Saturday, 30 March 2013

Glacier Media 2012 Fourth Quarter Update

Glacier Media recently reported results for 2012.  While sales were up significantly, increasing 23.4%, cash flows from operations, the company's preferred gauge of profitability, were flat from the earlier year, at about $44 million.  More importantly, though, the company required virtually no tangible equity to generate these cash flows, the mark of a dominant business.  The somewhat soft results were due to weakness in national advertising, sluggish economic growth in the important B.C. market, and mediocre performance in the assets acquired from Postmedia near the end of 2011, as well as increased investments that are likely to result in stronger earnings in the future.

On a happier note, business and trade publications performed well, and management is making energetic efforts to increase the "decision dependence" of those assets: the more businesspeople rely on the information, data and analytics these publications provide, the higher Glacier Media's cash flows will be.
In the area of capital allocation, the company pursued its usual balance between investing in its own operations, making acquisitions, paying down debt, funding the dividend and repurchasing shares.  Unlike in most years, when capital expenditures tend to range from $2-5 million, Glacier spent around $15 million, mostly on a printing press, a one-time expense that will both increase revenues and decrease costs.  However, sustaining capex was a paltry $2 million, though that figure may rise somewhat in the years to come after the elevated spending in 2012.  Perhaps the sound and responsible capital allocation is because management is relying on share/dividend returns for their own wellbeing: after all, just $4.5 million was spent on wages for all directors, senior executives and divisional managers, a refreshing difference from what generally prevails in the corporate world.
Despite a lackluster year, Glacier Media remains a compelling investment.  The share price stands at about $1.90, and net debt is $1.42 per share, meaning the company's enterprise value is $3.32.  Even assuming only modest organic growth, the company is likely to generate $0.45-0.55 in free cash flow per year over the next few years.  Buying stock in a company that generates $0.50 in free cash flow and costs $3.32 is the equivalent of buying a bond that yields 15%.  However, this particular arrangement is better still.  In theory, Glacier Media could retire debt in about three years, and pay all of its FCF out as a dividend in the ensuing years.  If it did so - it won't, but it could, and all other capital allocation decisions should be weighed against this alternative - shareholders would be buying the equivalent of a bond that yields nothing for the first three years, but beginning in year four yields a staggering 29% ($0.55/1.90) with the coupon likely to grow modestly over time.  Not bad for a bond.
Disclosure: At the time this article was published, the writer was long GVC stock.

Here is my Investment Analysis of Glacier Media.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

Tuesday, 26 March 2013

Book Review - The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, by William Thorndike, Jr.

William Thorndike Jr.'s The Outsiders considers eight Hall of Fame CEOs (and, in some cases, the small teams that they worked closely with), the only executives that passed his twin tests: outperforming companies in their peer group, and besting the performance of General Electric's Jack Welch, widely considered one of the finest managers in business history.  Thorndike found that unlike the jet-set, media-savvy, wheeling-and-dealing, larger-than-life Welch, the truly elite eight were modest, private, and humble.  Their most notable qualities, however, were cerebral.  As Bill Stiritz of Ralston Purina put it: "Leadership is analysis" (145).  And all of the featured executives had the independence of mind to turn analysis into action.

Warren Buffett has noted that most CEOs, however exemplary their abilities in areas such as marketing, production or administration, tend to be poor capital allocators.  They're executors, not investors.  However, decisions about what to do with a spare dollar are just as important to the long-term performance of a business as the day-to-day operations.  In terms of specific policies, most of the featured CEOs repurchased shares, but none paid a significant dividend; all focused on one version or another of cash flows, rather than emphasizing earnings; and none provided earnings guidance to analysts - in short, they behaved like investors, rather than operators.  They didn't out-manage Welch; they bested him in the area of capital allocation.

Perhaps Thorndike's greatest achievement in the book is to resurrect the largely forgotten story of Henry Singleton, who Warren Buffett regards as among the greatest capital allocators in the history of business.  No business major, Singleton earned a PhD in electrical engineering, was awarded the Putnam Medal as the best math student in America, and played chess at an almost-grandmaster level.  In 1960, he and a partner founded a small firm, Teledyne, a conglomerate that swallowed a mind-boggling 130 companies in its first decade of existence, using his own firm's high-priced stock as the currency.  While the sheer scale of his shopping spree might suggest an indiscriminate approach to acquisitions, Singleton was in fact a bargain-hunter: he never paid more than 12x earnings.  

Singleton understood that using Teledyne's stock to fund acquisitions made sense only if that stock was fully (or over) priced, and by 1971 he had grown the share count by about 14x.  However, when the conglomerate form fell out of favor on Wall Street, Teledyne's stock swooned, and he correctly reversed course.  Not only did he never again issue a single share of additional stock, he spent the next decade-plus retiring an unheard of 90% of Teledyne's shares.  In part by issuing stock at an average P/E of 25, and buying it at an average of 8, Singleton managed to grow EPS by a world-beating 27% per year for 33 years.
Just as he had earlier retreated by repurchasing shares that had been previously issued, Singleton eventually decided to dismantle the conglomerate that he'd spent his life building.  He spun out several of Teledyne's largest operating companies, and sold what remained to another firm, but only at a full price.  What was it all for?  A 20.4% stock return over nearly three decades, or an 180-to-1 increase. 

John Malone, who has made his eye-popping fortune in the cable and media industries, allocates capital, and leaves operations to a trusted number two, as well as local managers.  For many years as he built his empire, Malone was the only significant cable company CEO to strive for cash flow growth, rather than increases in EPS.  In fact, the now widely used acronym EBITDA was coined by Malone.  (Admittedly, this is not a wholly desirable accomplishment).  Recognizing that scale is a powerful competitive advantage for cable operators, Malone bought smaller competitors at a heated pace, but managed to do so on attractive economic terms.  Not only did size lead to lower costs - and higher cash flows - per subscriber, Malone used it to strike unique deals in which he acquired stakes in up-and-comers such as BET and Discovery in return for access to his imposing subscriber base.  Thorndike argues convincingly that Malone used joint ventures more often and more effectively than any other CEO ever has, perhaps adding a sixth category to the Big Five types of capital allocation.  The scorecard: 30.3% per year from 1973 to 1998, over 900-to-1.

Inevitably, a book about capital-allocating CEOs will include a chapter on Warren Buffett and Charlie Munger.  While the chapter itself covers no new ground, it's an able summary of the twin Oracles of Omaha, and offers a nearly up-to-date performance record: 20.9% over 45 years, or a 6,265-to-1 return.  But Buffett and Munger cannot be bound and contained in a single chapter.  In fact, the book reads a little like an experimental, post-modern literary work, in which the mischievous author (Buffett) writes a book wherein its main character (Thorndike) writes a book about the author (Buffett).  After all, Thorndike, like most investors, almost certainly first heard of Tom Murphy and Dan Burke of Capital Cities and Henry Singleton from Buffett; Kay Graham would not have fared nearly as well as she did without the active, ongoing counsel of Buffett, long the Washington Post's largest shareholder; Buffett invested in General Dynamics well before it became a must-read case study; and most of the books Thorndike cites are about, or have been recommended by, Buffett and Munger. 

Though Buffett, Munger and Singleton are three of the finest, most original minds in the history of business and investing, better capital allocation is possible for most CEOs, regardless of their ability to play chess blindfolded or perform complex calculations in their head.  In fact, the book left this reader frustrated: a few of the case studies offer formulas that are so simple they border on boring.  How difficult can it be, after all, to close or sell poor businesses?  To be sure, not all businesses can be above average, but shareholders as a whole would be meaningfully richer even if CEOs were better at just one simple task: discriminating between paying a dividend and repurchasing cheap shares.  For even a moderately disciplined chief executive, buybacks are a far more attractive option over the long-term, since most stocks are undervalued in the market from time to time.  Thorndike is more optimistic than this reader about the potential uses of leverage: even the uber-talented John Malone nearly succumbed to bankruptcy - largely because of debt that he inherited, but not entirely - and few CEOs will be mistaken for Malone.  

Rather than merely reassembling and reinterpreting publically available material, Thorndike conducted nearly 100 interviews, talks that included many of the (surviving) subjects themselves, as well as people who worked directly with them, adding freshness to the book.  In addition to the stories noted above, he offers analysis of the Dick Smith at General Cinema, and Bill Stiritz at Ralston Purina, case studies unknown even in many business schools.  And for active investors, Thorndike addresses a few potential investments, including Transdigm, Sara Lee, Exxon Mobil and the collection of companies controlled by John Malone.  This fine book ought to be read by most investors; but it's an emphatic must read for all CEOs.

Source: Thorndike, Jr., William.  The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success. Boston: Harvard Business Review Press, 2012.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

Sunday, 10 March 2013

Mason Hawkins and Carl Icahn versus Dell

Outside shareholders upped their pressure on Dell's board of directors this week, arguing that the proposed go-private transaction is unfair to all shareholders not named Michael Dell.  Southeastern Asset Management’s Mason Hawkins, who has been arguing for several weeks that the deal being promoted by the board undervalues the company, sent a letter to Dell restating his case, and requesting information about Dell's shareholders, which will enable him to persuade other owners to join his cause.    

In the letter, Hawkins points out that the special committee charged with assessing the proposed transaction - and soliciting alternative offers - is composed of board members who themselves own very little of Dell’s stock, meaning that their interests may not be fully aligned with the interests of all shareholders.  In addition, he questions the fact that Dell has long argued that its sizable cash hoard was "trapped" overseas - since repatriating it would involve paying tax - yet is now using that very same cash to fund part of the buyout.  Further, Hawkins wonders aloud about the way management presented recent earnings results, and suggests that they were arranged in such a way as to emphasize the declining PC segment, rather than highlighting the rest of the business, which surely has a brighter future. 

Hawkins was joined by the formidable activist investor Carl Icahn, who reportedly owns up to 6% of Dell.  The significant size of his stake, combined with Icahn's experience and reputation engaging in proxy battles, adds immense weight to the growing list of dissatisfied outside shareholders.  It's unclear if their efforts are coordinated, but Icahn contends that Dell is worth around $23 per share, almost exactly the same number that Hawkins has put forth, and recommends a deal that is similar to one of the scenarios that Southeastern favors.  Icahn would like to see the company pay a special dividend of $9 per share, funded by a combination of cash, receivables and new debt.  In addition to the $9, ongoing shareholders would own a "stub" that could be expected to be worth nearly $14, based on Dell's cash flows.

But Icahn goes further than Hawkins.  If Dell shareholders vote against the go-private proposal, and if the company doesn't then implement his preferred deal, Icahn stated his intention to run a slate of directors who will.  In effect, the annual meeting where shareholders are given the choice between the two competing boards would amount to a vote between Dell's deal and Icahn's.  In a bold and clever move, Icahn pledges that he will personally provide financing, on commercially reasonable terms, which would allow for the prompt payment of a special dividend.  

Taken together, Hawkins and Icahn are making a multi-pronged attack on the go-private offer.  They make a sound business case that the proposed deal undervalues the company; they raise hard questions about the interests and fiduciary duties of the board, questions that will not fade away quietly as they proceed to rally the support of additional shareholders; by offering financing of his own, Icahn has pre-empted management, if they were planning to claim that the cash for a special dividend was unavailable; and management was reminded that matters that can't be settled agreeably in the boardroom can be settled disagreeably in the courtroom, as legal options remain available.

If reports of Icahn owning about 6% of the firm are accurate, then together he and Hawkins control 14-15% of the company, about the same proportion as Michael Dell.  It will be fascinating to watch which side prevails, though this writer's guess is that shareholders will not approve Dell's existing offer.  Whether the transaction that is ultimately agreed to is a sweetened version of the go-private deal, or a different transaction altogether, remains to be seen, however.

Sources: The letters referred to above can be found in Dell's SEC filings.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

Sunday, 3 March 2013

Warren Buffett - A Friend to Shareholders

In The Office, Steve Carrell's Michael Scott, a manager at dying paper company Dunder Mifflin, hosts the "Dundies," an annual award ceremony put on to recognize the staff's accomplishments.  In that same spirit, this writer will award a "Friendly" to acknowledge behavior that is beneficial to shareholders, whether it comes from managers, investors, members of the media, or elsewhere.  These prestigious awards will be handed out from time to time, rather than annually, and without the accompanying evening at Chili's, where the not-so-grateful employees of Dunder Mifflin met to receive their awards.

And the award goes to...Warren Buffett

It's fitting that the first "Friendly" has been earned by Warren Buffett, history's most thoughtful, convincing and prominent advocate of shareholder-friendly behavior.  In a remarkable move - and a first, to my knowledge - Buffett has invited a "bear" to join the cast of analysts that will pose questions to himself and Vice-Chairman Charlie Munger at the upcoming annual meeting.  The person must be an investment professional with a negative outlook on Berkshire, preferably holding a short position.  Most CEO's would sooner invite an actual bear to the AGM than face the paw-swipe or bite of a short-seller, but Buffett's commitment to openness, transparency and the free expression of ideas is authentic.  A range of perspectives are necessary to an efficiently functioning market, and Buffett is helping ensure that Berkshire Hathaway shareholders are alert to the challenges facing the company, not just the opportunities.  Bravo, Mr. Buffett.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

A Comment on Warren Buffett's 2012 Letter to Shareholders

Warren Buffett's eagerly-awaited annual letter to shareholders was recently released.  As ever, Buffett highlights the negative, even as he downplays his accomplishments.  For example, he refers to last year's performance - 14.4% growth - as "subpar."  This is true in the literal sense that par is the S&P index, which returned 16%.  However, that's not much of a difference, and a gain in book value of $24 billion isn't all that shabby.

He quickly summarizes the basic terms of the Heinz deal, agreed to after the end of 2012, without a hint of the "Gotcha!" that he must feel.   Many long-time Buffett watchers likely scratched their heads when they learned that the Master offered a price that valued the venerable seller of ketchup and beans at about $28 billion (including debt).  However, once the details emerged, it became clear that the terms of the deal were extremely favorable to Berkshire shareholders.  Alice Schroeder responded to the deal in the Financial Times, explaining that it was the Buffett brand that allowed for the one-sided benefits of the deal, a transaction that will be studied decades from now in business case studies.

As usual, much of the letter's space was devoted to a summary of Berkshire's large business categories - a range of insurance companies; regulated, capital-intensive businesses; manufacturing, service and retail businesses; and finance and financial products - plus a few words about the stock portfolio.  Most of this section is similar to the comparable coverage in years past, with a few added comments, and, of course, numbers that are more recent by one year.

Buffett always offers sharp, clear insights into the sometimes fuzzy world of accounting.  This year, he illustrated the difference between "real" and "non-real" amortization charges – software-related write-downs are generally legitimate, while charges to the value of customer relationships tend not to be – and how they diminish the reported earnings of IBM and Wells Fargo, two of Berkshire's "Big Four" stock holdings.  He also holds forth on some of the arcana of GAAP purchase accounting as it relates to Berkshire's steadily increasing investment in Marmon.

This year, Buffett spilled much ink on the newspaper industry.  Because he has long prophesied that newspapers are in permanent decline, many have wondered about his sudden spending spree on them (people must not lose their sense of proportion, however: while he has bought many different papers, even in aggregate they represent only a small fraction of Berkshire's resources - so small in fact, that one wonders if his focus might be better used elsewhere).  Still, he offers a clear and insightful history of the newspaper industry, where it stands at present, and the direction it might take in the future.  While he remains pessimistic about papers in large, hyper-competitive markets, smaller papers with "primacy" in matters of interest to readers - high school sports, local coverage, obituaries - plus a sensible internet strategy can make for a buy, though only at very low prices.

Using the topic of dividends as a launching point, Buffett offers a concise general theory of capital allocation.  While he's shared most these thoughts in the past, this primer is excellent.  Both experienced and novice investors ought to read and re-read this section.

Now well into his 80s, Buffett's mind remains razor-sharp, and his performance continues to be stellar.  The 2012 letter to shareholders belongs in the same exalted company as all of the previous ones.  Here's hoping for many more to come.

Here is a rare summary of Warren Buffett's early letters to partners.

Disclosure: At the time this article was published, the writer was long IBM stock.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.