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The Unintelligible Investor

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  • Canadian Imperial: The Best Of The Big Banks [View article]
    I also question the statement that Canada "has a more stable operating environment." This may be true from a historical perspective, however, the go forward is a very different picture. Present household debt levels in Canada are WELL above those in the US in 2007/2008, energy prices appear to have stabilized at prices not conducive to outsized growth in the oil segment, other resource plays are depressed, and the country's once strong manufacturing base has been decimated by a high USD/CAD (though this trend is reversing). I think Canada's best years are behind it.
    Jan 17, 2014. 02:06 PM | Likes Like |Link to Comment
  • Cherry Hill Mortgage Investment Corp.: A Favorable Bet On Rising Interest Rates [View article]
    Instead of simply using comparables, if we were to model the cash flows of the MSRs, we would need some predictive model for prepayments as they relate to interest rates and also default rates as they relate to both credit quality and ALSO interest rates. All else equal, at some point, higher rates should lead to greater defaults.

    Is any of this kind of information readily available, either through CHMI or some other source?
    Jan 6, 2014. 09:34 AM | Likes Like |Link to Comment
  • Cherry Hill Mortgage Investment Corp.: A Favorable Bet On Rising Interest Rates [View article]
    this is my major question mark on this investment ... even if the assets it just purchased ARE quality ... there's nothing to stop Middleman from using it as a dumping ground in the future.

    Couple questions:

    1) What is the BoD composition like? Any independent directors or directors unrelated to Freedom?

    2) You described what "recourse" CHMI has wrt prepayments (they get to service the new loan, if in fact there is one) ... but does CHMI have any recourse for defaults?
    Jan 6, 2014. 09:32 AM | Likes Like |Link to Comment
  • Peregrine Semiconductor Warrants A Serious Look [View article]
    Do they need that cash to operate the business? If so, then you can't simply subtract it from the share price.
    Jan 6, 2014. 09:08 AM | 1 Like Like |Link to Comment
  • MTY Food Group Inc. - A Restaurant Stock For The Wallet [View article]

    Great article on a great company. I wrote a piece on MTY a couple years ago, back when it was trading at ~$10. Check it out here:

    I love the depth of brands, I love the smart acquisitions, I love the branding (and re-branding, in some cases) of their various banners, and I even love the food.

    BUT my big concern is your valuation and the use of a 20x multiple on F2016 earnings. MTY is running out of businesses to buy in Canada. At 2,500 locations, they are already the 3rd largest restaurant operator in the country, behind only Tim Horton's and Subway. They've already got 1,000 more locations than McDonald's! And the bigger they get, the less these bite-sized acquisitions will impact their growth rate.

    And as you've indicated, growing in the US or elsewhere is a much different animal. Canada just isn't as competitive.

    I respect your take on this, but I just don't think MTY will have the same growth going forward and, therefore, doesn't warrant the same multiple.
    Dec 18, 2013. 01:35 PM | 3 Likes Like |Link to Comment
  • Netflix: Reloaded [View article]
    John, I see where your coming from, but ultimately I disagree. You believe NFLX will eventually be the sole "channel" that all people use to consume content, imaging some scenario where most of the US population cuts the cord and uses NFLX exclusively. But I think this is faulty thinking for a couple reasons

    1) TV is not going to decline rapidly. It will be a long, slow demise similar to that experienced by wireline telephones.

    2) there will be plenty of competing "channels" online, generally all with access to different content. NFLX is not going to be able to secure ALL of the possible video content available in the world.

    3) people don't have a "median expectation" of cost for a service. they benchmark the value of a product offering against the best alternative. When the first $100/month cable packages were rolled out, there was no unending supply of online video content for people to watch. There were 4 broadcast networks. So they saw value in the $100/month to have access to a vastly larger chunk of content. This paradigm has reversed now, with unending amounts of content available entirely for free ... where is the value of a $100/month content cost?

    Instead I see a world where people cut the cord, take that $99/month and spread some of it among a number of different online channels, maybe an NBA League Pass subscription, an NFLX subscription, a HULU plus subscription, and whatever other channels emerge. Then take whatevers left and spend it on other things (maybe they'll pay more for movie theatres). A similar thing has happened in the music industry, where all of the money we used to spend on CDs, we now spend on concert tickets (which are insanely expensive today versus the past).
    Dec 2, 2013. 09:37 AM | Likes Like |Link to Comment
  • Netflix: Reloaded [View article]
    The 41M subs is taken from page 5 of Time Warner's 2012 annual report ..... although I did see some newspaper articles stating it was closer to 30M. May be a difference in definition of "domestic" and "US" subs.

    A couple other points
    1) Time Warner did not break out the performance of HBO seperate from its other networks, so its difficult to know exactly what HBO's profit margin is. The contribution margin of their Networks segment is 33%, which would put them around 14% profit margin after corporate costs, interest deductions, and taxes.

    2) The number of subs doesn't really say anything about what their profit margins will be. WMT has alot more customers than a high-end retail boutique, and their profit margins are alot less. Profit margins are going to be determined by NFLX's ability to obtain and, more than ever, produce content ... and there is no reason to believe NFLX will be more proficient at producing content than any of the television networks. NFLX's innovations have been on the demand side, through its better user interface, than on the supply side (content). In particular, as NFLX starts producing more content of its own that is closer to the cost of the premium content of HBO, you could expect that NFLX would have lower margins than HBO because it charges alot less.
    Nov 28, 2013. 03:47 PM | Likes Like |Link to Comment
  • Netflix: Reloaded [View article]
    thank you … yes, how it will end no one knows, only that it will end.
    Nov 26, 2013. 10:50 PM | 2 Likes Like |Link to Comment
  • Netflix: Reloaded [View article]
    1) I'm not sure that Piracy is declining all that much. And if it is, I would suggest that it will probably increase when/if the competitive pay products increase their prices.
    2) based on what reasoning? at just 10% yoy increase, NFLX's content costs are just 20% of revenue …. NFLX's content is going to get more expensive and probably won't cost them much less than what the networks end up paying for it.
    3) its true that the company is less profitable now because it is investing for overseas expansion, fair point … but the point regarding the DVD contribution margin IS relevant because the DVD business is in inexorable DECLINE, and that's going to impact the profitability of the future business.
    4) international content doesn't simply refer to internationally-made content … it refers to the purchase of rights to show US content internationally.
    5) im not so sure … you don't see the vast majority of people buying 2 or 3 phones … plus if people started adding all of the different providers that significantly impacts the costs savings they receive.
    Nov 26, 2013. 10:49 PM | 2 Likes Like |Link to Comment
  • Netflix: Reloaded [View article]
    hmmm … well, when you pick a "reasonable non-mature P/E" that represents future opportunities … you are essentially completing an analytical evaluation of the growth opportunities afar the 3-5 year time span.
    Nov 26, 2013. 10:42 PM | Likes Like |Link to Comment
  • Netflix: Reloaded [View article]
    That is a fair point … but I think it shows simply that the 20% figure is wildly optimistic and makes the stock look all the more overvalued.
    Nov 26, 2013. 10:38 PM | 1 Like Like |Link to Comment
  • Netflix: Reloaded [View article]
    This is a fair question.

    The revaluation here does make a couple of changes to the assumptions in the valuation that was done in 2011. Namely, I significantly reduced the increase in content costs and content amortization to give some credence to the the operating leverage idea, which has a dramatic positive impact on future profitability. I also assumed domestic penetration would be higher. (56% versus 50%)

    This was offset by a reduction in projected ARPU and international penetration, which as I said at the time, were wildly optimistic (and unrealistic) projections.

    The net effect essentially NIL.
    Nov 26, 2013. 01:07 PM | Likes Like |Link to Comment
  • Netflix: Reloaded [View article]
    No I understood it fully. I am not saying NFLX's price will stagnate. It could rocket up to $1,000 for all anyone knows.

    I am determining NFLX's value. In the long-run, the price will tend towards the value. And frankly, NFLX's value is probably alot less $300 per share and when the market realizes that, its a reasonable assumptiont that you will probably see a decline in the stock price.
    Nov 26, 2013. 12:53 PM | Likes Like |Link to Comment
  • Netflix: Reloaded [View article]
    Obviously the DVD business is still very valuable to Netflix, however, I am not suggesting that NFLX will choose to discontinue the service or otherwise dispose of it.

    I am saying the DVD business is in a secular, technological decline and demand for the DVDs will become increasingly immaterial (just like wireline phones or CDs or walkmans or any other technology that has been rendered obsolete by something different), to the point that income from the segment will be negligble.
    Nov 26, 2013. 12:04 PM | 3 Likes Like |Link to Comment
  • Netflix: Reloaded [View article]
    Not reasonable to project future value in today's dollars????????? Discounting cash flows at the cost of equity is one of the fundamental cornerstones of finance. You are assuming that in 2028 NFLX will have the same growth prospects it has now, which it won't because it will have substantially saturated the market, so you wouldn't pay the same multiple in 2028 that you are paying today.

    This "rule of thumb" that prices double every decade is also highly suspect. How is that a rule exactly? There have been plenty of decade stretches where share prices haven't increased at all (like the decade we just got out of). And while I may grant you that stock prices over VERY long periods trend upward, that does not mean that every individual stock goes up. Some individual stocks decline or disappear entirely. This is not a steadfast rule I would follow with any conviction.

    Your comment is exactly the kind of thing that makes me thing NFLX is overvalued ... the longs at this price don't seem to have a clue.
    Nov 26, 2013. 10:23 AM | 3 Likes Like |Link to Comment