem and make sure youŕe invested at the point where there is maximum pricing power and growth potential. John Malone is the champion in this space and I want to invest with him and thus I traded out of DTV and bought Liberty Global. One of the Buffett guys recently bought into this stock and i followed suit. What are your thoughts on LBTYA? i'm hoping it's a cash flow machine like DTV.

    Another reason i sold DTV is that Lou Simpson recently sold half his shares of DTV. I would not be surprised if he sells the rest of his stake. I'm a huge fan of Lou Simpson and i do what Lou does.

    Question on DTV I've always had is why don't they expand to Europe and Asia?

    1. Hi,

      Good points. I haven't followed LBTYA closely but Malone did say that there is more opportunity in Europe recently; maybe they are a few years behind the U.S. so there is a chance to build scale there and get the benefits. A lot of smart investor are in LBTYA.

      I don't know why DTV doesn't expand into Asia/Europe but I would guess it's because they see so much potential in Latin America and that's where they are putting their focus/effort, which makes sense.

    2. I would imagine that DTV doesn't go to the EU because satellite is already ubiquitous over that footprint and there is a well built out cable/fiber infrastructure. Latin America is desirable because the cable infrastructure is relatively poor and less competitive. DTV should have a huge advantage in Latin America based on the ability to provide a superior video product.

  20. Great overview, thanks for posting.
    Malone personally owns a lot of DTV stock. He also recently said in an interview that he is very bullish for the company.
    You may like my owner earnings calculation for DTV over at SA:
    I believe $8 in 2016 is highly likely.

  21. I think the really important thing no one has mentioned is that the majority of DTV's subscribers are rural. These markets don't have enough population density to support cable / fiber investment and internet there is often provided through guys like ViaSat and is too slow to stream live video. This dramatically reduces the risk of internet based TV for DTV.

  22. KK, thanks for the great work that you do. Nevertheless, I'm not sure I buy the "21% of Ted & Todd's portfolio" assumption. Does anyone on the planet (other than perhaps John Malone) understand the economics of TV better than Warren Buffett? I have to believe that he's bought into this. A few additional points:

    1) this point was made earlier, but the capitalization vs. expense of SAC is an important point. You will find that the fine folks at Longleaf-- not exactly the dullest tools in the shed-- raised it as an attractive quality in 2012, I believe.

    2) sorry if I missed it in this thread of Biblical proportions-- but satellite offers inherent advantages in Latin America, where a lot of the target audience doesn't have easy access to underground pipe.

    3) Note decreased planned capital expenditures this year. Not an insignificant point. It makes sense to think carefully about what constitutes maintenance capex vs. growth capex in DTV's business, with the moving parts of churn, expansion in Latin America, etc..

    4) Mike White appeared on an episode of "Undercover Boss," if I have the name of the series right. Recommended.

    5) Worthy of mention/ reiteration that DTV does not consolidate Sky Mexico.

    1. Hi, all good points. Sky Mexico is interesting; it may be valued much higher than the rest of DTV but with emerging market valuations low now, I didn't think too much of it. But it can be a factor going forward. Mexico is included in earnings, though, in equity earnings of unconsolidated affiliates or whatever they call it.

      As for SAC, that's a valid point, but to the extent that new subscriber adds just replace disconnectors, I don't think you can capitalize all of that.

      For example, SAC per subscriber was $873. This includes SAC in SGA and some in capex (which is capitalized). This is for the 3.79 million gross new subscribers last year. Guess how many disconnected? 3.62 million. So net new adds were 0.169 million. So if you want to capitalize SAC for only the net new adds, then that's only 4% of total SAC that you get to 'capitalize'. With $2.6 billion in SAC (just what's in SGA), that comes to around $100 million that you get to capitalize over however many years against an operating income (for DTV U.S. only) of $4.4 billion.

      It may be different in Latin America as they are growing more. They don't itemize costs like that for DLA but I think SAC was $800 million or so (subtracting consolidated SAC from DTV-US SAC) and if you use 50% (roughly half of gross adds in LA replace disconnectors), then $400 million can be capitalized versus $5 billion in consolidated operating income. Maybe doing that against DLA is better. So there is more of an impact there.

      But I would guess going forward that this rate of replacement would go higher so how much you can capitalize would get lower (like the U.S.).

      I am doing this in a rush with one foot out the door.

      But anyway, I don't disagree; I would take the SAC issue as a bonus/cushion and not a main driver of DTV's value.

    2. Oh, and about Buffett; Todd and Ted both admitted on CNBC the other day that they bought DTV. So it's possible that Buffett bought into it too, but if he did, I would imagine the size would be much, much bigger.

  23. Hi KK - wanted to share this with you before it goes up on my own site... curious what your thoughts are: - Analyst

    1. Thanks. That's very interesting. I do agree we are at or coming close to some inflection point. How it all plays out is a good question. We'll see.


  25. This deal would make sense given TWC/CMCSA deal in the works. Has anyone done any work around how accretive this deal could be to DTV if it were acquirer? Would definitely want to see White's team take over for the combined entity given their management strength.

  26. You're probably looking at $4-6bn of annual cost synergies. That's like $20-30bn of incremental unlocked value at 5x multiple. Don't know the specific accretion to earnings but there would be enormous accretion to underlying value.

    Challenge is getting this through regulatory approval. Comcast/Time Warner clearly is an impetus here. But they can make the argument that they don't compete in their markets. Not the case for DirecTV/Dish. In the rural areas, you're talking about going from two competitors to one. Potential workaround is concessions that link prices to major markets.

  27. This is somewhat interesting.

    If Dish makes tangible steps towards finding a partner to help develop its spectrum, Ergen could argue that they're working on providing a competing offer in areas where competition is weakest/most in question and that adding DirecTV would expand the base.

  28. I am a avid reader of your blog.

    My actual question is have you got any thoughts on Sirius XM? Share price has gotten whacked for months and is now priced as if it left to die. And if I just use the current market’s consensus, revenue is still expected to grow at 8-9%, and since SIRI is also a scale-driven business, margin would expand too and give a tailwind to the bottomline. Unlike DTV which is a more or less close to maturity (excluding the LATAM business), SIRI is still likely at the mid-point of growth, or probably, slightly over midpoint (at least based on the company’s presentation which guides for 40% ebitda margin and 40m subscribers at maturity stage, compared to low 30% and 26m subs now).

    Based on market’s consensus, FY2015 revenue is expected at $4.5b, assuming ebitda margin at 35% and fcf conversion at 80% of ebitda, FCF could be close to $1.26b. Current share count is 6.2b and SIRI, like all other Malone’s related companies, is a huge repurchaser of its own stock, and assuming they repurchase total of $3b from 2014 to 2015 at say $3.3 per share, share count would be reduced from 6.2b to 5.3b. As a result, FCF for FY2015 could be almost $0.24 per share, which makes the forward multiple only 13x. Looks like a better deal than DTV as an alternate investment.

  29. Hi ,
    Saw At&t's bid for direct tv for about 95$.
    Why is it trading at 85 ? Does it reflect chance of regulators not allowing the deal and the time it will take till it gets done ?
    Do you have a view on it ?

  30. Hi,
    There might be some regulatory uncertainty, but on an unleveraged basis, the spread looks normal, I think. I don't follow M&A deals closely so don't know what typical spreads are these days, but this one looks like an 11.8% spread at the moment, but if you consider the 4-5% dividend on ATT that you would have to short, the spread looks more or less normal.

    1. Thanks for the reply , valid point did not realize direct tv had zero yield.

    2. Oops, I meant 4-5% dvd you would have to pay on your short T position (if you went long DTV / short T).

    3. Also, this is collared so the calculation is not so straightforward as I said... The lower price on the collar is $34.90, 3% lower than here. So you would have to be short some T; like delta-hedging a 97% strike one-year put...

    4. Actually, there would be very little stock to hedge initially as you it's a 95%/105% collar, so if T stock doesn't move around a lot there wouldn't be much dividend cost.

      Sorry for the multiple stage response... I should've looked at it closer before responding initially...

    5. This comment has been removed by the author.

    6. This comment has been removed by the author.

    7. Hi ,

      with the price of DTV coming off , I had another look.

      these are my calculations :

      current price say 82.50
      minus 28.50 you get in cash equals 54
      Divide by 1.905 equals 28.35
      current price for At&t equals 35.40. cushion on the low side 20%

      Alternatively Using a warrant if you want more protection:

      lets say you buy a 33 put for Jan 15 it costs 2.19. But you need to buy 1.905 so total cost 4,17.
      At 33 you will receive for each share of direct tv 28.5$ plus 1.905 shares of T priced at 33 minus 4.17 equals 87$ so again a profit of 5%.

      On the upside let say the price closes between 34.90 and 38.58 you will get 95$ minus 4.17 so 90.83. your upside is reduced to 10%.

      worse case scenario is that you buy the put it expires worthless and the deal does not get through DTV price drops to 75 so you lose 7.5$ plus 4 equals 11.5$ so 14%

      obviously the risk is on the deal not going through.
      I have no experience on these but if you assign say 25% probability deal does not go through and you lose 10% unhedged, 50 probability that you make 15% and 25% probability that the deal does go through but AT&T stock drops to 32 ( this year low) and you make 8% in that case , gives you an expected return of 7%.

      Direct tv has not asked for a break up fee in case the deal does not through so that seems to indicate they are quite confident it will do.

      I guess not a spectacular expected return and might not be worth getting involved but seems interesting to me

    8. the warrant is for Jun 15 not Jan 15 it was a typo

    9. Hi,

      I haven't checked the numbers but you can sell calls to help fund your put purchase; it's actually a collar on the deal (initially at 95%/105%) so that might improve your expected return a little.

  31. This comment has been removed by the author.

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