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sersoylu commented on MritikCapital's article
05-17 13:05
DIRECTV – Exceptional Execution, Diligent Capital Allocation
I came across DirecTV (DTV) two years ago when I started reading about Ted Weschler and Todd Combs, the two portfolio managers that had been hired by...
View all 41 commentssersoylu 05-17 14:05- Fully agree on CHK. I have been waiting on point to buy into CHK but I haven't been able to capture a good enough discount to BV so far. It looks like Berkowitz is less conservative and more optimistic on the prospects of CHK. Mohnish Pabrai also has a large position on CHK. A great play for the game changing oil & gas boom in the US, in my view.
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sersoylu commented on MritikCapital's article
05-16 01:15
DIRECTV – Exceptional Execution, Diligent Capital Allocation
I came across DirecTV (DTV) two years ago when I started reading about Ted Weschler and Todd Combs, the two portfolio managers that had been hired by...
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sersoylu commented on MritikCapital's article
05-15 18:00
DIRECTV – Exceptional Execution, Diligent Capital Allocation
I came across DirecTV (DTV) two years ago when I started reading about Ted Weschler and Todd Combs, the two portfolio managers that had been hired by...
View all 37 commentssersoylu 05-15 19:00
- Apparently Seth Klarman opened a small position on DTV as well in Q1 2013. The weight of gurus on the long side is becoming overwhelming, I must say.
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sersoylu commented on MritikCapital's article
05-10 14:48
DIRECTV – Exceptional Execution, Diligent Capital Allocation
I came across DirecTV (DTV) two years ago when I started reading about Ted Weschler and Todd Combs, the two portfolio managers that had been hired by...
View all 31 commentssersoylu 05-10 15:48
- Cogitator99,
I have the utmost respect for Steve and Mritik, as well as other great investors who are behind DTV at the time. That's why I noted I'm likely to be wrong in being suspicious about DTV. I've only been familiar with value investing for the last 3 years and I don't hesitate to disclose that. I consider myself a beginner. I also don't do this full time, so I set up a system for myself to maximize my efficiency in reviewing stocks, because I simply don't have as much time as I'd like to have to review companies (unfortunately). Per this, I use an elaborate spreadsheet to review certain key numerical metrics on a business, and if there are red flags in this quick screen, I pass. Only on companies that pass the quick smell test I dedicate my time to dig in deeper. DTV was one I had passed due to high debt, but I came back to it for a few reasons, one of which is this great article and the other is the great set of investors behind this stock. I wish I had the time to read 5 years of annual reports on all stocks that trade in the US market, but unfortunately I don't. I only read the last DTV annual report. So you don't need to beat on me for this point. I'm not trying to debate investing decisions with people with better skills and more time. Just trying to understand the reasoning behind DTV's hyper-aggressive buybacks and learn from an educating exchange.
I think both you and Vgm are misunderstanding my point. I don't argue that if a company with good ROC that trades well below IV (by all valuation metrics and beyond any doubt or variance) buys back stock, that's the wrong way of allocation capital. My question was HOW FAR do you go in doing this ? In the last 5 years, DTV's long term debt increased 3-fold, from $5.7 billion to $17.2 billion. The company carries a negative BV of $5.4 billion. Steve made a good point that operating cash flow still covers interest expense by about 6 times, which is important, but this is certainly a lot of debt for a company with net income under $3 billion.
In 2012 shareholder letter, Buffett says; "In re-purchase decisions, price is all-important. Value is destroyed when purchases are made above intrinsic value. Directors and I believe continuing shareholders are benefited in a meaningful way by purchases up to our 120% limit (of BV)". Now, DTV has a negative BV so Buffett's metric of optimum share buyback threshold cannot even be calculated. Let's just assume DTV had not engaged in this aggressive debt-funded buyback program, and grew BV at a rate in line with earnings growth the last 5 years. At best the BV would still be below $10/share based on some rough calculations. So the stock is nowhere near being undervalued by Buffett's own principle in share buyback limits. I looked at other metrics for IV, including DCF, Graham Value and Earnings Power value, and my own intrinsic value calculation does not indicate as high a margin of safety as you indicate. In fact, the DCF showed the stock is fairly priced.
I understand Berkshire and DTV are two completely different companies, but let me ask a question in a different way; If Buffett were the CEO or Director of DTV, do you think he would allow buybacks to the extent of creating negative BV, or would he support buybacks in a more limited fashion ? My guess is probably the latter, because he may not feel it's prudent. Now, it's different to be managing a company vs. being a shareholder, but I think some principles should be somewhat in line.
There are many other companies in the market today that trade well below IV, they dominate their market, and hold CROIC figures similar to DTV. I'll give you Cisco Systems as an example, which is a powerhouse in switches and routers. Many of these companies engage in share buybacks, but not many that I follow do it as aggressively as DTV with such leverage. These are the points that make me struggle with DTV (although the recent quarterly announcement was quite impressive, particularly what's going on in South America).
And my last humble point about Vgm's IBM buyback case numbers; I had read that section by Buffett and I'm glad you brought it up because it reveals an important nuance from what I can see. Buffett likes to invest in wonderful businesses an hold them forever. This is one way of value investing as we all know, among others like cigar butts, net-nets, BV discounts, etc. etc. Since I have such small amount to invest with, I'm in the camp that buys smaller cap deep discounts, as well as good, large, but temporarily undervalued businesses, but I don't hold any stock forever. I like to hold them until they reach IV and I sell at that point and move on to another, preferably within 1-3 years (most similar to Pabrai style). In this sense, I don't care what % of the company or its earnings I own. I only care about the value of my holdings, and how quickly I can recover a gain from the stock appreciating to IV. When you look at the IBM case, a languishing stock price would increase Buffett's holding % of outstanding shares, true. But when you invest with my strategy (which is not undervalued in my view, but for talking purposes), when you buy in at $200, you want to see IBM reaching $300 (or whatever the IV value is) as soon as possible. At the end of 5 years, Buffett may own 7% of IBM at $200/share, where his holding would be worth $12.7 billion. But if the stock goes up to $300/share, yes he'd own 65.% of the company but his holding would be worth $19.1 billion. That roughly 50% increase is the actual goal for some investors, not the % you own. So as a shareholder, I primarily like the share buybacks by IBM to the extent that it acts as a catalyst in raising the stock price to where I think it should be, so I can sell. So shareholders may be looking at it from different points of view, and that's what I was trying to elaborate in my previous message. In IBM's case, I think aggressive share buybacks currently is not the best capital allocation in my view because the stock is not cheap. In DTV's case, we'll see if this leveraged buyback strategy will pay off and raise the stock well over $100.
I appreciate the feedback from all of you guys. I'll definitely get that book, the Outsiders.
- Cogitator99,
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sersoylu commented on MritikCapital's article
05-08 22:33
DIRECTV – Exceptional Execution, Diligent Capital Allocation
I came across DirecTV (DTV) two years ago when I started reading about Ted Weschler and Todd Combs, the two portfolio managers that had been hired by...
View all 28 commentssersoylu 05-08 23:33
- Stevenramsey,
Thanks for your response. Like I said, you and all the other great investors buying into DTV are probably right, and I'm wrong. I just like to follow my principle of understanding the business and its financials first before investig (in this case, possibly at my own peril).
Vgm,
I don't think management of a company has a motive or mandate to increase the piece of the business each shareholder owns, or increase their control of the company, etc. Management has a duty to provide highest value to shareholders. We see many companies do buybacks even though the stock is not undervalued. or at times overvalued. Buffett says that's a wasteful way of capital allocation and he wouldn't support it even though it may increase his share of the company. He'd like to see capital allocated where there's highest return for him. If a company has a durable 40% ROC, he'd like to see the money invested back in the business and turn into higher earnings.
The primary reason for buybacks is actually to increase the share price and thereby increase holders' holding value. If the stock price is unreasonably low, it is also a measure against takeover attempts (hostile or otherwise) at such a price. While this may increase each patient holder's share, I don't think it is the primary intent. These are not mutually exclusive events, and I think what you're saying is a biproduct of share buybacks.
- Stevenramsey,
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sersoylu commented on MritikCapital's article
05-08 00:46
DIRECTV – Exceptional Execution, Diligent Capital Allocation
I came across DirecTV (DTV) two years ago when I started reading about Ted Weschler and Todd Combs, the two portfolio managers that had been hired by...
View all 25 commentssersoylu 05-08 01:46
- Thanks for the responses guys.
What DTV is doing is arbitrage alright, but it's an arbitrage undertaken with debt. Wasn't it Warren Buffett telling us all along to never bet with debt ?
If a firm's stock is significantly undervalued, it's normal for management to take measures to levitate the stock. We all remember Berkshire was in a similar situation not too long ago, when Buffett had to institute a first ever share buyback program (which he normally hates). I think, at that time, Berkshire stock was way more undervalued than DTV is today, but we didn't see Buffett borrowing like crazy. So why do this so aggressively with so much debt ? And how come does this debt not bother Buffett, as he preached to us over and over that we should always prefer companies with low debt/equity ratio for long term investments ?
I guess when a firm is run by a CEO that comes from the LBO industry, this kind of financial engineering becomes business as usual. I'll stay on the fence for now.
- Thanks for the responses guys.
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