Liberty

It's my mixup. Too many similar names early in the morning.

http://www.cnbc.com/id/101742317 Ackman on CNBC this morning. This video is interesting: http://video.cnbc.com/gallery/?video=3000282619&play=1 Ackman called Chanos back when he was studying VRX with inside access, got his 26 page analysis that he went through very carefully, and still thought Chanos is wrong. He offered Chanos to come on the show and talk about this with him but Chanos refused. Apparently Chanos was also short Danaher in the past and has now bought AGN, which is a way to cover his VRX short if the merger goes through. (edit to fix name mixup) More here: http://video.cnbc.com/gallery/?video=3000282601&play=1 Michael Porter on big pharma model, AGN and VRX (said VRX has good organic growth, and that AGN would be a great fit for synergies): http://video.cnbc.com/gallery/?video=3000282598&play=1

Is it maybe possible that GAAP accounting distorts the picture in this case, as it often does? Would you value Charter (CHTR) on just the GAAP numbers, or would you be better served by trying to understand the real economics of the business?

Lu_hawk, did you look into what Ackman said about VRX's declining assets (that are getting good IRRs nonetheless) masking the organic growth in the durable part of the business? If they were to let those run off and didn't buy more soon-to-go-off-patent drugs to replace them, they would have high single-digit growth on the remaining portfolio of products, which is what the ex-generics numbers show. If one does not understand that part about the business (look at it as two parts, not as one), nothing else matters. They are buying good assets with organic growth for low to fair prices and making them more profitable by cutting low ROI spending on R&D and SG&A and getting a lower tax rate, as well as boosting sales efforts and focusing on the most profitable markets and getting out of the more competitive ones. That's real value-creation to me, and much better to do it with money borrowed cheaply than by raising equity (of course they could wait to self-generate the funds internally, which would make the business safer but much slower growing; that's sub-optimal in this case, just like Malone doesn't always pay cash when he has assets that can easily support debt).

The doom sentiment is gone, but we're pretty far from real enthusiasm IMO. What we're seeing now is more mild-skepticism, somewhat-intrigued. A discount to fair value gives them a great opportunity to do buybacks, and I don't think that we can say with such certainty that it'll never close. The weighting machine has to kick in at some point, but the longer it doesn't, the more effective the buybacks will be. I think that at some point, sentiment will turn really positive again and we'll get closer to fair value, and that'll be a time to harvest profits or sell. But I'm not selling until bigger screen iPhones hit a ramped up China Mobile (big screen phones are very popular in Asia, where they are often a person's only computing device) and until I've seen what new categories they have waiting in the wings. WWDC boosted my confidence in the quality of the company's current work, so I'm hopeful that they have good things planned (it was a remarkable event, I can't imagine any other company doing so many good things that will matter to their customers right now, so who's catching up to them?). One last thing: Many people say that Apple is a 'hit driven business' and that they're only as good as their last product. That's true, but it's not as scary as it might first seem. They're not writing novels or making hollywood movies. They're not starting from scratch every time and crossing their fingers, hoping that they'll make something people enjoy based on purely subjective taste attributes. The iPhone 4 was based on the original iPhone, and iOS 6 was based on iOS 5, and the iPhone 5S was based on the iPhone 5, and so on. They're not starting from scratch all the time and hoping to re-conquer their whole customer base all over again. They're evolving a hit product into something even better, and they have a sticky ecosystem that acts as a scaffold to build on. And they're not just trying to make something that people like based on intangible subjective taste, they're solving real-world problems that their customers have, or giving them new tools they didn't know they needed. That's a lot more concrete a target than trying to write a hit song. You can have a company culture that is set up to do just that. If it wasn't the case, why would Apple's personal computers still dominate profit-wise and quality-wise in a decades-old mature declining industry with lots of competition? In fact, I'd say that Apple's strengths are more important for smartphones than personal computers, so maybe the competition will have an even harder time storming the castle there?

Adidas/Puma/Reebok are all playing in the higher end, right? The low end is a zillion semi no-name brands, but Nike isn't really competing against them. They'd rather have profit-share than market-share, right? So who's threatening Apple in the higher end, the only area where they play? Who's nipping at their heels to offer the very best overall customer experience? Samsung? HTC? Motorola? Xiaomi? LG? Lenovo? Huawei? Nokia? Blackberry? But we can agree to disagree.

What multiple is Nike getting?

Maybe folks say that, but I didn't say that, and I want to make that clear. A few posts above I said that WS varies between positive and negative on Apple, but the constant is that most of WS doesn't understand Apple. That's a different point, and it doesn't imply that they have to have a negative view of the company. As for the rest, we've already gone over it. Time will tell who's right.

Good points, ni-co. I suppose that in 10 years a management guru will write a best-selling book about how consumer products are judged on different criteria than business products and a large number of people will have their 'ah-ha' moment... Until then, well.

Hey Biaggio, always good to hear from you! Does this mean that you give a 0% chance to the Allergan merger (which would be significantly deleveraging), or other similarly profitable deals in the future? It's not like VRX's valuation on an EV basis is much higher now than it's been in the past 6 years...

There are two different things here: Steve Jobs and Apple employees who worked on it definitely knew they had a game-changing product that was years ahead of the competition (even that isn't quite right; it's not 'years' ahead, because if it hadn't been made, it's likely nobody else would've made something as good). It's clear in the announcement and in various articles and interviews with those people. But, they couldn't know how fast the market they were creating would unfold, because they were trailblazing. The iPod took a little while to take off too, but once it did it was massive. The iPhone wasn't an immediate super-hit. It took a little while to really get going. The one that was immediately a hit was the iPad.

Valeant's revenues this year break down: 41% RX, 21% devices, 20% OTC, and 18% generics. Different factors make part of each of these segment "durable", though most of their declining products are in RX. In some countries/segments, branded generics are very strong. For some others, it's hard to manufacture certain products, so there's not much generic threat. For others, the product is too small to be worth the trouble for generic makers (when you add up lots of small products, you get something that moves the needle, yet no product alone is big enough to attract much attention), in certain areas, brands and doctor recommendations matter more (stuff you put in your eyes and on your skin is particularly sensitive). For some stuff, it's fairly easy to reformulate and extend protection. All those things and more combine to various degrees. Etc. But what's impressive is that about 80%+ of their products fall into these 'durable' categories (and a similar proportion is cash pay, so they don't have threats from government coverage changing, group buying power against them, etc) because this has been a specific focus for Pearson from the start. So add those predictable, stable cashflows to a low tax rate, low R&D and SG&A model with disciplined M&A and you get a different animal. Their model is different from what Teva and Mylan does. These might be great businesses, but they're not the same, adjusted cash EPS or not.

Well, of course it's not the label that makes them durable, it's various facts about them (this has been explained in detail in various places). It also doesn't mean that they are 100% durable for ever and ever with no maintenance; any consumer product by P&G needs some basic maintenance investment to keep going, and these aren't different, but compared to patent cliff products they can still be very durable and require minimal expenditure. If you don't think the products they call durable are durable, that's another issue. What I've seen makes me think they are, but you can have a different view.

That's a mistaken way to look at their assets since what they own and what they buy falls into two main buckets and they have different criteria for each: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg175012/#msg175012 For the declining assets, everything i've seen shows me that they buy them cheap enough to get very good IRRs. It's like a company in runoff; if you buy it cheap enough, it's profitable, even if it'll make it seem like your revenues are dropping. For the durable assets, for which they pay more, they've been getting high single-digit organic growth for years. If you were right that the largest part of their portfolio which they call durable was declining, then yes, it would be a terrible business. But that's not the case. It's just that the rapid decline in the non-durable part masks the medium growth in the durable part when you consolidate the two.

I disagree. Everything I have read suggests that high quality .com sale prices are higher than ever. So it could be a bubble but it's not a slump. There is very minimal demand for any of the new TLDs, or anything other than .com. http://w3techs.com/technologies/overview/top_level_domain/all Buying the right domain name can easily be the most critical part of a business' marketing spending. It doesn't make sense to go cheap / risky instead of getting the name you really want. You may be right. As I said, I haven't looked into this business, that was just my initial impression. Let us know how it turns out.

Indeed, except for the added complexity that each product is part of the same ecosystem, and they help sell each other and make each other stickier. Your Apple TV is more useful if you have an iPhone, your iPhone is more useful if you have a Mac, and so on. How many people bought Macs 10 years ago because they first got an iPod? Taking a cut from all the paid content (including games, movies, TV, etc) on a device that is designed pretty much just for content consumption like the next-gen Apple TV could help make the economics better. I doubt that will be gigantic, but it should be profitable and recurring. In my opinion, wearables will be more accessories to the iOS ecosystem than primary devices. So while they could be a nice business on their own, I think they'll mostly help boost the iPhone business. Imagine something that integrates superbly with the iPhone and makes it much better (now you can see all kinds of stuff at a glance on your wrist, and your phone now has data on your health 24/7 (HealthKit API), you can control stuff in your house (HomeKit API) - including your Apple TV - and maybe even your car (CarPlay) without even taking your phone out of your pocket, or even having it on you, etc). I could be a must-have accessory and functionally increase iPhone's ASP (you wouldn't buy the wrist band alone -- it's like an extra option on the Phone). Just some speculation... I guess we'll find out soon enough.

Trivia: That naming convention is a very 'Web 2.0' thing. I believe it was started by Flickr in 2004, but maybe someone else came before them. In 2003 there was del.icio.us which deconstructed its domain. That's another trend starter, I think.

Domain names have lost a lot of value over time. It used to be that to go somewhere, you had to type the domain name in your browser's URL bar. So shorter, memorable, typo-proof ruled. You could also typo-squat because when people have to type something, they make mistakes. Nowadays, URL bars autocomplete, people use search, and most people move around more by following links on social media and blogs than by deciding to directly go to a site. This is even more so on mobile devices where people type even less. You could have a domain name that is complex and long and most people on iPhones would never notice it. So I haven't really looked into that business, but on its face, it doesn't sound like something should be very profitable, if at all, especially now that we're being flooded by new generic top domain names: http://newgtlds.icann.org/en/

Wall Street was gaga over Apple's growth, but that doesn't mean that they understood the company. I'm not saying that they've always had a negative bias against the company, just that they don't really get how and why it does what it does and how it's different from competitors. But it must be because they have no moat that all their competitors are doing so well, making so much money creating high-end products that are just as good... And if there's a product line where Apple really must not have any moat, it must be in personal computers, right? That's a declining mature industry that has been around for over 30 years. Oh yeah, the competition is doing just as well as Apple there. People buy them just because of fashion, not because they have better products, and it's not like their ecosystem is sticky. They're doomed just like Nike and Porsche are doomed because of cheaper competition. Please tell me what rapid technological changes threaten Apple? Or maybe, just maybe, they're a beneficiary of rapid technological changes, because they incorporate those into their products to make them better, giving people reasons to upgrade, and their massive profit advantage over their competitors mean that they can invest more in new technologies - even expensive ones like custom SOCs, aluminum milling and sapphire glass or whatever - to further differentiate their products, creating a virtuous cycle. If Apple fails, it won't be because they can't incorporate the latest technology into their products, it'll be because they lose their culture, and that's what I'm watching for. WWDC to me was reassuring; they dug the moat a few feet deeper and wider. Maybe we should talk about this again after the fall announcements... Let's see how Samsung's Galaxy S, Galaxy Tab, and Galaxy Gear do against the iPhone 6 and new iPads, as well as whatever new categories they announce.

I think Apple would make more money on iPads and Macs if the price paid by customers was spread over 2-3 years as monthly payments. Most people think a smartphone costs a couple hundred bucks. It's not rational, but people aren't rational about money. But I also think that iPhones bring more value to most people than Macs or iPads. They're always on you, very personal devices used for countless tasks throughout the day (utility and pleasure). They're more indispensable than most other devices, so worth paying up for.

If VRX was growing at the rate it was with zero debt, I know I'd be using much higher multiples of Cash EPS to value it, but that's just me. But as long as they get much higher returns on what they buy than what they pay in interests, and as long as the durable part of their business has organic growth and the non-durable part has good IRRs, I think the debt is a very good thing. Not levering up would be a missed opportunity when you can do what they've shown they can do over the past 6 years. Most other pharmas would be crazy to lever up that much because a much bigger part of their portfolio is not as durable, they have more blockbusters (something happens to 1-2 products and it's very material), and their growth depends more on uncertain R&D, and so their cash flows are a lot less predictable. Bottom line for me is that if VRX stopped doing acquisitions, within a relatively short period of time it would be earning its cash EPS. The durable part of the business has high single-digit growth and represents the vast majority of the revenues, and the non-durable part would run off at very good IRRs. So I'd be left with a medium-growth business with a very nice cash flow that could be deployed into buybacks and dividends, as well as internal growth initiatives (if you're not doing acquisitions anymore, more could go to R&D). But as long as acquisitions meet the high hurdle of management and can create more value than this scenario, I hope they continue in that direction.

As a follow up to the discussion about battery breakthroughs and something obsoleting the Gigafactory, from the shareholder meeting:

Indeed, the size of the market cap has nothing to do with it. All that matters is the per share value. They could be a smaller market cap company with a much smaller number of shares in 10 years and that could be very good for shareholders. Apple is in the interesting position of being known by everybody but understood by relatively few. Wall Street just tries to compare them to other easier-to-understand companies instead of truly looking at what's going on, but these other companies aren't doing the same thing. I guess that to get the whole rather than just bits & pieces it takes someone who has a foot in many disciplines (arts/design/tech(software+hardware)/consumer products/fashion/finance) and that's rare.

Ok, thanks. I was curious so I checked; It's up 63% since your last post (plus a little in dividends). Seems like an interesting company, but it's probably going in the 'too-hard' pile for me.

http://stratechery.com/2014/growing-apple-wwdc/