Ted Weschler is the managing partner of Peninsula Capital Advisors LLC, which he founded in 1999. Since 2009, he has also served as director of WSFS Financial Corporation and his position as such expires in 2013, at the Annual Shareholders Meeting. Before funding Peninsula, Weschler was the founding partner of a private equity firm called Quad-C. Even prior to that, he worked for W.R. Grace & Co. where he served in many positions such as Assistant to Assistant to J. Peter Grace and Assistant to the Vice Chairman. His capacity to work for many companies and in so many positions has been developed after he earned a BS in Economics from The Wharton School of the University of Pennsylvania.
Turning back to Peninsula, it is worth mentioning that the firm manages a pool of capital that, on behalf of its clients, makes important investments in publicly traded companies that are correctly managed. Mr. Weschler has joined Berkshire Hathaway Inc (BRK.B) to help Mr. Buffet to control the company´s $110 billion in stocks, bonds and other investments.
This important piece of news makes Mr. Weschler stand as a candidate, together with Todd Combs, to take over Mr. Buffett´s portfolio, a portfolio the latter has run for over 45 years. Mr. Weschler, much as Mr. Buffett did, focuses on a small set of companies. He holds stocks for years at a time. And like Mr. Buffett, he has experience snapping up whole, privately held companies.
From an individual investor´s perspective, I find truly interesting to focus on stocks that are large holdings in Ted Weschler's portfolio. I analyzed them and found the reasons why Mr. Weschler could have invested in them. I look for companies that I can understand, with favorable long-term prospects that are operated by competent people and most importantly, are available at attractive prices. You can also analyze Peninsula Capital Advisors portfolio in Whalewisdom.com, which directly crawls SEC fillings and places them orderly into the website.
DirecTV provides satellite delivered digital television, video and broadband. It also provides communication services and a range of entertainment, information services for home and business use. The two segments through which it operates are: DIRECTV U.S (80.3% of the total revenue in 2011) and DIRECTV Latin America (nearly 19.7% of the total revenue in 2011).
DirecTV has two main positives. First, DirecTV has reported a strong Q4 in 2011 with 125,000 new subscribers in the US and more than 590,000 in Latin America. ARPU in the U.S. was $101.38 compared with $96.64 in the prior-year quarter. Furthermore, DirecTV is making great efforts to generate net subscriber addition while its competitors like Comcast, Time Warner Cable and Cablevisión systems are losing basic video customers. This great performance can be attributed to its NFL Sunday Ticket promotion popularity. Most importantly, customer screening, target marketing, innovative product developments, avoiding disputes with content manufacturers and media companies also resulted in such improved performance.
Second, there is an increasing demand for HD DVR services that enable the company to focus on new product development. The Whole-Home DVR grew from 40% to 45% in the quarter. The company also expects to launch Home Media Center, a new product, with which customers will be able to record five shows at one time. This new device has a double storage capacity. Nomad device is also gaining acceptance among consumers. It provides flexibility to watch programs. Of course all these product lines will bring higher revenue. Finally, the company is planning to launch two more satellites in 2014 and 2015 which will improve service quality. Such product innovation and development will reduce churn rate further as well as help the company to combat competition.
DIRECTV current net profit margin is 9.58% currently higher than its 2010 margin of 9.12%. I like companies that increased profit margins in comparison to prior years. It is essential to know the reason why that happened. In terms of income and revenue growth, DIRECTV has a 3 year average revenue growth of 11.40% and a 3 year net income average growth of 19.71%. Its current revenue year over year growth is 12.96%, higher than its 2010 revenue growth of 11.76%. The fact that revenue increased from last year shows me that the business is performing well. I look for companies that increase both profits and revenues.
In terms of valuation ratios, DIRECTV is trading at a Price/Sales of 1.3x and a Price/Cash flow of 6.9x, in comparison to its industry averages of 1.3x Sales and 5.2x cash flow. It is essential to analyze the current valuation of DIRECTV and check how is trading in relation to its peer group.
DIRECTV is currently trading at 10.7x the fiscal 2012 earnings estimate. This involves an important discount to both the industry average and the S&P 500 average. With respect to the fiscal 2013 earnings estimate, the stock is trading at 8.7x, at a discount to both the industry average and the S&P 500.
DIRECTV has a very good prospect given its penetration in developing markets in Latin America and the permanent improvements in the US segment. Furthermore, it provides service quality. Management permanently focuses on reaching high-end customers. However, macro-economic fluctuations, huge programming costs and growing competitive threat may restrict the company´s upside potential.
DirecTV generates solid free cash flow, though it has spent this and more buying back shares recently. The debt load currently sits at $12.2 billion, net of cash, up from $9 billion at the end of 2010.
DaVita Inc. (DVA):
DaVita provides dialysis services in the U.S. to patients suffering from chronic kidney failure. The company provides such services in kidney dialysis centers but also provides related medical services in those centers and in contracted hospitals in the US. The dialysis and related lab services business segments, which accounts for 93% of revenue, provides inpatient and outpatient services, routine laboratory testing for ESRD patients and management services to outpatient dialysis centers. The company's other ancillary services and strategic initiatives (7%) segment involves international dialysis services, pharmacy services, infusion therapy services, disease management services, vascular access services, ESRD clinical research programs and physician services.
I think Mr. Weschler felt attracted to DVA because it has been generating strong cash flow; it has been collecting robust cash and has made time payments of working capital expenditures. Indeed operating cash flows increased at a 3-year CAGR (2008 2011) of 24%.
For the future, management expects a similar growth, given the operating cash flow guidance of $0.95 - $1.05 billion. These results enable the company to meet capital expenditure needs, repurchase shares and carry out acquisitions. In terms of repurchases, DaVita repurchased shares worth $323.4 million in the first half of 2011, but did not buy again in the second half of that year to set aside cash for acquisitions given possible market volatility. As of December 2011, the company had $358 million for repurchases. There is no doubt DVA has flexibility. I like the fact that the Company is making every effort to develop in international markets and increase its existing holdings. For instance, it has opened a center in Singapore and it is about to enter an agreement to operate various clinics in Malaysia. Furthermore, DaVita acquired a German company, ExtraCorp that owns two dialysis centers and manages other two. In January 2012, the company increased its stake in NephroLife, an Indian kidney care company. The purpose was to enter the Indian economy as it provides a wide range of investment opportunities in the health care sector. DaVita would also like to expand its presence in Europe. That is why it is trying to acquire or to set up partnerships in the continent as well as in Asian countries.
DVA´s current net profit margin is 6.85%, currently higher than its 2010 margin of 6.29%. I like companies that increased profit margins in comparison to other years. It is essential to know the reason why that happened. Current return on equity for DVA is 23.21%, higher than the +20% standard I look for in companies I invest and also higher than the 2010 average ROE of 19.72%. In terms of income and revenue growth, DVA has a 3 year average revenue growth of 7.25% and a 3 year net income average revenue growth of 8.51%. Its current revenue year over year growth is 8.45%, higher than its 2010 revenue growth of 5.39%. The fact that revenue increased from last year shows me that the business is performing well. The current Net income year over year growth is 17.83%, higher than its 2010 net income y/y growth of -4.02%. I like when net income growth is higher than in the past.
In terms of valuation ratios, DVA is trading at a Price/Book of 3.8x, a Price/Sales of 1.2x and a Price/Cash flow of 7.1x in comparison to its industry average of 3.2x Book, 0.6x Sales and 5.7x cash flow. It is essential to analyze DaVita Inc. current valuation and check how it is trading in relation to its peer group.
It is very important to analyze the company´s valuation. DaVita´s shares are trading at 13.8x, the 2012 earnings estimate. This involves an 11% premium on the industry average of 12.4x. On a price-to-book-basis, shares trade at 3.8x, again at a 65% premium vis-à-vis the industry average of 2.3x. Finally, the price-to-book-basis valuation is interesting as the trailing 12-month ROE is 22.4%, by far exceeding the industry average of 15.6%.
Financially speaking, DVA acquisitions have increased leverage as the debt load amounted to $4.5 billion in the last year, in comparison to the $575 million of cash and investments. The firm has been able to offset this leverage increase with the generation of strong cash flow.
Liberty Media Corporation (LMCA):
Liberty Media Corporation is a Colorado based company that owns interest in many businesses within media, communications and entertainment segments. The company produces and distributes theatrical films, home video, is engaged in television production and distribution and theatrical and nontheatrical animation businesses. Its subsidiaries include Starz LLC., Atlanta National League Baseball Club Inc., and TruePosition Inc. The company also holds interest in SIRIUS XM Radio Inc. (SIRI), Live Nation, and Barnes & Noble Inc. (BKS) and a minority interest in Time Warner Inc. (TWX) and Viacom Inc. (VIA).
From my personal research, LMCA could be a solid pick because the company has abandoned its idea of buying a controlling stake in Barnes & Noble Inc. This change of plan for an investment in preferred stock in that same company has been extremely wise. The company invested $204 million thus holding 12 million of shares. The purchase of Barnes & Noble Inc. shares will provide annual dividends of 7.75% per year. Barnes & Noble is the largest bookseller in the world. It operates hundreds of general and college bookstores in the U.S. Furthermore, it has developed a digital business which grew 60% in the last period. Given the decline in the sale of printed books, the company has developed an e-book reader called Nook. It holds 25% of the e-book market as it is currently positioned as the second best e-book after Kindle, of Amazon.com. The investment in Barnes & Noble, rather than purchasing it will encourage the company in cash savings, especially given the current volatile environment and it will strengthen the company´s top line backed by strong dividends and finally, it will provide the company two seats in Barnes & Noble Board of Directors. Holding preferred stocks give LMCA a 16.6% controlling stake. Last but not least, the advance in the e-book market will allow the company to increase its share.
Current return on equity for LMCA is 40.20%, higher than the +20% standard I look for in the companies I invest and higher than the 2010 average ROE of 10.60%. In terms of income and revenue growth, LMCA has a 3 year average revenue growth of -24.13% and a 3 year net income average growth of -21.32%. Its current revenue year over year growth is 9.09%, higher than its 2010 revenue growth of 5.70%. The fact that revenue increased from last year shows me that the business is performing well.
In terms of valuation ratios, LMCA is trading at a Price/Book of 2.5x and a Price/Sales of 7.4x in comparison to its industry average of 1.9x Book and 1.6x Sales. It is essential to analyze Liberty Media Corporation current valuation and check how it is trading in relation to its peer group.
One point Weschler found in the valuation is that Liberty Media is currently trading at 45.8x the 2010 earnings estimate. This figure really exceeds both the industry average and S&P 500 average. In terms of fiscal 2013 earnings estimate, the stock is trading at 35.2x, again exceeding the industry and S&P 500 averages. Not cheap valuation numbers in LMCA.
Valassis Communications Inc. (VCI):
Valassis Communications is a company that provides marketing services to consumers, manufacturers, retailers, technology companies and other consumers across the United States, Europe, Mexico and Canada. The company operates across many industries. It is the only company providing a combination of home-delivered media products and services at market, neighborhood and household levels. As a leader in invited media, Valassis is poised to take advantage of a number of positive macro trends.
VCI is engaged in a cost cutting initiative. In the fourth quarter of 2011, it has been able to cut selling, general and administrative costs by 6.8% from $95.8 million to $89.3 million. Taking into account the whole fiscal year 2011, SG&A costs declined from $371.3 million to $329.1 million (an 11.4% decrease). As regards capital expenditures, in the fourth quarter of 2011 they amounted to $3.6 million while in the whole year they totaled $21.7 million. During 2011, the company has been able to repurchase shares, 8.9 million thereof, which involved $215.1 million. These common shares were bought at an average price of $24.25 per share.VCI also reported fourth quarter adjusted EBITDA of $91.3 million, which was driven by the great performance of VCI´s shared mail and NCH business. For 2012, the company expects that these two segments will continue providing good results.
VCI current net profit margin is 5.07% currently lower than its 2010 margin of 16.52% I do not like companies that have lowered their profits margins. That could be a reason to analyze why that happened. The current return on equity for VCI is 23.19%, higher than the +20% standard I look for in the Companies I invest but lower than the 2007-2012 average ROE of 30%. In terms of income and revenue growth, VCI has a 3 year average revenue growth of -2.09%.Its current revenue year over year growth is -4.18%, lower than its 2010 revenue growth of 3.98%. I do not like when the current revenue growth is lower than in the past. It generally shows that the business is decelerating for some reason. The current net income year over year growth is -70.57%, lower than its 2010 net income y/y growth of 477.23%. I do not like when current net income growth is lower than in the past year. I look for companies that increase both profits and revenues.
In terms of valuation ratios, VCI is trading at a Price/Book of 2.2x, a Price/Sales of 0.5x and a Price/Cash flow of 5.7x in comparison to its industry average of 2.8x Book, 1.2x Sales and 8.5x cash flow. It is essential to analyze Valassis Communications Inc. current valuation and check how it is trading in relation to its peer group.
Cincinnati Bell Inc. (CBB):
Cincinnati Bell provides data and voice services on wireline and wireless networks. It is also a full-service provider of data center collocation and related managed services, and a reseller of information technology and telephony equipment. The company is a regional service provider that operates in Greater Cincinnati and Dayton areas. Its services are targeted at individual consumers and business. CBB is made up of four segments: Wireline (52%), Wireless (21%), Data Center Collocation (9%), and IT Services and Hardware (18%).
CBB generates strong revenue and EBITDA growth. As regards EBITDA, the firm has posted the strongest EBITDA growth in the last nine years and revenue growth is the highest on a quarterly basis in the last eight years. Management considers that this situation will continue in the years to come thanks to the strong growth in the Data Center Collocation and IT Services and Hardware business. Furthermore, the company has recently acquired CyrusOne, which will bring important growth.
Another fact I like in CBB is the growth of its own datacenter business. This increase will certainly offset the declining sales in other segments. Furthermore, the data center will surely experience an important growth due to the internet technologies and the increasing demand of outsourced solutions. Finally, the company is making every effort to continue expanding and become one of the largest data center operators in the U.S. For such purpose, it has built 17 data centers in Ohio, Kentucky, Indiana, Illinois, Texas and England. The expansion of data centers in Phoenix and Singapore is underway.
CBB´s current net profit margin is 0.56%, currently lower than its 2010 margin of 1.30%. I do not like companies that have lower profit margins than in the past. That could be a reason to analyze why that happened. In terms of income and revenue growth, CBB has a 3 year average revenue growth of 1.39% and a 3 year net income average growth of -43.40%. Its current revenue year over year growth is 6.20%, higher than its 2010 revenue growth of 3.07%. The fact that revenue increased from last year shows me that the business is performing well. The current net income year over year growth is -34.28%, higher than its 2010 net income y/y growth of -68.42%. I like when the net income growth is higher than in the past.
In terms of valuation ratios, CBB is trading at a Price/Book of -0.9x, a Price/Sales of 0.6x and a Price/Cash flow of 2.8x in comparison to its industry average of 1.6x Book, 1.1x Sales and 4.2x cash flow. It is essential to analyze Cincinnati Bell Inc. current valuation and check how it is trading in relation to its peer group.
It is a must to analyze current valuation of CBB in relation to its peers. CBB´s 12-month earnings multiple has been 12.6x, lower than the peer´s group average of 17.4x and the S&P500 average of 17.1x.
Shares have been trading in the range of 3.5x and 17.7x trailing 12-month earnings. As regards the peers' group average and the S&P 500 average, CBB shares are trading at a discount.
Fortunately, CBB has good prospects for the long-term given its 3G and 4G wireless services. Management also thinks that the business will continue growing but the debt load has been increasing lately. This may affect expansion. Finally, intense competition and persistent wireline erosion could also put pressure on the stock.
Financially speaking, Cincinnati Bell has a debt position of $2.5 billion after reaching $74 million in cash equivalents. This involves a slight increase in comparison to 2010. The firm is in decent financial shape, since it has no near-term maturities over the next few years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.