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  • Rangeley Capital Annual Dinner [View instapost]
    John Galt wants the presentation... you know where to find him!
    Jun 12 07:33 PM | 2 Likes Like |Link to Comment
  • ADT: Time To Eat Your Shorts [View article]
    For what it's worth, the net neutrality argument is probably the most interesting bear argument (and not coincidentally, the least discussed). There is a risk factor in their K along these lines - "Certain providers of Internet access may block our services or charge their customers more for using our services, or government regulations relating to the Internet could change, which could adversely affect our revenue and growth." Considering that the average household's bandwidth usage due to security video would be far, far less from than that from YouTube and Netflix and, shall we say, "other" types of Internet video, I have a hard time seeing ADT as a primary target of fast-lane type activity... regulatory response to that sort of move by telcos would be interesting (could potentially be seen as anticompetitive).

    As for de novo customers, you do have a point but if you leaf through a few IR decks, I'm pretty sure there's a slide somewhere that breaks down SAC pretty nicely. A lot of it is the actual hardware and installation (labor), which presumably wouldn't go away - it would actually be higher than average for home automation, which requires more components and more subsidization (hence ADT's increasing SAC recently). At the price points I've seen out of everyone in the business, there's pretty heavy subsidization of the hardware going on. Finally, it's not just on the SAC side - despite claims that the telcos have lower break-even economics because of bundling/attrition, they also will have higher CTS because they don't have the economies of scale and deep experience that ADT does.

    All that said, thank you for the constructive and civil comments.
    May 16 06:41 PM | Likes Like |Link to Comment
  • ADT: Time To Eat Your Shorts [View article]
    E - I obviously think the cash returns would be great (that's why I own the stock!) I'm not saying that returns would be unattractive; I'm just saying that ADT is a big bite to chew. There are just fewer acquirers that could pull that off vs. an deal of a lower size... which makes it less likely anyone will buy ADT. Not to worry though, public market investors will catch on eventually.
    May 16 05:57 PM | Likes Like |Link to Comment
  • ADT: Time To Eat Your Shorts [View article]
    Mike, thanks for sharing your thoughts. feel free to borrow my shares... just make sure to buy them back at $40, okay? :)

    Couple comments. First off, I think you're ignoring creation multiples in your discussion of gaining customers - it's not cheap to build a customer base, which is why so many transactions happen (net of synergies, acquisition multiples are probably in the same ballpark as organic creation multiples). Second, if it's so easy for these companies to destroy ADT, then why hasn't it happened yet? Only 20 bps of ADT's attrition is to cable/telcos, and they've been at it for a couple years now. Like I said, AT&T launched their first offering in '06. ADT somehow still exists and (despite the market's perception) has posted pretty good financials. I definitely think cable companies will have an impact, but it'll most likely be at the expense of mom-and-pops, not ADT.
    May 16 03:22 PM | Likes Like |Link to Comment
  • ADT: Time To Eat Your Shorts [View article]
    E: ADT would be a pretty big buyout, whether for a PE shop or a cable co. Assuming they paid ~7x EBITDA, we're looking at what, $12B or so minimum? Current EV is somewhere in the $10-$10.5 range, yeah? That sort of deal would be up there. That's not a small buyout for PE. Don't remember stats off the top of my head but I want to say you're getting into the low double-digits all time for deals of that size. As for a cable co, a lot of the companies (VZ, T, TWC) are already involved in major transactions... not sure they have either the capital flexibility or management bandwidth for integration.

    I guess it's not out of the question but I didn't really consider it as a particularly likely outcome. Not a factor in my analysis; it was just interesting to me to look at the transaction multiples as an example of what smart money is willing to pay for ADT's little cousins. I'm willing to be proven wrong, and I suppose you could generate good IRRs if you levered it to 5-6x, but you'd have to be REALLY committed to the idea of getting into the home security biz to shell out that sort of capital.
    May 16 03:12 PM | Likes Like |Link to Comment
  • ADT: Time To Eat Your Shorts [View article]
    I addressed this in Section 2.h. Ctrl+F for "Steady-State Free Cash Flow and the Futility Of Earnings"
    May 16 11:07 AM | 1 Like Like |Link to Comment
  • ADT: Time To Eat Your Shorts [View article]
    LenR4, that was not a mistake. Several thoughts:

    First of all, "cost of equity capital" is a meaningless, artificial construct for a firm that's not issuing shares (which ADT isn't - they're buying back). If they were issuing shares, they'd have to determine whether or not the transaction would be accretive (and not necessarily in an earnings sense).

    Second, the way most people measure cost of equity capital isn't actually "hard to do" but the accepted methodology [i.e. CAPM: Re = Rf + B(Rm-Rf)] yields a nonsensical result. Volatility or the expected return on the market is not a relevant input for corporate managers (or smart investors). There are plenty of different approaches to discount rates, none of which are particularly scientific. In this case, I didn't do a discounted cash flow analysis (as it was not necessary) but typically I'll start with a rate of 10%, which represents the fair value at which the stock would return 10%/yr (my expected baseline rate of return for any investment). I will add to that rate if the situation is more risky than expected (this is a lazy but quick way to account for higher-than-average risk, i.e. using 15% for a company with significant execution issues). I would then look for stocks trading at a substantial discount to that fair value, commonly known as "margin of safety". This of course presumes that going-concern cash flow is the only way for a company to create wealth, which is often not true - resource conversion activities and super-attractive access to capital markets can be very lucrative as well. (Modern Security Analysis by Marty Whitman is a good intro to this line of thinking.)

    Buffett shared some thoughts along similar lines regarding cost of capital at the recent Berkshire Hathaway meeting. Essentially, he doesn't buy into it. Every successful value investor that I know of agrees.
    May 16 10:21 AM | 3 Likes Like |Link to Comment
  • Intel's 14nm Delay More Complex Than Process Technology [View article]
    "40M low margin Atom processors targeting the server space"

    Do you mean tablet space?
    Feb 12 09:46 PM | 2 Likes Like |Link to Comment
  • 4 PM Journal [View instapost]
    "we have suffered from a troublesome amount of leakage with our in house berry pickers"

    Best line ever.

    (although I feel like I say that about 99% of things you write.)
    Jan 21 04:28 PM | 2 Likes Like |Link to Comment
  • Shorts Forum [View instapost]

    1) thoughts on the following? While I haven't reviewed in-depth, my "gut feel" is the thesis is solid. However, I've been informed that borrow costs are steep.

    2) Between this picture (rather than, say, a pair of random cargo shorts or gym shorts) and your fondness for the T-Mobile girl, one might start to get the wrong impression about you. ;)
    Jan 16 12:53 PM | 2 Likes Like |Link to Comment
  • Mama Zuma's Revenge, Caveat Emptor, And Natural Consequences [View instapost]
    +1,000,000 (because +1 isn't enough). seriously awesome/hilarious/sad.
    Dec 20 05:01 PM | 1 Like Like |Link to Comment
  • Profiting From Pavlov's Puppies [View instapost]

    Sorry, I got distracted by the picture... GCVRZ is good too.
    Dec 20 12:01 PM | 1 Like Like |Link to Comment
  • Best Ideas For 2014: Short IPO (And/Or Its Components) [View article]
    I think the best indicator that IPO/early-stage co valuations (especially in social media) are insane is that Snapchat was offered $3B for a no-revenue, negative-profit fad product... and they turned it down.

    Smirky 20somethings indeed.
    Dec 13 10:35 AM | 2 Likes Like |Link to Comment
  • Do Euphemisms Help? [View instapost]
    What's wrong with boy, girl, and man? Didn't realize they had any negative connotations.
    Dec 10 03:37 PM | 1 Like Like |Link to Comment
  • The Elf Must Die [View instapost]
    this is !@#$ing hilarious. I hate Elfie too. My kids will never have Elfie. A miniature Warren Buffett action figure perhaps, but not Elfie.
    Dec 9 04:45 PM | 1 Like Like |Link to Comment