Whistler Blackcomb $WB and the curious case of minority interest
As part of my on going research, I follow roughly 200 writers / bloggers. Most of them post once or twice a month, if that, so don’t think that I’m some reading crazed fool (though I may be that too!). Whenever I read a particularly interesting post, especially by a writer or analyst I trust, my first instinct is to rush out and buy the stock. Forget research and due diligence, that’s already been done for me, right?
Fortunately, I never give in to those instincts. Whenever something like that happens, I take a deep breath and read the company’s 10-K. I find that by time time I’m half way through the “risks” section of the 10-K, I’ve calmed down and I’m more rational. But I’m worried that some people are using the blog in exactly that way: read the analysis, like it, see that I’m long at the bottom of the post, and buy some shares. Hopefully, the WELX / WEXL example is a simple reminder that every investor makes mistakes, and sometimes those mistakes can go public. Some of those mistakes are harmless (like an amateur blogger mixing up the last two letters in a ticker during a late night blogging session!) Some of those mistakes are material and extremely public. And since my example is rather minor, let’s take a look at a rather major one.
Vitaliy K (author of the Little Book of Sideways Markets) published an extremely bullish presentation on Whistler Blackcomb at Value Investor Congress. This is an incredibly high profile event for a fund manager, with plenty of media coverage and potential new investors. And the argument for Whistler is extremely compelling. I think the highlight is the slide below
That’s a heck of a slide, right? At current prices, WB is trading for less than 10x free cash flow. The presentation talks about how great WB’s competitive position is, and the downside case has the company trading at under 10x normalized free cash flow in a few years. Seems like a tremendous buy, right?
Well, I’m not sure. I was checking out their investor presentation and noticed this slide
The “non-controlling” interests line jumped out at me. WB only owns 75% of the mountain. That means all of the EBITDA doesn’t actually belong to them. VK didn’t adjust for the non-controlling interest- what a huge, embarassing mistake, right? What a perfect example for this post on doing your own research!
But then I looked at VK’s projections again. And he starts with net income. Net income is given after minority earnings.
That’s right. I had just made a mistake on my own post encouraging people to do their own research and check investment write ups for mistakes.
Digging a bit deeper, I realized that there actually is an error in VK’s presentation, but it’s not what jumps out at you. VK is correct to use net income, as it is a post-minority interest number. However, he’s incorrect to use depreciation and maintenance capex, as those are pre-minority interest numbers. For consistency, he should only apply 75% of WB’s depreciation and maintenance capex to get to a cash flow number distributable to WB shareholders (alternatively, he could add back minority interest to net income to get to cash flow distributable to all partners, then take 75% to get down to WB shareholders take). This will lower the cash flow metrics he’s valuing the company on and turn it into less of a bargain, but it’s still probably an attractive investment if you believe the rest of the presentation.
For those of you keeping track, this minority interest trick confused a noted hedge fund manager making a widely publicized presentation once and me no less than three times when doing my research. Or maybe I missed something and it didn’t confuse the hedge fund manager but actually got me four times! But I think the point remains whether the mistake was his, mine, or somewhere in between: question everything. Dig. Do your own work. Start your own blog. You’ll become a better investor and learn something new every day.
My personal favorite line from the annual meeting this year came when someone asked Buffett about his thoughts on corporate margins given he said they were elevated twenty years ago. Charlie took the question and said, “this isn’t a religion. think for yourself” or something along those lines. Well, investing certainly isn’t a religion. Trust but verify every investment you consider making, whether you see it on this blog or it’s handed to you by Buffett himself.
PS- sahara first caught the minority interest thing, though I believe he made the same mistake I did originally.
Disclosure: Long WELX