(GuruFocus, February 1, 2009) Investment Guru Bill Nygren, long-time manager of Oakmark Fund published his latest Commentary on the Oakmark and Oakmark Select Funds. Here is an excerpt with his comments on the stock market in general and the Comcast/GE deal over NBC Universal:
Comcast
The AOL recap is a dramatic reminder of why, as value investors, we are reluctant to pay for highly priced businesses. It also demonstrates why our natural skepticism increases when we hear corporate managers try to justify the high cost of their acquisitions. So, as holders of Comcast, we were on alert when we read rumors that it might be purchasing NBC Universal from GE. We were concerned when we learned that GE bought out their minority partner Vivendi at a price that implied that 100% of NBC Universal was worth $30 billion. It wasn’t that $30 billion looked crazy for a company producing over $2 billion in EBITDA from cable TV networks. However, with Comcast’s own stock selling at about half of what we thought it was worth, a big acquisition at full value looked like a very sub-optimal use of capital. On December 3, Comcast and GE announced a joint venture that will result in Comcast eventually acquiring all of NBC Universal, and indeed, the announced value was $30 billion. There’s an old saying in the business world that if you can set only price or only terms, always pick terms. The Comcast GE deal is one of the most complex we’ve seen, but once you cut through all the terms, it becomes pretty simple. NBC Universal will borrow $9.1 billion and give the proceeds to GE. Comcast will pay GE $6.5 billion, and GE will also receive the excess cash flow from the joint venture for about the next seven years. At that point, the joint venture should have less debt than it started with, and Comcast should have 100% ownership of NBC. So, in summary, Comcast pays about 30% of the debt-adjusted value of NBC-Universal, gets operating control, and gets full ownership in about seven years. Not too shabby. By our calculation, this is not only a very undervalued acquisition, even before considering its probable synergies, but it adds more to our estimate of Comcast’s per-share value than a similar size share repurchase would have. We’ve always been admirers of Comcast management, but the favorable terms of this acquisition surprised even us. Further, the dean of value investors, Warren Buffett, also appears to have a positive opinion of Comcast management because he just added the company’s Chief Operating Officer, Steve Burke, to Berkshire Hathaway’s Board of Directors. We are aware that there are no guarantees about the future, but starting with a good price and good people—whether buying a stock or buying a business—sure puts the odds in one’s favor.
Stock Market
We continue to believe that stocks are attractively priced and that most investors still need to purchase more to reach their long-term goals. The bears today are angry that the stock market recovery has been so quick and so strong. They say that up 65% in ten months is too much, too fast. They say that the P/E multiple for the S&P 500 is way above historical norms. And they say that mutual fund inflows show that the individual investor is no longer on the sidelines, but has jumped in head first.
We counter that the S&P 500 closed 2009 at a price that was down 24% from the end of 2007, and has fallen by that same amount from its 1999 closing price. A market down more than 20% from both two years ago and a decade ago hardly sounds overheated. As for the P/E ratio being excessive, it is true that the S&P 500 trades at 18 times Bloomberg’s consensus estimate of 2009 earnings, which is 20% above its long-term average of 15 times. However, 2009 appears to be a trough year for earnings, and we believe earnings should be markedly higher by 2011. Using Bloomberg’s 2011 forecast, the S&P 500 now sells at 12 times projected earnings, which is well below average. Further, we would argue that the historically low returns now available on competing investments justifies a higher than average P/E multiple. Finally, although it is true that mutual funds have enjoyed cumulative net inflows of over $400 billion since March, almost all of that has gone into bond funds. Over that same time period, domestic equity funds have seen cumulative net redemptions exceeding $20 billion. Large redemptions from equity funds have never been a market top indicator. In fact, they have indicated quite the contrary.
Read the complete Commentary here.
Comcast
The AOL recap is a dramatic reminder of why, as value investors, we are reluctant to pay for highly priced businesses. It also demonstrates why our natural skepticism increases when we hear corporate managers try to justify the high cost of their acquisitions. So, as holders of Comcast, we were on alert when we read rumors that it might be purchasing NBC Universal from GE. We were concerned when we learned that GE bought out their minority partner Vivendi at a price that implied that 100% of NBC Universal was worth $30 billion. It wasn’t that $30 billion looked crazy for a company producing over $2 billion in EBITDA from cable TV networks. However, with Comcast’s own stock selling at about half of what we thought it was worth, a big acquisition at full value looked like a very sub-optimal use of capital. On December 3, Comcast and GE announced a joint venture that will result in Comcast eventually acquiring all of NBC Universal, and indeed, the announced value was $30 billion. There’s an old saying in the business world that if you can set only price or only terms, always pick terms. The Comcast GE deal is one of the most complex we’ve seen, but once you cut through all the terms, it becomes pretty simple. NBC Universal will borrow $9.1 billion and give the proceeds to GE. Comcast will pay GE $6.5 billion, and GE will also receive the excess cash flow from the joint venture for about the next seven years. At that point, the joint venture should have less debt than it started with, and Comcast should have 100% ownership of NBC. So, in summary, Comcast pays about 30% of the debt-adjusted value of NBC-Universal, gets operating control, and gets full ownership in about seven years. Not too shabby. By our calculation, this is not only a very undervalued acquisition, even before considering its probable synergies, but it adds more to our estimate of Comcast’s per-share value than a similar size share repurchase would have. We’ve always been admirers of Comcast management, but the favorable terms of this acquisition surprised even us. Further, the dean of value investors, Warren Buffett, also appears to have a positive opinion of Comcast management because he just added the company’s Chief Operating Officer, Steve Burke, to Berkshire Hathaway’s Board of Directors. We are aware that there are no guarantees about the future, but starting with a good price and good people—whether buying a stock or buying a business—sure puts the odds in one’s favor.
Stock Market
We continue to believe that stocks are attractively priced and that most investors still need to purchase more to reach their long-term goals. The bears today are angry that the stock market recovery has been so quick and so strong. They say that up 65% in ten months is too much, too fast. They say that the P/E multiple for the S&P 500 is way above historical norms. And they say that mutual fund inflows show that the individual investor is no longer on the sidelines, but has jumped in head first.
We counter that the S&P 500 closed 2009 at a price that was down 24% from the end of 2007, and has fallen by that same amount from its 1999 closing price. A market down more than 20% from both two years ago and a decade ago hardly sounds overheated. As for the P/E ratio being excessive, it is true that the S&P 500 trades at 18 times Bloomberg’s consensus estimate of 2009 earnings, which is 20% above its long-term average of 15 times. However, 2009 appears to be a trough year for earnings, and we believe earnings should be markedly higher by 2011. Using Bloomberg’s 2011 forecast, the S&P 500 now sells at 12 times projected earnings, which is well below average. Further, we would argue that the historically low returns now available on competing investments justifies a higher than average P/E multiple. Finally, although it is true that mutual funds have enjoyed cumulative net inflows of over $400 billion since March, almost all of that has gone into bond funds. Over that same time period, domestic equity funds have seen cumulative net redemptions exceeding $20 billion. Large redemptions from equity funds have never been a market top indicator. In fact, they have indicated quite the contrary.
Read the complete Commentary here.
