(LMCA) Investment Company Act

I did not understand the Investment Company Act before.  This set of regulations would be extremely onerous for Liberty Media if it were deemed to be an “investment company”.  In particular, Liberty would likely run into problems with the following:

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LMCA update May 2014

Previously, I predicted that Liberty would repurchase its shares.  I was dead wrong.  Instead of buying back shares, Liberty decided to buy $124.5M in Charter shares at around $138.8 per share (press release).

I believe that Malone wants to play defensively by gaining more voting control over Charter and ensuring that Tom Rutledge can run the business without interference from other Charter shareholders.  (I honestly can’t think of any other reason why LMCA would buy CHTR shares instead of LMCA.  In the past, Liberty has bought back shares in the $110-$130+ range.  Its stocks have gone up since then so Liberty’s intrinsic value is higher now than in the past.)

LMCA’s 1.375% Cash Convertible Notes due 2023

Here’s what I think is going on with these notes.

1. They are tax advantaged.
2. The Black-Scholes options pricing model has some flaws over long time periods.  To some degree, Liberty is on the wrong side of it.  However, the tax benefits likely outweigh the disadvantages.
3. I suspect that the covenants on the debt are weak.

(LMCA/LBTYA) Malone’s cable strategy

Here’s how I see it.

Some people are superstars at operating a cable company while the majority of people are bad at it.  One way to figure out who the superstars are is to figure out how much money is made per home passed.  Liberty’s investor day presentation uses adjusted EBITDA per home passed, which is a rough proxy for this.  (I would prefer to subtract maintenance capex from adjusted EBITDA.)  Each home passed represents a potential customer.  Good operators will turn a high percentage of its homes passed into customers and sell them as many services as possible (television, premium channels, Internet, voice, video-on-demand, etc.).

Liberty’s investor day presentation (PDF) compares various cable companies:

Closed my ESRX position

1. My thesis was that ESRX would grow its profits.  In the last quarter it did not.  Something is wrong and I don’t understand what it is.
2. I goofed because I don’t understand the implications of Obamacare as well as I should.  I can’t figure out where the macro environment for Express Scripts is headed.
3. I don’t like how Express Scripts’ integration costs have supposedly gone up.  It seems like they may be trying to manipulate their adjusted earnings.  I really dislike that type of behaviour.  Honest managers tend to be better at running businesses.  Managers may fail to correct mistakes if they do not want to recognize that they made them in the first place.

In general, I know I’ve been much better at identifying bad stocks than good stocks.  I definitely have room for improvement on the long side.

*Disclosure: I sold all of my ESRX calls.

When I wrote about ESRX on August 1, 2013 the stock closed at $65.56.  It is currently trading at around $67.32 (+2.7%), underperforming the NASDAQ, S&P 500, and other indices.  I happen to have made an overall profit on my calls because I sold ESRX shares in January when my Jan 2014 calls expired.

(KMI) Mispriced long-term options

Here’s the idea:

1. Find options or warrants where the implied volatility (according to the Black-Scholes model) is very low.  I consider implied volatilities slightly above the IV of the S&P 500 index to be low.  Anything under 30 is low.
2. Among that universe of long-term options, find the ones with underlying businesses that are able to compound their intrinsic value at very high rates.

Compounding is very powerful over long periods of time.  Options are generally a leveraged way of playing a stock.  If a stock is mispriced, the options may be even more mispriced.

LMCA predictions March 18, 2014

Predictions:

1. Liberty will buy back shares below $135.  A year ago, Liberty was buying back shares below $135.  Since then, Liberty’s stock portfolio has gone up in value.  SIRI is mostly flat while CHTR, LYV, and BKS have gone up.
2. Liberty will continue selling its Barnes and Noble shares since (A) the share price is rather high and (B) it looks like the Nook will die.  Both Liberty and Leonard Riggio (founder and major shareholder) have been selling.
3. If Liberty sell shares to pay for share repurchases, Live Nation shares will be the first to go after Barnes and Noble.  I think that Live Nation is largely mature and will not grow as fast as Sirius XM or Charter.  Management strikes me as slightly promotional.  Their metrics (e.g. adjusted operating income) consider their IT investments as growth capex rather than maintenance capex.  In my opinion, their business is one where they have to keep running just to stay in place.  Adding new features simply maintains their competitiveness rather than growing market share.  Lastly, Live Nation shares have gone 62% in the past year.
4. Both Sirius XM and Charter will continue to grow their free cash flow at high rates in the next few years (at least 10%).

The reason I am putting my predictions down is to test my investment thesis.  If my predictions don’t pan out, then I will need to reconsider my position in Liberty.

I have recently sold some of my Altius Minerals shares (Altius is not buying back its shares) to buy more LMCA shares (LMCA should be buying back more shares).  Liberty’s current assets consist mainly of wonderful companies (Sirius XM and Charter) alongside a mismash of other random assets (LYV, BKS, True Position, Atlanta Braves, a potential lawsuit windfall, cash, and a very large interest free loan from the IRS in the form of deferred taxes).  It is essentially a wonderful company trading at a small discount to its assets.