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Given that Warner Music Group has recently had an IPO, I thought it would be interesting to compare the company to privately held UMG, which we own via Bollore. UMG and Warner, along with Sony, make up the "big three" music labels owning 80-90% of revenue-producing music.
History of Warner Music In 1957, an actor for Warner Brothers movies made a hit song for an independent record company. Sensing a missed opportunity, Warner created Warner Bros. Records in 1958. This served as a platform for numerous acquisitions, including Atlantic Records. Atlantic paved the way for WMG's success, and during the 60s and 70s became the home of hit artists such as Ray Charles, Aretha Franklin, Led Zeppelin, Bette Midler, Neil Young, and Cream. Today, WMG traces its roots back to 1811 via their Chappell and Co subsidiary, which was purchased in 1987. That firm was once called "one of the best publishers" by Beethoven himself.
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 Uniti Group is a weird little company that trades 9x EBITDA and arguably a ~20% free cash flow yield to the equity.
The company owns fiber optic cables and copper wires and leases them to ISPs, mobile wireless providers, and businesses. Comps Owning fiber-optic cables can be a good business. Fundamentally, they are the key asset behind a roughly $70b market in the US - fixed broadband internet (and increasingly important in mobile wireless as well). Once deployed, fiber is costly to compete with: the only real way to do so is to “overbuild” your own fiber. Estimates of the cost to run fiber to one household varies between about $700 for telcos to wire existing customers to $1250 per home for a near-nationwide build-out. Costs are even higher in some rural areas where homes are far apart. Insurance is a strange business, because unit costs are not known ahead of time and are different for every customer. Sometimes these costs are not fully known for decades, such as when asbestos claims surfaced in the 1970s and resulted in hundreds of billions of dollars in liability for manufacturers and insurance firms.
Not only are costs not known ahead of time, but they are different for each customer. In some cases the factors most heavily influencing claims are random. Who can know which coastal town in Texas is more likely to be hit by the eye of a hurricane? For car insurance, though, the customer is in much more control. While there is certainly still lots of randomness to car insurance claims, an aggressive driver has a much different risk profile than a conservative one. Since this factor -- how someone drives -- is both heavily correlated to insurance risk and knowable ahead of time, car insurance companies make a big effort to quantify it. In the early days of auto insurance, this was pretty tough. Insurance companies had to make an educated guess based on age, gender, and driving history (tickets, accidents, insurance claims). Over time, though, insurance companies have gotten more sophisticated at collecting data. Clayton Christensen is an HBS professor that coined the term "disruptive innovation".
The theory His theory states that disruption is made possible by low-end (read: cheap) or new-market footholds. Incumbents have little incentive to match prices with low-end disruptors since it would hurt their margins. This allows the disruptor to gain market share with little direct competition. Eventually, their product improves and becomes "good enough" for a large segment of the market. At this point it may be too late for incumbents to change course. Often the disruptor has developed new manufacturing or distribution methods (with the original goal of lowering costs) that make their strategy harder to imitate for the market leaders. In my view, Christensen's theory focuses too much on price. The number of investment ideas and full-fledged stock writeups in the public domain has got to be at an all-time high. Whether its on Value Investor's Club, SumZero, Seeking Alpha, or simply on twitter, there are probably multiple writeups on the vast majority of publicly traded equities.
I look at all the above. But one of the places I enjoy browsing for ideas the most is in quarterly investor letters. The folks at r/securityanalysis make this process extremely easy by collating a vast array of publicly-available letters. Here is the posting for Q3 if you want to check it out. Below are a few ideas from that post that I thought were interesting. To my wife's chagrin, I'm slightly obsessed with another woman. The other woman is smart, accomplished, and ... 76 years old.  Her name is Judy Faulkner. Here are some of her accomplishments:
Perhaps now you understand why I think she's so cool. What multiple would you pay for a business with the following EBITDA profile? To help you out a bit, allow me to include a couple more details:
 Does 10x EBITDA sound like the right number?
Today's post is on Verint Systems (VRNT), a software company started under Comverse Technology in the 1990s and IPO'd in 2002. I decided to take a look at this company because it's in the software business -- an industry I like -- and it was trading near a 3-year low price. We find that screening for this level of negative sentiment provides good hunting ground for stocks that are affected by cognitive biases. For more background on our cognitive bias framework for finding undervalued stocks, see here. The financials Here's a look at their numbers over the last few years:  What is clear at a glance is that this company is not exactly a rocket ship: sales appear to be growing at a mid-single digit rate in recent years and are nearly flat since 2015. Adjusted EBITDA margins are flat at around 20%, lower than many software companies. Shares outstanding are up more than 50% since 2013, probably evidence of the company's looseness with share issuance for acquisitions and employee compensation. In an idea shamelessly stolen from Andrew Walker of Rangeley Capital, I’ve decided to start writing down my thoughts on stocks more often. Some of these thoughts may be quite long, as today’s is. Some may be merely a paragraph or two. But either way, I think putting my thoughts out into the world more frequently will help clarify them.
Today’s stock is Pershing Square Holdings, which trades as PSH on both the LSE and Euronext exchanges. In this post I may refer to PSH (the fund itself), PSCM (the asset management company), and Bill Ackman (the billionaire founder of both entities). |
