Tracking John Malone (Part 4) – Live Nation (LYV)

Liberty Media continues to buy shares of LYV on the open market.  I don’t see crazy undervaluation at LYV, though there are a few things about the company that stand out to me.

1. The accounting is misleading.  Live Nation has lots of non-cash depreciation and amortization charges that deflate earnings.  Its stated depreciation is excessive.  Its true earnings might be somewhere around $120-150M/year.  This suggests an adjusted P/E ratio of around 16-20 (at $12.69/share).
2. This company is leveraged.  If you account for the debt, its valuation seems a little rich.
3. Live Nation seems to be a bet on innovation increasing its earnings.

Though to be honest, I still can’t quite figure out why Liberty Media is so excited about Live Nation.

A bet on innovation?

One big issue with concerts is that tickets often sell out and there is a secondary market where tickets are resold (AKA scalping).  The opportunity for Live Nation is:

1. Eliminating scalping.  Some artists and event organizers (e.g. for charity events) do not want fans to get ripped off.  Live Nation / Ticketmaster is making headway here with paperless tickets.  Holders of these tickets must present a credit card and some form of ID to enter the venue.  This stops resales/scalping.
2. Becoming the scalpers.  If Ticketmaster does this, then it will take profits away from scalpers and distribute the profits among itself, the event organizers, and the artists.

One way Live Nation is trying to get a piece of the secondary market is by pricing tickets closer to the “correct” price.  By integrating all of its data (e.g. page views in advance of ticket sales, past ticket sales, etc.) it can try to mine data and make a better prediction of future supply/demand for a ticket.

Another way Live Nation is getting a piece of the secondary market is through TicketsNow, a company that was purchased in Feb 2008.  TicketsNow is a platform for reselling tickets (similar to Ebay’s StubHub).  By charging fees on resold tickets, Ticketmaster receives a cut of the secondary market.

Operating performance

Live Nation uses a metric called adjusted operating income (AOI), which provides a pretty good picture of how the underlying operating business is doing.  It strips out many charges that muddy the picture of how the underlying business is doing (D&A, non-cash and stock-based compensation expense, loss/gain on asset sales, and acquisition expenses).

Here are their AOI figures:

YE2012:  $459M
YE2011:  $437M
YE2010: $362M (this does not include a full year of Ticketmaster’s operations)

The growth in AOI over the past 2 years has been roughly 12.6%.  Organic growth is lower as Live Nation has been acquiring more assets than it has sold.  (It was forced to sell assets as a condition of its Jan 2010 merger with Ticketmaster.)

So far, the merged entity has posted good growth though it’s nothing too spectacular.  However, small improvements in operations and margins lead to large increases in earnings.

Accounting

Non-cash amortization charges related to its merger with Ticketmaster distort Live Nation’s earnings.  Buffett discusses this issue in his 1983 shareholder’s letter.

We believe managers and investors alike should view intangible assets from two perspectives:

1. In analysis of operating results – that is, in evaluating the underlying economics of a business unit – amortization charges should be ignored. What a business can be expected to earn on unleveraged net tangible assets, excluding any charges against earnings for amortization of Goodwill, is the best guide to the economic attractiveness of the operation. It is also the best guide to the current value of the operation’s economic Goodwill.

2. In evaluating the wisdom of business acquisitions, amortization charges should be ignored also. They should be deducted neither from earnings nor from the cost of the business. This means forever viewing purchased Goodwill at its full cost, before any amortization. Furthermore, cost should be defined as including the full intrinsic business value – not just the recorded accounting value – of all consideration given, irrespective of market prices of the securities involved at the time of merger and irrespective of whether pooling treatment was allowed. For example, what we truly paid in the Blue Chip merger for 40% of the Goodwill of See’s and the News was considerably more than the $51.7 million entered on our books. This disparity exists because the market value of the Berkshire shares given up in the merger was less than their intrinsic business value, which is the value that defines the true cost to us.

Live Nation also has many depreciation expenses that far exceed reinvestment in the business.  It has also been recognizing a lot of impairment costs over the years.

I believe that it is helpful to look at Live Nation on a free cash flow-esque basis.  For Live Nation, I will define free cash flow as follows:

FCF = Earnings + D&A – capex – purchases of intangible assets

Of course there are other factors to consider:

1. Live Nation has to pay taxes eventually.  In YE2012 there was a tax expense of $29.7M, in YE2011 it was a benefit of $26.2M, and in YE2010 it was an expense of $15.1M.  The overall tax expense over these three years averages out to $6.2M/year.  The true tax expense is likely higher than that.
2. Some of Live Nation’s capex is for growth purposes and not maintenance.  Some adjustment for growth capex should be made.  The “revenue generating” capex reported by Live Nation may or may not be higher than their non-maintenance capex.

I’m lazy so I’m just going to guess that Live Nation’s true after-tax earnings are somewhere around $120M-$150M.  There’s no point in analyzing this stock too much when you can simply buy LMCA (assuming that LMCA is trading at a discount).

Links

VIC has 2 different writeups on Live Nation.  Here is the first: http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/59719

*Disclosure: No position in LYV or LMCA.  I have a limit order to purchase LMCA shares and am patiently waiting for a better price… it may or may not fill.