Richard MacDonald

Growth at reasonable price
Richard MacDonald
Growth at reasonable price
Contributor since: 2011
Company: MacDonald Media Analytics
Yes, you are absolutely right. Disney wants to retain its considerable leverage in any of the companies relationships. Netflix is a pawn in this game--something to keep in mind. Did you see the terriffic interview tha tBuffet did with Charlie rose a couple of weeks ago?
Yeah, only time will tell.
We agree about the longer term nature of this investment. Also, your point about the multiple is an important one--very-- but subtle as well. What do multiples express? They express the number of dollars investors are willing to pay for one dollar of earnings. In effect a short form for discounted free cash flow. Interest rates are the first determinant because the discount rate is a crucial element. In terms of operations, as you know deteriorating sales and/or falling growth or losses are killers to DCF valuations because projections fall AND risk premiums go up. Multiples collapse along with earnings. But if a company's strategic prospects are improved from investments which generate book losses, then DCF values can be enhanced (as long as the investment is not permanent) and multiples will rise correspondingly. Amazon is a perfect example. That company has heavily increased investments in both working capital (inventory) and in new plant. These are paying off as AMZN has become the leading Cloud services company as well as the leading cyber retailer in the world. Sincere thanks for the comments.
Andrew thanks for the thoughts. At the end of the day, Disney wanted out of the Starz deal--Netflix played a bit role in that--because DIS wanted to control its product. I will not argue that NFLX management is smart about arguing why Disney II is better than Disney I, but I will tell you that without Disney, NFLX has a second rate business if any at all; with it the company has a cornerstone that it can build on. Remember that Turner Broadcasting pursued the same strategy in acquiring MGM--out of which emerged the enormously successful networks TNT and Turner Classic Movies. You may point out that Turner was undercapitalized and investors were diluted by the investment of the cable industry, but when it was sold TBS returned billions to patient investors. It seems to me that NFLX is not as good a business as TBS was but, owing to its first mover position in online streaming that it has excellent opportunities and the Disney deal will help the company achieve its potential.
Thanks Eagle. Made my morning. I am hoping that at some point SA could allow for much longer in depth company analysis. Most companies of interest to investors making longer term commitments are not single issue stories. Often, there is growth but capex, or working investment and or are high--Amazon is a very good example . Brokerage house analysts routing do this, but often their reports are not available to the individual investor or they are biased. SA is/or should be a place where independent analysts can provide in depth institutional analysis as well as short "action " notes. Again, thanks and keep the cards and letters coming!
This kind of discussion and these comments makes me want to drop "seeking alpha" altogether. It certainly does not assist the professional investor in any meaningful way.
According to a lawyer I consulted you ought everything in any case because Romney (a) won't be able or (b) doesn't want to prevent the economy from going over the fiscal cliff either. I did except a vix short ETF and a defense ETF.
I'll be in that line for number seven right behind you.
Here, here! Some how the incentives have to change from page views to some other metric--otherwise the whole SA blog will be one long AAPL article. OK so it has become that already!
Thanks for the thoughts.
HW
wanted to go back to your point. Clearly, buffering in periods of peak viewing occurs. More often than not, this reflects the ability of those encoders and decoders we talked about. From a practical point of view your observation is correct, but the system is capable when new devices reach the market of being upgraded to significantly greater capacity.
This just came across the wire.
"8:52 AM Warner Bros. (TWX), which hasn't been keen on working with Netflix (NFLX), is rolling out Flixster Collections, a portal for online video watching and sharing that can tie into users' Netflix, Amazon (AMZN), iTunes (AAPL), and Hulu accounts. Netflix's lack of U.S. social media support (due to regulatory concerns) has been seen as a weakness."
TWX clearly fears Netflix plus the other offerings but this seems to me to be a pc screen only service. Hard to see why Apple would include a portfolio on top of its Itunes/Apple TV portal. It seems to me that TWX/HBO remains boxed in. What do you guys think?
Bruce
Right, exactly, how come HBO hasn't offered? The reason they can't by pass is because the cable operator most profitable offerings are basic channels. HBO and Showtime and like services split the subscription fee with the operator. So let's make an example. Young male consumer wants to buy only Movie channels. Say he spends $50 per month on those channels without purchasing the basic service. He's happy but the Cable MSO gets $20 per month after splitting with TWX. and VIA. Typically, average revenue per sub (ARPS) is $80 per basic subscriber with programming fees of $20 for a cash flow per sub per month of $45 to $50. You see why cable operators are reluctant to give up the most profitable part of their business to create an a la carte movie offering. The question is will they be able to extract some portion of netflix income from using their pipe for the last mile.
Thanks for the question. all the best
Lightway,
Yeah my analysis misses the multiple points you bring up! I am and have a feeling will always be a cable analyst and therefore won't see the star burst of outlets that is the internet. I think the notion of Hobson's choice is a good one especially for cable operators. Their future lies in the ability to distribute the star burst of services emerging on the internet. Wireless distributors will pressure the cable operator especially as 4 G service expands but ultimately land based internet distribution has no theoretical bandwidth limitations. Fiber offers limitless capacity and the only bottlenecks are the encoding and decoding devices at the nodes. Netflix as I tried to point out fits into this future in a cost effective way. As you point out the content providers are in fact partnering to make sure that they are not shut out as well.
Be well
and thanks
Jason,
Very thoughtful comment. Programming costs and their amortization has been since the time the Greeks put on their first plays THE issue when it comes to entertainment companies. A couple of things before I get to that point however. I din't actually choose the title! Oy! My title was far more boring but points to the pricing flexibility of the service and its continued and continuing advantage over main premium packagers. I think that is the issue above all.
You bring up a point highly relevant to short sellers: the company is likely at some point to take advantage of its multiple to sell new and secondary shares. Growth requires capital and rapid growth requires substantial capital. It is possible that insiders would like to diversify their portfolios. I have not offered any thoughts on valuation in my piece because I wanted to focus competitive landscape and the significance for the cable industry and other players in that market.
Investment bankers are no doubt lining up to provide access to the capital markets. On the announcement the stock presumably will decline to reflect the dilution but it seems to me that a sufficiently sized new issue would alleviate the balance sheet stresses you rightly bring up.
again, important comment thanks.
HW, thanks also for the comment. What is fascinating about the Netflix streaming model is that, for the moment, they do not have to pay for carriage on the "last mile" of cable company bandwidth as the premium cable services do. This is a tremendous disadvantage to premium cable services. Therefore, as you rightly point out and as I tried to emphasize in my piece, Netflix will have a double cost advantage to consumers and will be able to maintain that advantage at even higher prices. There are other scale economies that I think are available to Netflix in advertising an program purchasing. A big question for the future of internet services is will Netflix and other internet based distributors of filmed content will have to pay for that carriage. That actually could play to their benefit as those payments would establish barriers to entry for future competitors.
Nesta thanks for the thought. The point of my piece is not "newness" but the potential of NFLX to mature ito a central piece of the entertainment puzzle. NFLX has upward pricing flexibility and economic stability of the service unlike any social media business. Again, thanks. Be well
Tom,
Thanks for the comment. Yes indeed. There are already articles about Fox News anchors and reporters avoiding the subject. The most egregious mumbling voice is the WSJ, which still has not figured out how to report the crisis. The same of it is that this is all self inflicted damage which the company did to itself. None of the hacking or other activity was necessary in pursuit if its objectives. Even for people who object strongly to Fox News political line, so far it appears as if that success was all out in theopen and the result of finding an audience with similar views. It was never fair and balanced but Fox Newws and other entities were open and honest.
Best
Lonely,
Viv and its predecessor CGE were/are particularly difficult companies to analyze. So yes the complement was sincere. In 1986, when I first recommended CGE, many of the same questions re ADR's and their tax consequences were also being asked. Clearly, the local versus global issues are still relevant and you have done a good job at tracking them done.
The involvement of the French state in decades past also clearly dampened the potential valuation of the shares as it turned off many foreign investors. Likewise the Messier disaster, but I also worry that the subsequent litigation, which I guess has exited the criminal phase and is entering the civil phase could continue to be an overhang.
In addition, not to mention the complexity of the company's holdings, it was/is a challenge to decide by what metric to value the company: for dividend, for sum of the parts value or earnings growth.
But Vivendi owns premier, trophy assets as you point and has always done so. In water utilities, media and wireless communications, the saying used to be that all roads lead to Vivendi (CGE's) headquarters. These business are well run and generate substantial cash and have always done.
In the French market, Vivendi shares had been core long term holdings for stability of dividend stream, like an ATT or Verizon or some such company--though as you correctly point out that went out the window in the Messier years. As the management restores traditional practices at the company and as many non consolidated businesses are brought in house, it seems to me that the kind of clarity you expect in the shareholder message will emerge, though maybe not as fast as you might think. This is a very old company, and remains, except for being hijacked briefly by rogue managers, very conservatively run and even less likely now to respond to shareholder demands that value be realized by large and rapid change in strategy or tactics. Again thanks for shedding light on an excellent company.
Pretty good analysis.
Since it has been a pretty long time since I looked at this name three questions: first, what is the conglomerate discount at current prices; second, what is your view of the management who took over after Messier and his henchmen were thrown out; and, finally, why do you think the company has reversed its pre Messier policy of holding a diversified portfolio of businesses in exchange for a wholly owned business with presumably operating responsibility? Is this an indication that the new management, is less "French" and more sensitive to the North American or global investment community in some sense?