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

[Packer16]

To give you some color on the work I do as an appraiser, it is primarily focused on private business, intangible assets and unusual securities associated with unusual assets.  Given this a good part of valuations I perform would not be applicable to public assets.  Not with standing this, there is a book called "Valuing a Business" by Shannon Pratt which is the private company valuation equivalent to Security Analysis without Ben Graham's flair in the use of the English language.  The other book which I really like "The Most Important Thing" as it gets at the behavioral aspect of investing.  The CFA also has industry guides which provide some nice industry specific considerations.  I also like all of the books Aswath Damodaran has written & his web site is execellent.  Two recent book have been the "Ground Rules" book about Buffett's partnership letters and Concentrated Investing.

 

As to the business valuation, it is a nice business to be to make a living in as asset management is difficult with a small amount of assets and the stress of money moving in and out of a fund.  I have been in the business valuation field for about 20 years and entered after an MBA and working at PW in Los Angeles in the mid 1990s.  I have a EE undergrad degree and an MBA from UCLA. 

 

Packer 

[Eye4Valu]

Appreciate it Packer!

[kab60]

Did you take a look at Townsquare, and what do you think? Who are the 'best' peers, and what do they trade at? I kinda like their local radio niches, but am not so sure about the rest. Serup looks interesting though with Oaktree as a signifikant shareholder among other things.

[InspireByReason]

Hey Packer,

 

I have been on the sidelines for quite some time at the corner and part of the reason I decided to finally take the plunge and get an account was because of this post. I've noticed your presence on a lot of other value investing websites and appreciate you giving so freely of your time & knowledge. Here's the questions:

 

Q1: Do you ever use owner's earnings? If you do what is the best resource for understanding why it is important, if you don't what do you use in its place?

 

Q2: Do you use a checklist? How long is it?

 

Q3: What's your annual rate of return up to now?

 

I'll leave it at that, thanks again!

[RedDaruma]

Hi Packer.

 

I wanted to ask you about this question, as you are familiar with both Energy space and private valuation. Do you have any idea how much asset impairments on offshore drilling equipment I have to assume in the worst case? I'm looking at ATW right now and taking a liquidation analysis. I wonder 50% discount is large enough.

 

Thank you very much for you time on this.

RD

[Packer16]

I do like Townsqure, it is cheap & the debt is priced at LIBOR plus 325 so it has a BB+ credit spread.  In terms of comps on the radio side you have SGA, SALM & BBGI and on live event side Live Nation.

 

I typically use free cash flow for most of the businesses I look at or nornalized cash flow (EBITDA). In term of checklist, I think of it more as a filter and ensure that the firms are no too levered and somehow growth will continue.  To certain extent it is a process of exclusion once cheap firms are located.  Annual return over a longer period is about 29%/year since 2000 but the past year has been tough as I have materially underperformed (down about 5%) due to O&G names which have failed to recover, Korean preferreds declining, Dhando swandiving and a some of my generally cheap stock declining (like GNCMA and AIQ).  At some point I think sentiment will change for these names.

 

It depends upon the specifics of the equipment and the contracts they have to lease.  If they do not have leasing contracts then the equipment will be stacked and generate no revenue until demand increases.  If they cannot find contracts, they can sell as scrap.  I like looking at the bonds to get an idea of how the assets are being priced.  If the bonds are at distressed levels, YTM>8% then if you want to invest here then the bonds are the place to go.  Currently, Atwood's bonds are trading at a YTM of 16%.  In looking at Atwood's fleet status, it looks like there is a cliff approaching for many of the rigs on contract now.  If these can be leased then they will able to service their debt if not then BK.  That IMO is the key question here.

 

Packer

 

 

[RedDaruma]

I do like Townsqure, it is cheap & the debt is priced at LIBOR plus 325 so it has a BB+ credit spread.  In terms of comps on the radio side you have SGA, SALM & BBGI and on live event side Live Nation.

 

I typically use free cash flow for most of the businesses I look at or nornalized cash flow (EBITDA). In term of checklist, I think of it more as a filter and ensure that the firms are no too levered and somehow growth will continue.  To certain extent it is a process of exclusion once cheap firms are located.  Annual return over a longer period is about 29%/year since 2000 but the past year has been tough as I have materially underperformed (down about 5%) due to O&G names which have failed to recover, Korean preferreds declining, Dhando swandiving and a some of my generally cheap stock declining (like GNCMA and AIQ).  At some point I think sentiment will change for these names.

 

It depends upon the specifics of the equipment and the contracts they have to lease.  If they do not have leasing contracts then the equipment will be stacked and generate no revenue until demand increases.  If they cannot find contracts, they can sell as scrap.  I like looking at the bonds to get an idea of how the assets are being priced.  If the bonds are at distressed levels, YTM>8% then if you want to invest here then the bonds are the place to go.  Currently, Atwood's bonds are trading at a YTM of 16%.  In looking at Atwood's fleet status, it looks like there is a cliff approaching for many of the rigs on contract now.  If these can be leased then they will able to service their debt if not then BK.  That IMO is the key question here.

 

Packer

 

Thank you, Packer. I was actually looking at ATW's 6.5% 2020 bonds. Its balance sheet looks pretty solid and their assets have to be sold for less than 50% of its current book value before the debt would be worthless. If they can make it to maturity, then I think the total expected return would be ~15% pa at the current quote. I knew that >50% of their contracts is expected to face renewals over the next 12-18 month. I was wondering if there is anything that puts the floor for the asset impairment but it seems depend on those renewals. Probably I have to look at what happened for their past renewals. 

RD

 

[muscleman]

I do like Townsqure, it is cheap & the debt is priced at LIBOR plus 325 so it has a BB+ credit spread.  In terms of comps on the radio side you have SGA, SALM & BBGI and on live event side Live Nation.

 

I typically use free cash flow for most of the businesses I look at or nornalized cash flow (EBITDA). In term of checklist, I think of it more as a filter and ensure that the firms are no too levered and somehow growth will continue.  To certain extent it is a process of exclusion once cheap firms are located.  Annual return over a longer period is about 29%/year since 2000 but the past year has been tough as I have materially underperformed (down about 5%) due to O&G names which have failed to recover, Korean preferreds declining, Dhando swandiving and a some of my generally cheap stock declining (like GNCMA and AIQ).  At some point I think sentiment will change for these names.

 

It depends upon the specifics of the equipment and the contracts they have to lease.  If they do not have leasing contracts then the equipment will be stacked and generate no revenue until demand increases.  If they cannot find contracts, they can sell as scrap.  I like looking at the bonds to get an idea of how the assets are being priced.  If the bonds are at distressed levels, YTM>8% then if you want to invest here then the bonds are the place to go.  Currently, Atwood's bonds are trading at a YTM of 16%.  In looking at Atwood's fleet status, it looks like there is a cliff approaching for many of the rigs on contract now.  If these can be leased then they will able to service their debt if not then BK.  That IMO is the key question here.

 

Packer

 

Hi Packer,

    When you look at companies, do you think it is ok that GNCMA's management bonus incentive is not aligned with shareholders but still invest in it? I know every company has some kind of issues. So what issues do you think kill the entire investment thesis?

    The concerns I have with GNCMA are the following:

    http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/gncma-general-communications/msg272011/#msg272011

 

 

 

Thanks!

[scorpioncapital]

I am struggling with an issue of preference over no debt companies with lower yield or higher debt companies with higher yield to shareholder BUT total yield is the same across debt+equity. What do you think is the better deal?

 

E.g.

Company A has no debt and 7.5% fcf yield.

Company B has 50% debt and 7.5% yield on total debt+equity but 15% return to YOU, the shareholder.

 

Assuming you calculate the second won't go bankrupt, what would be the deciding factor?

 

 

 

[Spekulatius]

I am struggling with an issue of preference over no debt companies with lower yield or higher debt companies with higher yield to shareholder BUT total yield is the same across debt+equity. What do you think is the better deal?

 

E.g.

Company A has no debt and 7.5% fcf yield.

Company B has 50% debt and 7.5% yield on total debt+equity but 15% return to YOU, the shareholder.

 

Assuming you calculate the second won't go bankrupt, what would be the deciding factor?

 

it depends on he sure you are about the business and the fact that they won't  go bankrupt. For me, both are more or less identical, the first is safe, but has lower owner earnings, the second one is more risky (due to leverage). If Think the business is very safe (think utility), then the second company with a reasonable amount of debt is better.

[scorpioncapital]

Thanks. I saw a study on the web some time ago saying that lower return without debt actually does the same or better as higher return with debt from a historical share price performance but can't remember the link. I did find this - http://people.stern.nyu.edu/adamodar/pdfiles/country/levvalue.pdf

Slide 13 looks especially on topic.

 

[Packer16]

With respect to GNCMA, although I do not like related transactions like this I look at materiality.  In the case of the plane, the impact is 0.1% of revenues based upon cost paid (it will be less if offset by commercial cost for transportation). 

 

With respect to firms with debt it depends. I think making generalities can be misleading.  For cyclical firms I would stay away from debt.  For more steady firms prudent use of debt is a key way returns are provided.  I use John Malone's use of debt as an example of prudent use of debt.  I also use bond pricing to determine if debt is too much or too little.  One thing you can look for is a large spread between the debt rate and the FCF yield a firm generates as they are both associated with same underlying cash flow stream.

 

Packer

 

 

[scorpioncapital]

With respect to GNCMA, although I do not like related transactions like this I look at materiality.  In the case of the plane, the impact is 0.1% of revenues based upon cost paid (it will be less if offset by commercial cost for transportation). 

 

With respect to firms with debt it depends. I think making generalities can be misleading.  For cyclical firms I would stay away from debt.  For more steady firms prudent use of debt is a key way returns are provided.  I use John Malone's use of debt as an example of prudent use of debt.  I also use bond pricing to determine if debt is too much or too little.  One thing you can look for is a large spread between the debt rate and the FCF yield a firm generates as they are both associated with same underlying cash flow stream.

 

Packer

 

Thanks Packer. I love the idea to compare debt to firm FCF. In the company I'm looking at they are almost the same figure. But I see that if debt is variable, this is an excellent test of pricing power as interest rates rise! I was reading somewhere that LBO firms love to over-leverage firms initially and they KNOW they are over-leveraging, which suggests if you see an LBO situation you can be almost certain they have taken on too much debt by design (what that design may be is another question!) :)

 

 

 

[muscleman]

I am struggling with an issue of preference over no debt companies with lower yield or higher debt companies with higher yield to shareholder BUT total yield is the same across debt+equity. What do you think is the better deal?

 

E.g.

Company A has no debt and 7.5% fcf yield.

Company B has 50% debt and 7.5% yield on total debt+equity but 15% return to YOU, the shareholder.

 

Assuming you calculate the second won't go bankrupt, what would be the deciding factor?

 

This is just like your home mortgage. If you have stable income, the banks will allow you to put down 20% and they will take very little risk. If you have unstable income then they won't lend to you.

 

 

[undervalued]

Packer, have you look into CBI (engineering and construction companies)? I think the stock is very cheap based on cash flow. Company estimates earnings will be $4 this year. Could you share your insights?

[no_free_lunch]

I wonder if you have any thoughts on Verizon?  I know that you follow a number of telecom companies so have a good sense for valuations.  This is obviously not the kind of upside you usually seem to go for but nevertheless from what I can tell it seems very cheap at current levels.

[Packer16]

In reply to the questions on CBI, it is in the too hard pile at this point for me.  It is cheap but you have the overhang of the Westinghouse sale & there are other firms closer to my circle that are cheap now.  An interesting one in the cement space is the Buzzi Unicem savings shares.

 

As to Verizon, I think it is fairly valued @ 6.8x EBITDA and 40x FCF (2016) or 20x (2015).  The larger telecom I like now are the savings shares of Telecom Italia.   

 

Packer 

[CleverLongboat]

Hi Packer, took a long and intensive look at Telecom Italia and also found it somewhat difficult to value. Lots of competition in the Italian mobile space, not sure if they can really increase rates. Capex increases to bring greater broadband penetration not necessarily a net positive, especially if competition from other players heats up. I can see the long argument but curious to hear what you like about them.

[Packer16]

The key here IMO is the fibre to the regions outside the regions that are already wired (the largest 15 cities).  There is no legacy cable infrastructure in Italy.  As far as I can tell the only 2 folks venturing outside these areas (140 cities) are a  TI/Fastweb JV, TI itself & Enel.  The only real competitor here is Enel who is laying cable to make its meters smart.  So the question is will TI make a decent return on the fiber versus the competition who is laying fiber for a different purpose and says it will run a "wholesale" telco on the side.  TI also has an advantage as it is the only incumbent who has access to these customers today with fiber.

 

As to wireless competition, Illiad is entering the market but does not have the same cost advantage it had when it entered the French market against Orange so we will see.  Remember you also have TIM, Wind & Vodafone already competing in Italy and keeping prices low.   

 

Packer

[wescobrk]

 

Sorry this is off topic but what happened to Ericopoly? He use to have his own separate category.

Hopefully he posts again, soon. I enjoyed his posts.

[Guest MarkS]

Hi Packer,

 

I noticed that at one point you liked Townsquare Media (TSQ).  The stock has moved up a little after a good quarterly report but still looks pretty cheap.    I've also notice that a decent number of institutions have added to their positions or started new positions during the last quarter.  http://www.nasdaq.com/symbol/tsq/institutional-holdings

Do you still like the company and would you start or add to a position at the current price?

 

Thanks

Mark

[Packer16]

Yes I still do like TSQ and the current price of 7.9x EBITDA & 6.1x FCF is not very demanding.

 

Packer

[Guest MarkS]

Thanks, Packer

 

Mark

[gurpaul88]

Yes I still do like TSQ and the current price of 7.9x EBITDA & 6.1x FCF is not very demanding.

 

Packer

 

Hey Packer just curious about your thesis on this one. Any thoughts on Oaktree as a major holder? TIA!

[cmakam]

Hi Packer,

 

Any thoughts on IGT ?

 

Their FCF is about 500m on mcap (now) of 3.8 B.

 

-cmakam