philly value

I know nothing about the business but am interested in potential short opportunities in companies that have/are underinvesting in their business and utilizing resources to buyback shares, especially when it involves levering-up to do so. Obviously buybacks are often a good thing for undervalued businesses but they can also be destructive if a company is neglecting its operations to focus on financial engineering. Here the magnitude doesn't seem interesting, however. Looks like they have $135mm of debt vs. a $1.2 billion market cap and debt is 1x trailing EBITDA and <1x forward EBITDA. FCF is roughly equal to net income and debt service will be a very small fraction of FCF/NI. So I am not sure what you are seeing here but it is not what I am seeing.

Your top down framing of revenue growth makes a lot of sense and is also how I look at it, but I disagree with the #s. I think it is very unlikely world online advertising spend will only grow by 13% in 2018, particularly since we're talking about spend measured in USD and for the first half of the year we are benefiting from a 10%+ depreciation in the USD vs GBP and EUR, and in the second half, benefiting from a smaller but still substantial mid-to-high single digit depreciation in the USD vs GBP/EUR. If for the year we end up seeing a ~10% benefit from FX on the EUR and GBP, and let's say that for the world ad market spend is ~25% Europe as it was for FB in 2017, then that is a 2.5% bump, which is meaningful. That means that in order for online ad growth to be 13% in USD, it needs to be ~10% in local currencies. We've seen accelerating transition of spend online (% of total ad spend that goes online each year), and are only at ~40% right now. There will eventually be a limit, but advertiser discussion of relative returns on ad spend suggest to me that that transition is not nearly complete yet. Further, the UK is an example of a market that is further ahead of the U.S./world on the transition of spend to digital, so you can study that for another sanity check. The world ad market in constant FX will likely grow something on the order of ~3% or so, so keep that in mind when considering the 10%. If we go from 40% penetration to 44% penetration (slightly less penetration growth than in '17, which would be a reversal of the trend FWIW) and growth is 3% constant FX, that'd get us to ~3% + (44/40 = 10.0%) = 13.3% + 2.5% FX = 15.8%, or ~16%. Facebook has been taking ~50% of incremental digital ad spend, so ~$200bn * 16% = $32bn growth * ~50% = $16 billion of Facebook revenue growth, slightly more than consensus. You can disagree +/- a bit, and I agree Amazon is a risk, but I think the consensus #s are very reasonable, and FWIW in the past have proven consistently conservative. As have "consensus" high-level predictions for digital ad growth, such as the 13% you mention. Engagement is extremely important, but so is advertiser return on spend. If advertiser return on spend is very high on Facebook, they increase ad dollars allocated to Facebook, and even if ad load is constant and engagement flat, the price per ad will rise so supply equals demand. It is market-determined pricing. As long as advertisers continue to feel return on spend is strong, which per my checks they do, I will not be concerned. Also, keep in mind that while Facebook engagement has slowed quite a bit, Instagram trends remain very positive, and Instagram is a very important part of the business.

On Core Earnings for Google (excluding Other Bets), GOOG is trading at low-twenties (21x or so) 2018 earnings, ex-cash. FB trades at a similar multiple, maybe a bit lower at the moment depending on your assumptions. That said, I think the growth opportunity for FB (% growth, not necessarily absolute $ growth - FB and GOOG are capturing a similar % of incremental ad dollars but FB is off of a much smaller base) remains meaningfully higher than GOOG. We're in an interesting spot. The regulatory risk is real, and this is likely to make it more likely that FB experiences real pain from GDPR this May in Europe. There's also now some risk GDPR-like data protection philosophy spreads to the U.S. I think the impact of the current situation is near impossible to quantify, which should make you uncomfortable for good reason, but I think the realistic scenarios where you lose money (long term) buying FB at current prices is also limited.

GOOG's market share of *digital* spend ex-China is low-40s%, I would imagine that is what is being discussed (if not, it's simply way off). Total digital ad spend ex-China as a % of total ad spend (digital + non digital) is also roughly 40%, meaning Google's market share of total ad spend ex-China is something like mid-teens %. The past few years, GOOG + FB have basically captured ~100% of digital advertising growth, with GOOG holding market share constant in the ~40% range and FB gaining share.

Fun stat: Facebook's GAAP EBT increased 64% in 2017. The stock is up 26% over the past 12 months, and +50% since the beginning of 2017. Ex-cash and adjusting for the (minor) amount of acquisition-related SBC/amort left in the #s, FB trades at a low-20s multiple of 2018 earnings.

For what it's worth, here is roughly how I think about GOOG. I like it, although I do not believe you can underwrite an explosive return owning it at today's price. Trades at 20x 2018 earnings ex-cash, excluding Other Bets. Core ad business should grow low to mid teens for 2019 & the next few years - let's say, on average, 13%. In 5 years if you think this should be a market multiple, 17x forward earnings business, you earn the following: 13% Ad Rev Growth 0% Margin (Assuming Flat) => 13% Profit Growth/yr +5% Earnings Yield Per Year (which unfortunately likely builds cash on the B/S) = 18% Return before multiple compression -3% Multiple (20x -> 17x, 15% decline over 5 years) => 15% return on the "Business" ~87% of the starting price of the stock is the business, the remaining 13% is cash that will end up earning 0%, so you earn ~15% * 87% = 13% per year. This analysis ignores any value for Other Bets, effectively ignores any growth in Other Revenue (cloud, hardware, etc).

That'll be interesting to track. They grew 47.1% in 2017, so they'd have to grow significantly below 25% in 2018 and 2019 for this to be accurate. By 2017-2019 CAGR they mean growth rate from 2017 to 2019, in other words, 2018 + 2019 growth rate, not including 2017.

I think after 10+ years of contradictory evidence it's very fair to change ones' opinion of a person's abilities. I wouldn't consider it overly volatile. I mean obviously Lampert chose to wrap his entire fund and legacy into one business. It turns out he was wrong on Sears. Even the best investors are frequently wrong, the issue here is he put too many chips in one basket.

In FY 2015, they did $70bn of free cash flow. LTM, $56bn. Versus a TEV of about $360bn [ignoring potential tax adjustments].

It's a huge fake rally driven by a short squeeze virtually across the board in E&P stocks over the past week. You have situations i.e. EXXI where debt is trading at between 0-10 cents and yet the market cap is suddenly ~$80mm.

We can't know but it's improbable. Buying back those puts now will cost him a lot of money if he finds a seller at all. No doubt he is in a potentially very tough position if the stock falls further. My point being that nothing technical should be expected to happen at $60.00. It's an expensive position to exit with VRX @ $61.00 and that doesn't change materially at $59.87.

Has Ackman's options positions changed since this? http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/11/ackman%20vrx%20again.jpg Not sure I understand the reasoning behind thinking something magical happens at $60. I count puts on 9.12mm shares that are still outstanding, of which 82K are at $70 and the rest at $60 strike.

-1.2%, which after a start to the year that included Ocwen and ASPS, feels pretty good.

It's not a question you can give a blanket answer to because every situation is different, but let's say you can lump these situations into two categories: (1) situations where the bonds are still trading on a yield basis, and an outcome in which the bond is paid until maturity is still likely, and (2) situations where bonds are trading on a recovery basis, and it's highly unlikely they survive to be paid out as scheduled. In (1), it is about choosing an appropriate risk-reward within the capital structure, and comparing your perceived risk of the assets versus the expected returns on the stock and the debt. I don't think there is much of a blanket statement to make here other than you obviously take higher risk with the equity position and expect to be rewarded with a higher expected return, and you need to be comparing the yield of the bonds to whatever you think a reasonable return on the stock is. How big of a spread there should be obviously will depend on the business itself and how volatile you expect its value to be, how much debt there is versus equity, where the particular tranche of debt you are evaluating is sitting within the capital structure and how much security there is in how the agreement / other agreements are structured, etc. In (2), unless you believe the market has it completely wrong, if you are seeing things trade in the 50s or below, most likely the debt is no longer trading on a yield basis where someone is thinking about the spread they need to be rewarded in order to buy the paper [with exceptions, clearly a very high duration bond i.e. a newly issued 30 yr treasury could trade at 50 just based on yield]. Instead, it's trading on where people think recovery value is in a restructuring, whether in court or out of court. In these situations, the equity is also no longer a security that is trading based on expected required returns - it's an out of the money option on the value of the business. Playing with buying the equity in this case is usually a foolish game; it's highly likely the equity is a zero or near zero. Investing in distressed debt can be rewarding but is really best suited for specialists and people who can actually get involved in the process, not retail investors. So I would simply avoid this type of situation from the perspective of someone at home.

I think it depends on what you are looking for. If you are looking to make a macro bet on oil or gas prices, that is easy to do and there is clearly an "opportunity" where prices are currently very volatile. In terms of betting on producers, I'm not sure there is an opportunity and fairly sure that there isn't an attractive opportunity for the small individual investor. For the small individual investor who is mostly stuck investing in equities, you face the issue that you are not betting on the long-term success of the producer, you are betting on the very near-term success of the commodity price environment essentially. You are really buying a short-term highly levered option, not an equity interest in a business. When you see debt tranches trading on a recovery basis and no longer on a yield basis then you know the equity is not trading on a long-term business valuation basis anymore. Even if you can buy the debt and normally be in a position to own the company, many of the smaller producers at least (let's say up to several billion in TEV before the crash for sure, but even larger ones) are in a position where, in Chapter 11 bankruptcy, they are finding it difficult or impossible to reorganize because there is not a real business to organize around at current prices. At $40 oil and $2 gas, few of these guys can produce positive unlevered free cash flow with a sensible drilling program. If you can't even produce FCF on an unlevered basis, there is no room for debt capacity, at which point you have everyone in the capital structure forced to take equity in a reorganized, zero earnings company. It's not an attractive proposition. What has happened in a few cases and seems likely to happen is that the Chapter 11 process turns into a liquidation and the assets are sold to someone who can sit on the assets or absorb them into a bigger organization. And if that happens, even if you held the debt you are going to be closing your position via an asset sale in the current depressed pricing environment - you don't get a piece of the business in order to make money if pricing and the business recover. So effectively my view is that if you are taking a macro view on prices, express that view directly and bet on prices. I think trying to bet on producers is little more than a levered short-term play on prices at this point, in most cases.