Vail Value Conference: Some Case Studies

After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!   –Jesse Livermore.

Many presentations found in this summary of the Vail Value Conference:

Several of the presentations are worth studying. See if you can analyze the companies below and then compare your conclusions with the presentations. Do you agree or disagree with the valuation. I included the Value-Line Tear Sheet as reference. You can download the financials of each company from their web-sites. Try the simplier businesses like PSUN or Staples.

Dream_Works-ValueXVail-2012-Barry-Pasikov  and DWA_VL

PSUN-ValueXVail-2012-Shane-Calhoun and PSUN_VL

Staples-ValueXVail-2012-Adrian-Mak and Staples_VL

SS_CNW-ValueXVail-2012-Dan-Amoss and CNW_VL

AMZN-ValueXVail-2012-Josh-Tarasoff and AMZN_VL


2 responses to “Vail Value Conference: Some Case Studies

  1. No doubt I’m going to talk some silly nonsense, so please be forgiving …

    Just taking the very quickest of looks at some of these.

    Dreamworks. It has very lumpy sales, and its returns on capital have been poor. I think you’re also only as good as your last film. Trading at a PER of 20 looks high (!), but if I take Value Line’s average of 1.75ps, then the PE is closer to 11. Less bad, but not compelling. I’m given to understand that Geoff Gannon likes this stock a lot, and I’d be reluctant to contradict anything he says. But looking at the numbers, all I’d say is that being generous, Dreamworks is “fair value”, and I don’t feel compelled to take a position. I haven’t really read Value Line’s commentary, but I notice it says in bold “DreamWorks Animation’s most recent production appears to be a hit, with moviegoers flocking to theaters”. But is that useful information? OK, the recent was is going to be good. What about the next one? And the next one? It’s not like Coca Cola, is it, where you’re guaranteed to sell? How many more Shreks and Kung Fu Pandas can you reasonably be expected to make? I’ve probably got it wrong to some extent, and their niche is more enduring than I’m protraying. I dunno, what do you think, John? If it came to a head-to-head, I’d thoroughly expect Geoff’s judgement to be better than mine. Still, nothing is leaping out at me on DreamWorks.

    Pacific Sun. Pfft, turnaround, good luck with that. Deficit in the last 5 years, and deficits projected going forward. It’s not even trading at a discount to book. The good folks at VL seem to think that the book value per share will even decline from current levels. Seems very poor on a risk/reward basis.

    Staples. Nice stable margins, and look at the sales per share growth. I see that it reached a peak PE of 39 in 1999. Investors were well overdoing it! At a current PE of 8.4, there seems to be a fair margin of safety here. I see the dividend cover is 3.4, which is quite stingy (at least by UK standards). The return on equity doesn’t suggest to me that it’s a great business, but it’s not bad. And a PE of 8.4 buys some forgiveness. I see that earnings have grown at about 12% pa over the last decade. Pretty good. The presentation showed an after-tax FCF of $1.2B. The market cap is $8.7B. That gives it a Price to free cashflow of 7.25, which would normally be considered bargain territory. I just took a look at Guru Focus, and notice that there have been a lot of gurus adding to their positions lately, including my hero Joel Greenblatt.

    Con-Way. First thing that struck me was that it has kept the same dividend since 1996. Revenues per share are about the same as then, too. So, definitely not a growth share. I would expect a dividend yield greater than 1.2% to compensate me for earning that go nowhere after 15 years. I’m not surprised Dan Amoss doesn’t like the company.

    Amazon. PE 179X. Pass. Next customer.

    Linta. Not sure what’s going on here, but I see the presented has noted 10.4X FCF, and EV/EBITDA of 6.3X. Things start to look interesting at these levels if there’s a good track record of earnings and high returns on capital. Net Debt to EBITDA is 1.5X, which looks safe enough. It’s interesting how he splits out e-Commerce, which is growing and becoming increasingly significant. I don’t know what the track record for Linta is like.

    I guess that one advantage that investors have is that they’re not forced to have a view on every company. Don’t understand the investment case for Dreamworks? Fine, move onto the next one. One thing that my investment in BATS (British American tobacco) has taught me: if you buy stable companies with long track records of rising earnings and dividends, reasonable debt, high returns on capital, not subject to technological obsolescence or great consumer shifts, and you buy at a reasonable price, then you probably don’t need many insights or over-arching intelligence to make decent returns in the market

  2. mcturra2000,

    I am a shareholder of DWA. I wrote it up on my blog awhile back. I’ve had some serious misgivings since I bought it, though, especially after talking about some of the corporate governance and compensation issues with other investors. Geoff Gannon is a bright mind and I have discussed the company with him, as well, and you’re right, it’s hard to contradict the man. But I am also pretty sure he doesn’t own it– that might tell you something.

    Katzenberg’s strategic initiative is essentially to turn DWA into the next Disney. I guess that raises a few questions:

    1.) Is there room in the world for more than one Disney?
    2.) Will the company be able to finance that all internally, or will they have to go to the capital markets at some point, and if so, what does that look like for current investors?
    3.) This is a highly ambitious goal that will strongly change the nature of the business and the core earnings stream over time– Katzenberg is a talented guy, but it’s one thing to create the Lion King and Shrek, but another thing entirely to create a Disney. Does he have the skills, endurance, etc., to pull it off? Meanwhile, a lot of that growth has to come from outside the company because they’re only generating 2-3 new movie properties (some of which are sequels) each year… they’ve got to find franchises and outlets for franchises elsewhere. Will they do a good job of not paying too much for this stuff?

    That’s a big, up-top concern.

    There are a few others:
    1.) Is the growth in the global theater market and 3D ticket sales enough to compensate for the shrinking DVD market and long-run (multi-decade) trend in the film industry in the US and developed markets toward smaller audiences and box offices over all?
    2.) Will internet media distribution create new competitors for the brand and weaken the entire model of big studio release in theatres followed by “exclusive” post-release viewing windows across other media distribution platforms?
    3.) Are the managers and board careful capital allocators? (They’ve bought back a lot of shares since the IPO, but at wildly different prices, most of which were closer to all-time highs than all-time lows).
    4.) Does the company truly generate FCF or Owner’s Earnings at this point? It seems like if they don’t continually reinvest a substantial portion of their earnings into development of the next wave of films, their earnings stream would dry up pretty darn quick as the “library title” revenue value is a fraction of total revenue and part of its value is “time-sensitive” in that they probably won’t get the same money for licensing Shrek to a TV network today that they would’ve a few years after it’s original release.

    Just some thoughts. Their proxy document takes 50-60 pages to explain executive compensation and option issuance practices and why they’re reasonable, and relies on consulting by compensation firms. That kind of crap scares me. All I know is I am my OWN compensation consultant as an investor so when my employees hire compensation consultants with my money to figure out what I should pay them, I get a little anxious.

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