Mohnish Pabrai: What I've Learned From Warren and Charlie (BRK-A, BRK-B)

Mohnish Pabrai: What I've Learned From Warren and Charlie (BRK-A, BRK-B)

Liberty Media's Spin-off Brief Analysis

According to Liberty Media's press release: 
 http://ir.libertymedia.com/releasedetail.cfm?ReleaseID=733175

Liberty Media Corporation and Starz announced the completion of the spin-off of Liberty from Starz at 5:00 p.m on Jan 11, 2012. As a result, Liberty and Starz are now separate publicly traded companies. As announced earlier, in connection with the Spin-Off, Liberty changed its name from "Liberty Spinco, Inc." to "Liberty Media Corporation," and Starz changed its name from "Liberty Media Corporation" to "Starz." Both companies will begin trading regular way on The Nasdaq Stock Market, under the symbols listed above, on Monday, January 14, 2013.

Following the Spin-Off, Liberty's principal businesses and assets include its consolidated subsidiaries Atlanta National League Baseball Club, Inc. andTruePosition, Inc., equity affiliates Sirius XM Radio Inc. and Live Nation Entertainment, Inc. and minority investments in public companies such as Barnes & Noble, Inc., Time Warner Inc., Time Warner Cable Inc. and Viacom Inc.. Starz' businesses and assets consist of those of Starz, LLC, its wholly owned subsidiary.

As spin-offs usually create unusual profit opportunities for special situation investors and John Malone is a master in creating wealth using the spin-off technique, I decided to take a closer look at the spin-off. 

I. Reasons for spin-off: 

According to the Company's filing: 

The board of directors of Liberty Media periodically reviews with management the strategic goals and prospects of its various businesses, equity affiliates and other investments. As a result of a review undertaken during the summer of 2012 the Liberty Media board determined that the Spin-Off would allow each of Starz and Spinco to pursue strategic opportunities that are not otherwise available to them in Liberty Media's current configuration and, over time, enhance the operating performance of the two companies. Among the factors considered by the Liberty Media board in arriving at its determination were the following:

• By separating the more complex collection of businesses and investments that currently comprise Liberty Media from Starz, LLC, Liberty Media believes that the conglomerate or "holding company" discount inherent in Liberty Media's common stock will be eliminated, as Starz will become a "pure play" media company valued in a manner consistent with other companies in the premium television industry. The elimination of the holding company discount at Starz will create a more efficiently priced equity security for Starz to use to effect a complementary business combination using its equity and enable Starz's stock to be more accurately valued by potential acquirors.

• The Spin-Off is expected to cause the holding company discount with respect to the Spinco common stock to be reduced, as separating Starz, LLC and its subsidiaries will better highlight the discount at which the Liberty Media common stock historically has traded relative to its underlying asset composition. This reduction of the holding company discount associated with the Spinco common stock would enhance the ability of Spinco to issue its equity for purposes of making strategic acquisitions with less dilution to its stockholders.

• By effecting the Spin-Off, both companies will be better positioned to take advantage of business opportunities that are not available to them under Liberty Media's existing configuration. Each of Starz and Spinco will have greater flexibility in structuring strategic alliances, acquisitions and other business combinations and a stronger acquisition currency.

• The contribution of cash to Spinco in connection with the Spin-Off will provide Spinco with greater liquidity to acquire additional shares of its equity affiliates, invest in complementary businesses and pursue other strategic objectives and acquisitions.

• In connection with the internal restructuring and the cash contribution to Spinco, Starz will optimize its capital structure, through the draw down of the Starz credit facility, which is expected to provide for more attractive leveraged equity returns for Starz's stockholders.

Conclusion: The reasons for the spin off seem compelling. If things go as expected, not only will Starz benefit from the removal of discount associated with being part of a complex conglomerate but also it will benefit from a leveraged equity position, which may provide better returns. 

II. Insider Ownership and Equity Compensation:

1. John Malone will mostly likely continue to own a significant amount of ownership in both Spinco and Starz, given that he owned 1.8% of Class A shares and and 83.8% of Class B shares prior to the spin-off. 

2. The new option awards and the new SAR awards are set up in a way that the lower the stock price during the first 3 trading days of Starz and Spinco's stocks after the spin off, the more attractive the option awards and the SAR awards. Therefore, there's a reason to believe that insiders want Starz and Spinco's stock to trade low during the first 3 trading days starting Jan 14th. 

III. Back of Envelope Valuation:

Upon completion of spin-off, Starz will have approximately 124 million shares outstanding common stock. Starz made $240 million net income, or $1.94 per share duirng 2011. Applying a P/E multiple of 12, which is mildly conservative for a premium subscription video programming distributor, I come up with a value of $23.3 per share. Comparable companies such as Scripts Networks Interactive and Discovery Communications are valued at 17 plus P/E multiples. At an implied price of $14.20 per share (1/11/2012 closing price of LMCA 124.03 - 109.03 LMCAV), Starz looks fairly attractive. 

IV.Possible Indiscriminate Dump by Institutions:
Before the spin-off, Liberty Media is a large cap stock with a $13.5 billion market cap. After the spin-off, Starz, with a implied $14.2 share price and 124 million shares outstanding, will have a implied market cap of $1.7 billion. Institutions with cap size limits may be forced to sell Starz's stocks after the spin-off because it won't meet the large cap requirement, which in turn may also create good buying opportunities.  

SSYS-What I Learned From Reading The 10K

1. SSYS's 3D printers range from $13,900 (uPrint Personal 3D) to $379,000 (Focus 900mc).
2. Sales are predominantly done by resellers with more than 100 US resellers and more than 100 International resellers.
3.Sales also include service contract which ranges from $2,000 to $49,000 annually.
4.Competitive Advantage: The 3D printers and high-performance RP systems using our FDM technology to produce prototypes and parts from industrial production-grade plastic do not rely on lasers. This affords our products a number of significant advantages over other commercially available 3D rapid prototyping technologies that rely primarily on lasers to create models. Such benefits include:  

•  the ability to use the device in an office environment due to the absence of hazardous emissions

 
• little or no post-processing

 
• minimal material waste 

 
• better processing and build repeatability 

5. Seasonality: Q4 strongest due to clients' capital budget cycles and sales compensation program. Q1 and Q3 historically have been weaker. 

6. Approximately 42% market share in the RP market. 

7. The HP deal has lower margin because HP uses its own resellers and SSYS has to sell to HP at a lower price. 

8. Certain raw materials are supplied by only 1 vendor. 

9. Historically, outstanding A/Rs have been concentrated in a few customers. 

10. Unit sales: 

2011: 2602

2010:2555

2009:1918

2008:2184

2007:2169

2006:1796

2005:1297

2004:1094:

2003:691

2002:459

11. 2011's ASP is higher due to a favorable sales mix of higher priced systems. 

12. Management expect unit sales volume to increase faster than revenue growth in the future and expect lower margin because sales push for more affordable personal 3D systems. 

13. CAGR (10 year from 2002-2011):

Revenue: 14.66%

Unit Sales: 16.2%

Net Income: 21.18%

EPS: 24.5%

SGA:8%

R&D: 12%

14. Tax Rate: 42% most recent 10Q but assume 35%. 

15. 2011 Net Income Margin: 13.2 %

Assuming 30% revenue growth rate for 5 years, which indicates $743 million in revenue on 12/31/2017. Pretty optimistic here. 

$743 million * 13.2% Net Income Margin: $98 million Net Income. 

$98 million/21 million shares O/S=4.60 EPS

Apply a PE of 18 (which still implies 15%-20 growth): 4.60*18= 82.8 in 5 years. 

10% IRR: $51.41

15% IRR: $41.16

Current Price: $82.25 as of 1/4/13