Media Investment Guides, MSG Spin-off and Yacktman’s Focused Fund

We’re two weeks away from Christmas. Wow.

If you’re struggling to think of what to get your significant other for Christmas — get them a stock! Unlike flowers, a stock will (hopefully) last decades. Churning out fat dividends. Then, use those dividends for dinner dates.

You can thank me later.

Anyways, here’s what we got in store this week:

1. 1. Andrew Walker’s Part 1 & 2 of Media Investment Guide
   2. Interactive Brokers Allows Russian Stocks
   3. Madison Square Garden Spin-off
   4. Tobias Carlisle’s Interview with Bluegrass Capital

And more!

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December 11, 2019

Christmas Trivia: This week’s trivia has a double meaning. The answer to the Christmas question also answers the question of where I’m finding a lot of deep value stock ideas. Are you ready? House rules, no Google!

In which modern-day country was St. Nicholas born?

First person to email me the correct answer gets $5 cash.

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Investor Spotlight: Local Broadcasters, Media Case Studies

Last week we said we’d cover every Andrew Walker post on media investments. And did we (Andrew) deliver. We’ve got Part 1 & 2 of Andrew’s media investment guide.

Andrew covers local broadcasters in part 1. Part 2 highlights a couple media investments / case studies.

Local Broadcasters: Retransmission Fees On The Rise

Andrew explains that broadcasters make their money two ways: retransmission and advertising fees. Cable companies pay local broadcasters retransmission fees to air certain content (think sports, etc.). Andrew uses this example:

“for every one person who subscribes to the cable bundle, the cable company will pay the broadcaster fee (around $1.50-2/month)”

The advertising fees are self-explanatory. But let’s circle back to retransmission fees. These fees are growing, fast. Andrew mentions that Tegna’s (TGNA) retransmission fees now account for 33% of TV revenue mix. This is up from 4% in 2009.

That’s not all. There’s evidence to suggest retransmission fees will continue to rise. The American Cable Associated (ACA) expects retrans fees to rise 88% in 2020. The survey involved members of the ACA, which averaged $11/month per subscriber in retrans fees. That same sample now anticipates paying $19/month per subscriber.

Three Concerns with Local Broadcasters

Andrew lists three concerns with the local broadcaster industry:

1. 1. Unclear fit within media ecosystem in the future
   2. Cord-cutting (obviously) a major issue
   3. Unsustainable advertising revenue

Despite these three concerns, Andrew remains interested in broadcasters? Why? Because they’re so darn cheap! Andrew mentions two reasons why broadcasters are attractive investment ideas:

1. 1. They generate massive amounts of levered free cash flow
   2. Most broadcasters are buying back their stock with the free cash flow

That’s a very accretive situation for shareholders. And if you can buy that stock for <10x earnings, even better.

Let’s move onto Part 2 …

Part 2: CBS and FOX

Andrew dives into FOX and CBS in Part 2 of his media investments guide.

Disclosure: I am currently long FOX.

The Bull & Bear Thesis For Networks

The Bull Thesis: Networks get paid less on a ‘per-eyeball’ basis than anyone else. If that gap narrows over time, networks should make a killing.

The Bear Thesis: Escalation of sports rights fees.

The Case for CBS

Andrew’s bullish on CBS. Check out his simple valuation model for the company:

He argues that even a SOTP (sum-of-the-parts) valuation reveals a cheap company. Although the shares are cheap, Andrew notes three potential issues with the figures:

1. 1. 2018 revenues capture tail-end political spend. Andrew suggests looking at local and entertainment earnings over the last two years to get a more realistic earnings picture.
   2. CBS is plowing money into content production for their direct to consumer (D2C) business. This will distort short-term cash flows.
   3. CBS will merge with Viacom — so the current business won’t look the same going forward.

A Word on Fox

I’ve previously written about the FOX bull thesis, which you can find here. Andrew isn’t as bullish on Fox for two reasons:

1. 1. Trump could start his own network
   2. The next president might not generate enough “buzz” to keep viewers entertained
   3. Reliance on live events and lack of direct to consumer offering

Before we go, here’s a shot of both companies’ charts. Oh and give Andrew a follow on Twitter.

CBS:

FOX:

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Movers and Shakers: MSG Makes It Official

Madison Square Garden (MSG) is finally spinning-off it’s sports and entertainment businesses. The company filed its Form 10 last week. There’s a lot to unpack, so let’s break down the two segments.

The Sports Segment

The MSG sports segment (SportsCo.) will include:

• • The New York Knicks NBA franchise and development team (Westchester Knicks)
  • The New York Rangers NHL franchise and its development team (Hartford Wolf Pack)
  • The New York Liberty WNBA franchise (company wants to sell)
  • Knicks Gaming, which includes NBA 2K esports franchise of NY Knicks, a majority interest in Counter Logic Gaming
  • Team Training Center in Greenburgh, NY

The Entertainment Segment

The Entertainment segment (EntertainCo.) offers a boatload of assets:

• • Venues: Madison Square Garden, The Hulu Theater, Radio City Music Hall, Beacon Theatre and the Wang Theatre
  • Bookings Business: Fills MSG venues with entertainment as well as booking live sporting events (NBA, NCAA, boxing, etc.)
  • Productions: Radio City Rockettes and the Christmas Spectacular
  • Majority Interests: TAO Group, Boston Calling Events
  • Joint Ventures: Azoff-MSG Entertainment, Tribeca Enterprises
  • 1/3rd economic interest in SportsCo.
  • $1B in cash

The company expects the spin-off to complete during the first half of 2020. We’ll make sure to track it once it hits the markets — we love that forced selling potential!

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Resource of The Week: Acquirer’s Podcast with Bluegrass Capital

Crash Course on Unit Economics

The man behind the Twitter account Bluegrass Capital joined Tobias Carlisle on the Acquirer’s Podcast. The hour-long interview is pure gold. BluegrassCap dove deep into unit economics evaluation, capital intensive businesses and more.

Before we continue, make sure to follow Bluegrass Capital on Twitter (link above). He posts excellent content.

Bluegrass shared his strategy for finding new investment ideas: 13-F filings. Here’s who he follows:

• • Berkshire
  • Merkel
  • Tom Gaynor
  • FundSmith
  • SPO Advisor
  • Sequoia
  • Rain Cuniff

One of my favorite parts of the interview revolves around the question: does this business need to exist? Here’s Bluegrass’ take (emphasis mine):

____________

Do people want it? I mean, do people need this service or product? And a lot of companies you can just look at and it’s like, no, or there’s 100 competitors and … or you can do it yourself, there’s no reason to pay somebody else to do it. So it just fundamentally before you even get to the, does this business make money at the unit economics level? Just think to yourself, do I need this? Do I want this? Is this valuable to anybody? If this business just fell off the face of the earth, would anybody care?

____________

Such a great question to add to your investment checklist (if it’s not there already).

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Idea of The Week: Yacktman’s Latest Buys

Donald Yacktman is one of the greatest value investors of all time. Yacktman’s Focused Fund has outperformed the market since inception in 1997.

$10,000 invested in the Focused Fund in 1997 grew to $80,000 as of Nov. 2019. That same amount invested in the S&P during that time? $60,240.

Yacktman’s latest 13F filing reveals two new names: News Corp (NWSA) and Rinnai Corp (RINIF/TSE:5947). Let’s check ‘em out.

News Corp (NWSA)

NWSA is a media and information services company. They produce content like The Wall Street Journal, Barron’s, The Daily Telegraph and MarketWatch … to name a few. The company also publishes fiction/non-fiction books, children’s entertainment and sports.

NWSA stumbled into a rough patch over the last two years. Revenues declined, operating margins shrunk and earnings turned negative.

But that’s reversed this year. Over the last year, the company grew revenues 10%, expanded operating margins over 400bps and generated positive EPS of $0.26. The company also generated $126M in FCF.

In light of Andrew’s media investment guide, NWSA fits the bill of another cheap news company. Here’s a few metrics:

• • 8x P/B
  • 7x P/S
  • 7x EV/EBITDA
  • 19x EV/FCF

Rinnai Corp (RINIF/TSE: 5947)

Rinnai Corp is a Japanese company that produces and sells heating appliances and components. It’s a boring business that trades roughly 1.45x NCAV. The company generated $3.13B in sales last year, and they’re tracking for $3.3B this year.

From that $3.13B in 2019 revenue, RINIF generated $278M in operating income (~10% margins). This year, the company anticipates around $300M in operating income. RINIF has no debt, 30%+ gross margins and trades for roughly 12x next years operating income.

Yacktman made it his smallest position (0.80% of portfolio). But it reveals that more investors are venturing into Japanese markets.

If I had to bet, I’d bet I’ll write about a Japanese stock in this month’s Value Ventures.

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Tweet of The Week:

Insider purchasing is a great signal. But it’s only as good as those that are allocating the capital. Macy’s (M) is a perfect example. Management bought at the top. Every. Single. Time.

Then again, it’s also a retailer.

I found this tweet via Chris Mayer’s account. Make sure to give him a follow.

That’s all I got for this week. Shoot me an email if you come across something interesting this week at brandon@macro-ops.com. Have a great Christmas holiday.

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