Ask Packer - No Seriously, Ask Him Anything (AHA)!

[prevalou]

If l look at the group (GNCMA, CHTR, LILA, LBTYA and CABO) at today's prices, I like GNCMA.  GNCMA is selling at 6.4x EBITDA while CHTR is at 9.5x and CABO at 7.9x.  The US firms all have about the same margins (EBITDA 33% to 37%) and GNCMA and CHTR the same historical growth over the past 3 to 5 years (about 10%).  The foreign ones have higher margins in part due to lower content costs.  In terms of positioning, GNMCA has a monopoly on hard wire and an advantaged position in wireless.  The others clearly have good hard wire positions with not much in wireless.  Although wireless is not a direct threat today, it may be tomorrow and provides growth today.

 

The foreign firms trade at 7.6x for LILA and 8.6x for LBTYA.  These also have John Malone at the helm. For foreign cable, I like the Korean players like Hyundai HCN trading at 1.7x EBITDA.

 

Packer

 

What annoys me about GNCMA is growth potential: ebitda by home passed is very high and penetration rate is high too. Have they milked the cow ?

[smathew]

Packer,

For Hyundai HCN is there any catalyst ? Carlyle is seems to have invested in 2006 and still holding on . 

[muscleman]

If l look at the group (GNCMA, CHTR, LILA, LBTYA and CABO) at today's prices, I like GNCMA.  GNCMA is selling at 6.4x EBITDA while CHTR is at 9.5x and CABO at 7.9x.  The US firms all have about the same margins (EBITDA 33% to 37%) and GNCMA and CHTR the same historical growth over the past 3 to 5 years (about 10%).  The foreign ones have higher margins in part due to lower content costs.  In terms of positioning, GNMCA has a monopoly on hard wire and an advantaged position in wireless.  The others clearly have good hard wire positions with not much in wireless.  Although wireless is not a direct threat today, it may be tomorrow and provides growth today.

 

The foreign firms trade at 7.6x for LILA and 8.6x for LBTYA.  These also have John Malone at the helm. For foreign cable, I like the Korean players like Hyundai HCN trading at 1.7x EBITDA.

 

Packer

 

Thank you Packer. GNCMA's EV/EBITDA ratio is lower but over 50% of the EBITDA comes from wireless. Shouldn't wireless trade at 3-4x EV/EBITDA? If we say the cable business trades at 8 and wireless trades at 4, then the combined company should trade at 6x EV/EBITDA, which is exactly where it is today.

Am I missing something?

[Packer16]

As to identification, I put together industry valuation sheets to monitor valuation.  When I find something interesting I will dive in deeper.

 

I buy the Korean stocks via Fidelity

 

As to growth potential, I think the monopoly position has enhanced the position of GNCMA.  They have recently purchased local TV stations and have been good capital allocators.  If they cannot find growth they will buy-back shares so although overall growth will slow value per share will increase.

 

The wireless business can have high multiples but it depends upon the margins and the competition.  The major carriers trade from 6.5x (Sprint) to 9.2x (T-mobile) EBITDA.  The wireless margins for GNCMA are the highest in the firm and higher than other wireless carriers.  GNCMA has an infrastructure built-out already so adding wireless is a small incremental cost leading to high incremental margins and the lack of competition keeps competitive pricing in check. 

 

Packer

[jay21]

Packer - The PE firm connected to GNCMA (Searchlight) is also connected to CHTR and LILA (through minority ownership of the PR sub). A nice qualitative point to back your capital allocation thoughts imo.

[muscleman]

As to identification, I put together industry valuation sheets to monitor valuation.  When I find something interesting I will dive in deeper.

 

I buy the Korean stocks via Fidelity

 

As to growth potential, I think the monopoly position has enhanced the position of GNCMA.  They have recently purchased local TV stations and have been good capital allocators.  If they cannot find growth they will buy-back shares so although overall growth will slow value per share will increase.

 

The wireless business can have high multiples but it depends upon the margins and the competition.  The major carriers trade from 6.5x (Sprint) to 9.2x (T-mobile) EBITDA.  The wireless margins for GNCMA are the highest in the firm and higher than other wireless carriers.  GNCMA has an infrastructure built-out already so adding wireless is a small incremental cost leading to high incremental margins and the lack of competition keeps competitive pricing in check. 

 

Packer

 

Thank you for the insights! Another question, why do you think cable cos should trade at 8x EBITDA but wireless usually trade at 6-7x? Is that because wireless has a lot more capex needs to constantly upgrade from 1G to 2G to 3G and to 4G, but cable co's capex to increase bandwidth is a lot easier and a lot less capex intensive? Or is it mainly because cable co's competition is a lot less intense? Usually what's the normal level of maintanence capex for wireless vs cable in terms of a percentage of revenue?

 

 

Thank you!  :D

[prevalou]

With the alaska economy tied to oil prices, is there a risk churn will increase at GNCMA, squeezing margins ?

[Packer16]

In general, wireless is more competitive and thus has lower margins for the same cap-ex.  Part of the competition is high cap-ex (similar to cable) but it is also in pricing.  You can see that margins of the carriers (VOD, USM, S & TMUS) have declined over time as the price cuts have more than offset the cost reductions due to scale.  But in Alaska it is different as the competition is less intense than in the lower 48.  Verizon was going to launch but I do not think they are in any hurry as Alaska is small potatoes for them and most of the other national carriers.

 

Oil prices will effect GNCMA but I would rather be in monopoly position in a market that will be temporarily hit with low oil prices than a much more competitive market that may not.

 

Packer

[muscleman]

With the alaska economy tied to oil prices, is there a risk churn will increase at GNCMA, squeezing margins ?

 

I asked my oil friend in Conoco phillips. He said Alaska's per barrel production cost is similar to the middle east, so I think Alaska would be one of the last ones affected by oil cuts.

With that said, if Packer thinks this can go to $30 but currently it is above $15, I have to be careful because I am strictly looking for 2x or more.

 

So packer, it sounds like you have avoided buying CHTR, LBTYK, LILA and CABO all because of the high valuation? Based on these companie's debt levels, the equity would have  to fall a lot to get to a 6x EV/EBITDA.

[prevalou]

Oil prices impact the budget (very high in Alaska). The budget deficit (maybe 10% of gdp) could  lead to state employees  cuts, reduction of state expenses, a new income tax or reduction in royalties paid to the population. Even if Alaska has a substantial  rainy day fund, all this could hit for the long term a state already in recession

[Graham Osborn]

With the alaska economy tied to oil prices, is there a risk churn will increase at GNCMA, squeezing margins ?

 

I asked my oil friend in Conoco phillips. He said Alaska's per barrel production cost is similar to the middle east, so I think Alaska would be one of the last ones affected by oil cuts.

With that said, if Packer thinks this can go to $30 but currently it is above $15, I have to be careful because I am strictly looking for 2x or more.

 

So packer, it sounds like you have avoided buying CHTR, LBTYK, LILA and CABO all because of the high valuation? Based on these companie's debt levels, the equity would have  to fall a lot to get to a 6x EV/EBITDA.

 

While I can't find a posted average (and it varies by extraction method), I find it very difficult to believe Alaska's average marginal cost per barrel is anywhere close to the Middle East.  Saudi Arabia and Iran can get down to $2/ bbl in some fields (again this does not include fixed costs like new rigs, welfare programs, etc).  They are in the same kettle of fish as Canada setting aside extraction mix and the currency situation.  That's why Canadian firms like TGA and BNKJF even bother signing overseas PSAs.

[Graham Osborn]

As to identification, I put together industry valuation sheets to monitor valuation.  When I find something interesting I will dive in deeper.

 

I buy the Korean stocks via Fidelity

 

As to growth potential, I think the monopoly position has enhanced the position of GNCMA.  They have recently purchased local TV stations and have been good capital allocators.  If they cannot find growth they will buy-back shares so although overall growth will slow value per share will increase.

 

The wireless business can have high multiples but it depends upon the margins and the competition.  The major carriers trade from 6.5x (Sprint) to 9.2x (T-mobile) EBITDA.  The wireless margins for GNCMA are the highest in the firm and higher than other wireless carriers.  GNCMA has an infrastructure built-out already so adding wireless is a small incremental cost leading to high incremental margins and the lack of competition keeps competitive pricing in check. 

 

Packer

 

The industry comps are super efficient.  I've been increasingly drawn to historical self controls simply b/c I don't trust the M&A comps.  It's like living in a rich neighborhood where each new neighbor feels the need to spend an extra half mil on an expensive/ pointless set of turrets etc.  I guess that's the Thiel argument that ultimately the spreads are gone and you can only make money through directional bets or luck.  GNCMA is trading at the highest EBITDA multiple since 2002.  Their tang book has cratered over the same interval and LT debt has skyrocketed concordantly with rev.  Death triad.

[Packer16]

The main reason industry comps are efficient is competition in their markets which is much less in GNCMA's case, even for wireless.  GNCMA has changed quite a bit from 2002, where it was a competitor in its markets to the dominate competitor in most of their markets.  This can be seen by their increased cash flow margins, revenue and cash flows in a market where most competitors in more competitive markets have seen declines. 

 

The cash flow multiple is actually cheaper today than in 2002, per Bloomberg.  The one trend I saw in GNCMA that I like versus other telcom comps is growth in CF/share per Value Line.  Bottom line, now GNCMA is being priced like a telco but has the economics closer to a cable co.  BTW the coverage ratio is above 4x which implies better than BB rating so I am comfortable with the debt level.

 

Packer 

[sae85400]

Packer I noticed you posted returns through 2013, was curious how you did that last 2 years?

[Packer16]

Not as well as in the past 8.5% in 2014 and 0.6% in 2015.

 

Packer

[muscleman]

Packer, have you taken a look at VDTH? The EBITDA growth is very very strong, but I don't quite understand the moats for that company and for satellite broadcasters in general.

For cable cos, I understand that they are mostly monopolies in their local markets, but how would satellite broadcasters compete with cable cos? It is surprising to me that even in the US as of today, these two co-exist.

[Guest JoelS]

Packer,

 

I have "The Great Crash and its aftermath" in my hands and noticed your recommendation on this forum. Have you altered your investment strategy at all, in light of what you learnt from the book? If yes, how?

 

Cheers,

Joel

[Packer16]

Packer, have you taken a look at VDTH? The EBITDA growth is very very strong, but I don't quite understand the moats for that company and for satellite broadcasters in general.

For cable cos, I understand that they are mostly monopolies in their local markets, but how would satellite broadcasters compete with cable cos? It is surprising to me that even in the US as of today, these two co-exist.

 

I have and have a few reservations, namely, I can purchase cheaper satellite TV operators like SKY Perfect for a lower EBITDA multiple and the thesis is predicated upon subscriber growth.  As to where satellite TV can do better than cable, it is in rural areas in the developed world and larger areas in the developing world as they have little telecom/cable infrastrutcure.

 

Packer

[Packer16]

Packer,

 

I have "The Great Crash and its aftermath" in my hands and noticed your recommendation on this forum. Have you altered your investment strategy at all, in light of what you learnt from the book? If yes, how?

 

Cheers,

Joel

 

I have not altered my strategy but I did learn which industries did well and not so well in a depression and how toady is different than the 1930s when folks were losing their life savings to bank failures.

 

Packer

[muscleman]

Hi Packer,

    I've seen a number of cable companies boasting that their return on invested capital is over 30%, but I don't know how to calculate that number.

    One approximation that I can apply is to use Adjusted OIBDA/(net PPE + accumulated depreciation), but I understand that some PPEs were added 20+ years ago, so the gross PPE number is artificially low, and the result of this calculation gives an ROIC number artificially high. But even with this kind of calculation, LBYTK's ROIC is about 24%, not 30%+.

    I wonder what's your thought on this?

 

 

Thanks,

MM

[Graham Osborn]

Packer,

 

I have "The Great Crash and its aftermath" in my hands and noticed your recommendation on this forum. Have you altered your investment strategy at all, in light of what you learnt from the book? If yes, how?

 

Cheers,

Joel

 

I have not altered my strategy but I did learn which industries did well and not so well in a depression and how toady is different than the 1930s when folks were losing their life savings to bank failures.

 

Packer

 

I haven't read the book but will check it out.  Just remember though - the big difference between the 1930s-40s and the 2000s-10s was the presence of concerted central bank intervention to redistribute losses in the latter case.  Redistribute, not reduce.  Because central banks neither create nor eliminate real economic value, they cannot change the ultimate outcome but only the kinetics.  I like to think of what we are seeing now as the slow-motion version of what happened in '29.  The ultimate destination is the same, but we are taking the scenic/ anesthetic route.

[muscleman]

Packer, do you think cableco's focus on EBITDA instead of net earnings is appropriate? I think this is only true when depreciation is not real. I think that's the case for real estate.

Cable is kind of like real estate but not exactly so. A house bought 40 years ago is worth much much more today. Not sure if a cable laid down 40 years ago is still worth anything today?

[fareastwarriors]

I do have an indirect interest, I own Sequoia.  As to VRX, I have been watching from the stands and am not sure how much I can add to what has been said.  The key question in my mind is how extensive are the problems at Philidor in terms of other distributors.  If Philidor is it, then at today's price it is cheap.  If there is more then there may be more downside.  A final point that reduced my enthusiasm are Munger's comments.  He usually is right.

 

Packer

 

Packer, do you still own Sequoia Fund? Did you sell or buy more?

[Packer16]

In general, EBITDA can be used in situations where there is a large one-time outlay where the benefits will be seen over years and there is customer lock-in.  Real estate is the extreme example.  Cable has some of these characteristics also however, there are more frequent "one-time" outlays but there is customer lock-in.  EBITDA also removes the non-cash amortization costs for consolidating industries.

 

As to Sequoia, I still own it.  I was planning on going to the annual meeting & maybe asking for a change to the management agreement with a lower fee with possibility of the fee going back to historical levels if they outperform at historical margins.

 

Packer

[jay21]

Any thoughts on the broadcasters? Seems to be the type of security you would look at

 

Thanks