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

[Packer16]

I know enough about telecom to be dangerous.  Small cell backhaul sounds like a promising concept.  As to STRP and its spectrum, I had valued it in the past for a client and at the time it was worth a good amount.  However, since then the prices have gone down along with demand.  At the time the plan was for Winstar to build-out or leases the licenses to have another telco build-out a fixed broadband wireless network.  I think the fixed broadband concept was overcome by events (mobile broadband networks - Clearwire).  The city spectrum is the most valuable but at the current time there is not alot of demand given the other build-outs.  There will be demand in the future but the question is will it be absorbed by the existing network spectrum or is there enough demand for a new network on a different frequencies.  Before the spin-off, IDT tried to sell what it could, primarily city network spectrum.  I would keep an eye on what these city users are doing as this may provide some clues to its potential value.  At this point, however, this spectrum is akin to buying land as a RE investment.  If you buy in the right places, it can be a multi-bagger but you have to wait for demand to develop and that can take a long time. 

 

Packer

[gg]

Packer / anyone else knowledgeable in telecom -

 

Do you have any thoughts on Cincinnati Bell (CBB)?

 

They have significant debt, but their assets include ownership of ~70% of CyrusOne (CONE) which is a data center reit they spun off in the past year or so, as well as addition their traditional telecom business.

 

[Packer16]

A full position is 6 to 7% and up to 10 - 12% on cost basis if it goes down further and value is increasing.  If they go up they will represent a larger % of portfolio.  My top five are typically around 60% and top 10 around 80%.  I have to constantly prune and plant to keep the price/value as low as possible.

 

Packer

[Packer16]

I put CBB in the legacy telco basket with a hosting firm attached.  CONE appears to be fairly if not overpriced at 13.6x EBITDA (adjusted for operating units which are not included in shares outstanding).  The other REITs are priced on yield and CONE appears to be valued this way. 

 

The telco industry reminds of radios a few years ago with most of the names having declines in revenues and cash flows that at some point turned.  I played that trend by purchasing the radios with growing CFs (Saga and Salem).  In the telco space, the analogies today are HCOM, GNCMA and ALSK. 

 

Packer

[Aberhound]

The new hydro lines have about 1/5th the line loss compared to the current standard so I expect the Utility industry will restructure. Which utility in the US is in sunny parts of the US and has a wide east-west footprint (more time zones) plus good management willing to test and use improved technology?

 

I also believe it is more efficient to use the new lines to compete with the alternative of exporting LNG to avoid wasting capital and so less carbon is used. (If line loss is 1/5th you can use capital to build useful power lines and super efficient LNG generating stations instead of NG pipelines and compressor stations and a fleet of LNG ships and terminals plus the same NG generating stations in Asia. More  power lines across more time zones let you close at least 1/3rd of power generating infrastructure). Which utility would be best to champion a better approach? is Transalta (in alliance with Midwestern) a candidate?

 

if utilities are allowed to merge cross-state like the banking industry which utilities are likely to be the mega-utilities similar to the current mega banks?

 

I want to buy utilities when they are doing stupid things which makes them cheap but I need your help identifying which ones have the brains and guts to preserve and grow my capital.

[plato1976]

Hi, Packer:

 

May I ask when you sell or rebalance your portfolio, do you consider the tax effect (at all) ?

In the US, anything in a taxable account subject to short term capital gain has high marginal tax rate (for me). Not sure how to take this into consideration. Even a long term capital gain has significant switching cost (you literally pay 25%+ tax for long term gain in CA: state+fed), and when you switch basically you lose the compounding power of the part you paid for tax.

 

To me it seems so difficult to achieve a high return in the U.S. (after tax)

 

/Plato1976

 

Investing Time - stocks 12 years (last 10 more seriously), mutual funds 25 years. 

 

Education - BSEE (Union College), MBA (UCLA), CFA

 

Best Year - 2009 (+108.9%) helped take sting out of 51.4% decline in 2008 (worst year)

 

LT record - 10 yrs (27.1% annualized); 12 yrs (21.2% annualized) (Note: 10-yr record coincides with 2002 bottom)

 

Easiness - focusing on circle of competence is easier and expanding it leads to more opportunities however the stress of not knowing if you are right or wrong is still the same as when I began.  I have tried to stop mistakes from turning into disasters by doing more credit analysis.

 

100% invested - yes I have and it has led to volatility. 

 

Hedge - I have thought about this but at this point in time the equities I own provide the cheapest set of cash flows out there.  If I were to hedge I would by more FFH.  Puts are cheap but my concern is if the Fed can cause asset inflation the puts will do no good and good cash flowing firms will perform the best.

 

Packer

[Packer16]

These are pre-tax numbers primarily from IRA accounts.  I have a small non-IRA that I use a small amount of leverage to offset capital gains. 

 

Packer

[muscleman]

Hi Packer,

    Of all these teleco companies that we discussed, PT, Oi, GNCMA, ALSK, TI-A, which one do you feel has the best upside and least downside?

    I am learning the teleco industry, but I sometimes get confused about those vs the cable companies and the internet companies. I think some teleco provides internet and cable service as well. How do you value these business? I see you use EV/EBITDA a lot, but I can't wrap my head around that vs price/FCF, because I don't know how to calculate FCF, because I don't know what is the proper level of capex, and when will the technology get out-dated and they have to build a new fancier network with a ton of money. Can you please share a bit of your insights?

 

 

Thank you!

MM

[Packer16]

For cable cos, I use a higher fair valuation at 8x EBITDA versus 6.5 to 7.0x for telcos.  They also have higher revenue and EBITDA growth than the telcos.  As to the most favorable pricing in order would be GNCMA, TI-A, ALSK.  PT and Oi are pretty close to fair value versus the others.  Oi also has a large amount of dilution risk.

 

Packer

[gary17]

Thanks Packer for sharing your experiences / thoughts on this thread.

 

I'm wondering if you could share your view on why cable should deserve more than telcos....  is it based on what's out there in the industry or your experience.

 

I would've thought cable is din decline because of then Internet...

 

Thanks

[Packer16]

Cable cos have more customer stickiness than POTS lines as can be seen by the revenue and EBITDA growth for cable cos in excess of the pure telecom cos.  Although basic cable subs are in decline the triple/quad play bundles cable cos provide an economic alternative for connectivity.  As a result cable cos trade at a premium to telecom cos.

 

Packer

[ERICOPOLY]

Does Packer want to manage OPP? (other people's pennies... what were you thinking I meant!!).

[phil_Buffett]

thank you packer for the Chance to ask you something. great answers and great help.

 

so under your assumption with 8x ebitda for example GNCMA has a fair value of around 2b.$?

 

that would be a 5x bagger  8) :)

 

 

[Packer16]

It has some great upside but it also has about $1b in debt so at 8x EBITDA I get closer to 3.6x the current price.  With all the consolidation amongst Time Warner Cable, Charter and Comcast maybe someone will start to notice the Alaskan cable/telco companies.  If not, they can quietly compound cash flows as we wait.

 

Packer

[phil_Buffett]

It has some great upside but it also has about $1b in debt so at 8x EBITDA I get closer to 3.6x the current price.  With all the consolidation amongst Time Warner Cable, Charter and Comcast maybe someone will start to notice the Alaskan cable/telco companies.  If not, they can quietly compound cash flows as we wait.

 

Packer

 

packer thank you very much for your quick Response. well 3x times sounds also very very nice. i like GNCMA very much and also have Shares in ALSK but more in GNCMA. I appreciate your great work packer all the time  :) :) :)

[tombgrt]

Exactly Packer. I think AWN is going to surprise as well, they got a very sweet deal.

 

Phase 3 construction, which will extend the network and cost review by the end of 2014 is well underway. Share repurchase program. During the quarter, we acquired an additional $242 of our Class A common stock at an average cost of $8.90.

 

We also retired an additional 19,000 shares at an average price of $9.9 per share that were withheld from end of the year employees to satisfy income tax withholding requirements. This brings our total year-to-date purchases to 1.8 million shares for approximately 15.4 million.

 

Depending on the company's performance, market conditions, liquidity position and subject to continued board oversight, we will likely continue to optimistically acquire shares in the open market.

 

Denali Media acquisition. Late last week, we announced that we closed the asset purchase agreements to acquire for $7.6 million, rebroadcast T.V. stations one of which is located in Anchorage and two of which are located in Southeast Alaska. Our plan is to provide a new statewide platform for news and information as well as the means to provide unique content and additional value to our video subscribers.

 

I'm wondering what other acquisitions we can expect in the future. Packer, what is your take on this? Do you think it boosts their "moat"? Let's hope they buy back a ton of shares in the next few years as well!

 

[Packer16]

These guys have been very disciplined over the years to stay focused on Alaska telecom/media market.  I would be surprised if they made another sizable acquisition outside of this space.  They are following the Malone playbook of re-purchasing shares with excess cash flow when re-investment opportunities are not there.  I think they will have free cash in abundance going forward.  As to moat, many of the acquisitions are making the moat wider by becoming the premier Alaskan content provider and distributor.  These guys are becoming like a Comcast for Alaska.

 

Packer

[gary17]

Packer - I am wondering if you could share your thoughts on LEAPS - noticed you had a comment about it in the other thread.  Under what circumstance would you say buying LEAPS is more favorable than commons?

 

thanks!

 

  What I take from this is making investment decisions on macro factors is like buying LEAPs, it is deceptively easy but about impossible to beat the index let alone some of your compounders or other's value oriented picks.

[Packer16]

In most cases never unless you have a panic event.  I have lost more money on LEAP purchases of undervalued stocks than other types of investments.  My largest win was when FFH had the short attack in mid-2000s.  But in that case you had a short attack and a panic decline that would correct itself if event played out as expected.  In most cases you have an undervalued security without a timeframe for it to return to IV.  Initially, LEAPs look like a nice alternative but in my experience  the timeframe to revaluation is a tough thing to estimate.

 

I really like the TARP warrants because they give you a much better chance of the value returning to IV due to the 5 to 7 year duration versus the typically less than 2 year period for LEAPS.  The only other option strategy I think you have done is selling calls to get a lower entry price.

 

Packer

[jay21]

Cable cos have more customer stickiness than POTS lines as can be seen by the revenue and EBITDA growth for cable cos in excess of the pure telecom cos.  Although basic cable subs are in decline the triple/quad play bundles cable cos provide an economic alternative for connectivity.  As a result cable cos trade at a premium to telecom cos.

 

Packer

 

Thanks for your contributions Packer.

 

Any good primers on cable cos out there or must reads?  I'm starting to dig into Liberty Global, any thoughts there?

[Packer16]

You can read 10-Ks of major players (Comcast, Cablevision, Time Warner and Charter) and look at investor presentations.  There is no tutorial I am aware of.  Liberty Global will probably provide a good flavor because it has both delivery and some content assets.  I haven't been following Liberty as I have found cheaper smaller players (like General Communications).

 

Packer

[augustabound]

Judging by the description below your avatar, you're a part of Rider Nation for tomorrow's game?  ;D

 

 

[Packer16]

Yes I am.  I will be listening because our TV provider does not have the stations covering it down here.  I wish a major broadcaster would at least carry the Grey Cup.  Are you a part of Rider nation?  I also could not find a downloadable Rider icon like I could do for the Packers.  Should be a good and cold game this year.  The Super Bowl will also be cold this year being in the Meadowlands.

 

Packer

[racemize]

I have a general question about EBIT and EBITDA multiples--how does one think about them?

 

For example, I presume that EBIT/EV should be comparable to pre-tax P/E, yes?  e.g., if you are willing to pay 10x pre-tax earnings with no debt, then you are also willing to pay 10x EBIT/EV?

 

Using EBITDA seems troublesome to me, e.g., what if they are extremely capital expensive?  I guess you can only use it for comparing companies within the same industry?  Would it make sense to create an owner earnings version, e.g., EBITDA - maintenance cap-ex / EV?

 

Generally, what is the advantage for EBIT/EBITDA use over say FCF or owner earnings?  What are common multiples for these metrics (e.g., as compared to P/E where < 10 is cheap, 13-15 is often "fair", >20 needs growth, etc.)

 

Not sure if I should post this elsewhere, but it seems like you use these multiples often, and I've never gotten a good handle on them.

 

Thanks!

[Packer16]

In theory EV/EBITDA becomes useful in cases where there are large amounts of investment that will be used over long periods of time and maintenance cap ex is much smaller than the initial investment.  Commercial real estate, cable and telecom are examples.  You can calculated the EBITDA - maintenance cap ex which is defined by some to be FCF.  I typically calculate the EBITDA and enterprise FCF (FCF plus interest expense) multiples for use with EV. 

 

The advantage over FCF is sometimes these firms are investing for future growth and current FCF is low.  General Communications is an example.  FCF is low due to investment and maintenance cap ex is small compared to initial outlay.  So to compare the value of General to other firms EBITDA is an appropriate metric.  If you want a standalone valuation, you can do a DCF where in the terminal value the future is all cap-ex is maintenance.  However, you don't need to that to see that it is cheap, you can just compare to other cable cos and use the market multiple to imply a reasonable price.  The other issue with the DCF is the large number of assumptions and the supportability of these assumptions and the amount of time to do all this versus the result.

 

The multiples used to determine cheapness is based upon the comps.  You can look cross sectionally at the current and historically and the current take out multiples of acquisitions.  So for cable cos the current multiples are in the 7 to 8 range with take-out multiples in the 8 to 10 range.

 

Packer

 

Packer