Most Popular ArticlesNovember 17, 2009
Is there any part of the media industry that is attractive economically?
The content business was never very profitable and the aggregation business went away with electronic distribution, so you are left with the final distribution – the pipelines. They ought to get correspondingly more valuable. They are Comcast and Verizon. They have local monopolies. Nobody is going to build infrastructure to compete with them. The issue is whether they can get along on price with the Telcos.
The one that we like best, even though they break our hearts with their stupidity, is Comcast, which is trading at a 13% earnings return because they are way over-depreciating. We think they ought to have huge pricing power. To do that, they’ve got to get along with the Telcos, but they are doing everything in their power to alienate them by going after small businesses, which has always been in the bailiwick of the Telcos. Hopefully, just like Coke and Pepsi, they will learn to cooperate.
What will happen is that you will have a cable wire into your house, and then everything will be wirelessly distributed. In that world, their costs go to nothing. If they keep their prices up – and they can probably charge $300/month, because it will cover your cell phone, regular phone, internet access, and on-demand programming – and they collaborate, they can charge a lot and make a ton of money.
The only reason we are seeing the opportunity to buy them is because of Brian Roberts, who has 100,000 people and a lot of costs. If he wants to indulge himself and waste a couple of billion dollars buying this wasting asset, Universal, and pay for it by cutting $3 billion in costs we are going to be happy.
That’s where we have the best value and, surprisingly, the best inflation protection. People do not pull out their wires in recessions, so it is also a safe asset. The market seems to understand the risks, but they seem to be shying away from it.
Is it reasonable to look at an index like the S&P from a value investing perspective and decide whether it is cheap?
I believe the answer is obviously yes. To say whether the S&P is cheap, you’ve got to compare it to something like earnings power or book value. You have to be very careful about sustainable earnings and real book value, and to adjust for over- or under-depreciating.
In March, life was sweet if you had the cash, but it’s not so cheap now. If you’re a global fund, you’ve got to start looking at national markets to see where the bargains are. For a while they were in India, but they are not any more. Nor are they in China.
You are buying in Japan.
We’ve made a judgment that everyone hates Japan because of its long-term stagnation, which we don’t think is going to change. Our holdings in Japan include Shimano, Fanuc, and some of the insurance companies. These are companies with global franchises.
You always must ask, “Why did God make these bargains apparent only to me?” When we look at their global earnings power, they have clearly been tarred with the Japanese disease. We are buying a business that is a global non-Japanese business at a depressed value, because people think of it as a Japanese business. We are buying a ton of cash in the Yen. In this environment, the Yen is probably not going to appreciate, but it’s probably not going to suffer long-run depreciation given the dollar deficit.
For you to ultimately reap rewards on those investments, doesn’t it require that other investors see the same value you are seeing?
In some sense the answer is yes, and in some sense the answer is no. To really pay off and make up the discounts we are seeing that is true. When we make these investments, we are increasingly looking at earnings returns. We are getting returns on those businesses, after the cash, of 8% to 10% or even as high as 12%. We’ll take that all day long.
Now – and this is where you are right – we have a lot our investment sitting in cash, which is not very attractive. We are assuming ultimately investors will recognize the value of the cash. But those are also the investments with the least downside risk.
Everyone knows the governance problems in Japan. We are buying these global businesses at a really good price, we think we are getting increased earnings, and we are reasonably happy to sit on them, because we think value is accruing.
What is your greatest fear?
The killer would be inflation. Normally, for inflation to take off you need expectations, which there are, and you need wage pressures, which I don’t see. But if inflation takes off, policy is going to be emasculated. The view that output demand can be stabilized by government policy is not going to be true any more. It’s going to be painful. The nice thing is that our natural-resource and franchise businesses can really do well in that environment.
But, in terms of a macro fear, that’s really going to be painful. If you get stagflation at these levels of unemployment, watch out.
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