Long/short equity
Long/short equity
Contributor since: 2012
Thanks for an informative article! However, DIRECTV is not a small company by any measure, valued at a market cap of $30B. The risk involved with DIRECTV comes from rising content costs and their high debt level, which would be a burden if some kind of a crisis erupted. Despite these, I prefer DIRECTV's simple business model over those of the company's peers you wrote about.
Thank you very much for this, beats CNBC's Berkshire tracking articles by far!
True that, thanks for the feedback. I got carried away with all the nice charts Google Spreadsheet has to offer and decided to add that one at the last moment. I think the last picture was quite unnecessary anyway, wouldn't make that comparison if I were to resubmit.
Thanks for your thorough commentary!
Regulatory Risks: True, although these these problems could occur to any company, especially those providing discretionary products (fat tax, soda tax?)
Franchise risks: If gvt decides to just slash rates that the cable/sat providers can ask, that would have far reaching effects down to the content producers, shocking the whole industry. As internet is making TV more and more discretionary, I think the pressure for government to do something like this is lessened even though the rates keep going up. But sure, this is another real threat of some probability.
Tech risks: You're probably right, it's hard to say anything meaningful about this as a layman, I can only hope they have enough redundancy.
Political risks, Argentina etc.: Again, I think this is a problem for all companies (discretionary), Coke and McD included. DTV is a relatively piracy-safe way for local content producers to have their content aired - much of which is sports in LatAm., - and compensated for. Again, I don't think anyone wants to disrupt a whole industry through reckless politics. But yes, I know the leaders in Lat.Am are whimsical.
Competitive risks: Sure, it's competitive out there. But it is still an oligopolistic business with high barriers to entry - how would you get 30 million pay-tv subscribers by starting out now? DTV is well positioned among its peers, but sure it is competitive as it is everywhere.
Financial risks: You're right that DTV has leveraged their balance sheet a lot lately. I looked into that in my more recent article about DTV. Overall I think it's a good time to lock in historically low debt rates, but I would agree that the levels of debt are a bit high for my liking too.
Inflation risks: content costs are the number one problem as they are the biggest cost driver and they have been increasing much faster than inflation for a long time. I can only hope the content guys and distributors will finally reach common ground in rate increases and bundling practices. I think they will as they are all in the same boat, but I could be dead wrong.
Military: If/when WW3 breaks out, yes, that's a HUGE problem. I would be more scared of the risks of nuclear warfare though.
Content risks: Content producers and distributors both face the challenge of keeping pay-TV relevant. It is in both of their interest to unite against the common threat of the pay-TV pie breaking up. I can only hope there's enough cohesion and far-sightedness among all participants to fight piracy and keep up exclusivity, etc.
Overall, there is a lot to "hope" in DTV's business, but I still think it's been trading at a pretty cheap price.
The Forbes article I posted in my previous comment has a pretty detailed take on what the landscape looks like from one successful content producer's standpoint.
Here's one pretty good point from the sixth paragraph:
"If HBO were to break off and do a stand-alone service they would be giving up those subsidies and would incur huge additional costs in terms of support, billing, and infrastructure that they currently aren’t burdened with."
DTV CEO Mike White thinks the whole revenue pie that the bundled TV distribution format now produces would shrink quite dramatically if a la carte was introduced (This can be seen in the video that I linked to in the article). He also points to Japan as reference of how this could happen.
Here's an interesting article by Forbes about why HBO won't go a la carte:
Thanks. I presume you are part of the 'cord-never generation' I mentioned - people who have never paid for TV and find the idea of paying for it ridiculous. As a DTV shareholder I can only wish that some day you'll have a family, a large TV in your living room and (maybe a bit pressured) wish to bring it to life with the best content. But as I said, "you people" pose a significant problem for the whole industry :) (btw. I don't have a TV either).
I don't know about Google Fiber but I think cable is an increasingly expensive way to distribute TV content.
I also wrote a more recent article about DTV and its prospects in Lat.Am, check it out if you're interested.
I think the satellite infrastructure and spectrum rights they have are, and will be, a tremendous asset for decades to come. 4G will be big but data usage seems to grow as the number of 4G masts grow, forcing telcos to set data caps and charge for usage in order to keep the connections functioning. Satellite transmission has a solid place there as a one-way connection, in my view. From content providers perspective DTV's most important asset is the unmatched amount of households they already serve and bill all over U.S. and Lat.Am - this has less to do with technology but how effectively they serve the financial needs of the content producers.
SG&A: I would think these are mostly selling -related expenses. Luring in more customers, having the sales people and advertisements, is expensive and ever more so as you grow. Luckily they are now focusing more on retaining the higher tier subscribers and giving up on some of the most cost-conscious ones who produce mostly just higher churn overall. Margins are still good despite content costs.
About internet offerings: They have all kinds of apps for Ipad, social networking etc. They offer their tv bundled with the telcos as well as their own 4G network in some areas (notably they are bidding for 4g rights in Lat Am), we'll see how far they'll go that route. But overall, I don't think we're going to see a lot of a la carte programming online for reasons discussed in my previous article about DTV - it's a content right issue.
You're right about the problem of comparing BK to other banks - BK is a bank by name and by some properties but the leverage is a different story. I decided to do it just to illustrate the two recent financial sector picks by Berkshire side by side in terms of size and revenue mix.
Thanks for clarifying 'K' and the use of return metrics.
Thanks for the comment.
Looking at their 2009 annual report, it seems that the proportions of the pieces in their revenue pie stayed pretty much intact as the overall contraction of equity markets pulled the results down. Performance fees are not non-recurring, but of course they vary. I didn't notice anything important that was non-recurring in their financials.
the company's ROA is at a healthy level compared to other banks. ROE has been lagging, partly because of post-crisis government regulation regarding leverage. I don't know what you mean by K.
I wouldn't mind buying DVA now to hold for a long time, I think it will do well. But there are two Berkshire picks that I like even more at today's prices, as detailed in previous articles.
The third picture columns represent subscribers in millions of course.
You are right, I will be more precise with my wordings. I tend to think of investing as something similar to buying a farm (to paraphrase Buffett) - you buy with intent to hold as long as the fundamentals don't change dramatically - preferably forever. I understand there's a middle ground between day trading and investing for the very long term, so I'll be more specific.
Thanks for the comment. I don't know of any aviation companies that have track records of, say 15%+ returns on equity with moderate debt, trailing for at least a decade. Costs of capital are very high as fleets need to be acquired and maintained, while consumers are not willing to pay up much for service or brand - they just want to fly cheap. I'm not saying you can't make a good profit owning any company (including ones in aviation) for some time, but the businesses don't seem friendly for the very-long term investors.
As for Nokian Tyres as an investment, I know its very thinly traded outside of Finland. I'm from Finland and here in our stock exchange it has liquidity. The point of this article was to highlight the fact that there is a company that is turning a good profit in a sector that is usually seen as a sucker. I'm writing for anyone interested in investing for the very long term, who wants to understand the fundamentals. He/She won't mind about liquidity so much after the deal is done.
I'm not going to argue more about this but if their SEC filings show an increase of 40% from Q1 to Q2, why do you keep saying they sold shares? Here's an article and reference to the SEC filing of Q1: and here's for Q2:
They didn't. Their SEC 13-F filing shows 20,348,400 shares at the end of Q1 and at Q2 the number stands at 28,420,700, a 40% increase.
...Yes, a bit of a pun intended there in the conclusion :)
They've leveraged their balance sheet a lot lately. I don't like that much either, but there's no denying that now is a great time to do that. Just look at their debt rates: