Podcast Summary
Valuing Companies During Bear Markets: A Lesson from Bill Nygren: During bear markets, focus on estimating a company's long-term business value instead of selling based on news. Stay rational, stay focused, and seize opportunities in undervalued stocks.
Bill Nygren of Oakmark believes that the average bear market is something investors can endure, and it is too late to sell once the news is out. Instead, investors should focus on valuations and try to estimate the long-term business value of a company to understand where opportunities may lie. Oakmark looks for large deviations between the stock prices and the estimated business values. With the market down this year, there are more opportunities to invest in undervalued stocks. Investors need to stay focused on their investment strategies and not be swayed by media reports and market conditions. A calm and rational approach is needed to succeed as an investor.
The impact of interest rates on investments and the changing face of financial companies.: Rising interest rates can decrease the value of investments, but also create opportunities to purchase stocks at a lower cost. Changes in the banking industry may benefit investments even in a recession.
Interest rates greatly impact the value of investments and companies, and as rates rise, the value of investments decrease. However, this also creates opportunities to purchase stocks at a cheaper fraction of business values. Additionally, the spread between companies that have held up well and those that have fallen greatly creates opportunities to sell and recycle dollars. Financial companies have changed significantly since the 2008 crisis, and although investors are treating them as dangerous, line item after line item in their financial statements indicate a reduction in risk. There is concern of a recession, but with the changes in the banking industry, a recession may actually benefit investments.
The Importance of a Thorough Evaluation Process in Investment Decisions: To make confident investment decisions, a thorough evaluation process must include reevaluating fundamental estimates, presenting the case for selling, and debating assumptions. This process is critical for long-term survivability, even during financial crises.
Investment decisions are based on a thorough evaluation process. When a company underperforms, the team reevaluates their fundamental estimates and investment thesis, and a devil's advocate presents the case for selling. In situations like the Netflix stock fall, management meetings are held, assumptions are debated, and conclusions are drawn. Although there are no guaranteed outcomes, the process is critical for ensuring a confident investment decision. Financial crises and recessions vary in magnitude and impact, but investment decisions for banks and other companies are based on their long-term survivability. Cheap stocks are often surrounded by significant controversy, and for Banks of America, their recovery and the expertise of their CEO have led to lesser question marks in comparison to other banks like Wells Fargo.
Oakmark Funds' Tax Management Focus and Investment Strategy: Oakmark Funds prioritize tax management by lowering their tax basis for higher tax efficiency. Despite not performing as well as their peers, their three-year returns are still pretty good. They would consider investing in Instagram if it were spun off from Meta.
Oakmark Funds prioritize tax management and aim to lower their tax basis in any of the names that have gone down in price. This helps to avoid making cap taxable capital gains distributions any more than necessary, making them as tax efficient as a separately managed account or even an ETF fund. Even though the peer group did better than Oakmark and Oakmark Select fund, Oakmark's three-year return has been pretty good in both funds. Although Meta has a lot of controversy surrounding it, if they were to spin off Instagram, it would be an investment that Oakmark would be excited about because they think Instagram alone is worth more than Meta is selling today.
The Potential Behind the Controversial Warner Media-Discovery Merger: Despite an initial stock decline, the merger offers cost-saving and revenue potential by creating a streaming service that engages more households. Buying at a discounted price can lead to future success.
The merger of Warner Media and Discovery caused a significant decline in the newly formed company's stock value. However, the deal rationale is intact and has enormous cost-saving opportunities and increased revenue potential. Combining the two direct-to-consumer businesses can create a streaming service that engages more members of the household, drives more viewing hours, and has lower churn. This promise is inherently long term and the right game plan will help in the process of putting this new company together. Despite the controversy, buying the shares at a quarter of the S&P multiple is a good move as the stock is expected to migrate towards a more normal PE ratio and become an incredible performer in the future.
Unlocking the Value of Warner Brothers and HBO's Back Catalog: Warner can generate healthy margins even if the streaming platform fails by licensing their extensive back catalog to third parties. Despite restructuring costs, the business generates significant free cash flow and has a reasonable balance sheet.
Warner Brothers and HBO have a massive back catalog, worth capitalizing at a negative by the market in a very low multiple. Even if the streaming platform fails, Warner can close it down, remove the technology and marketing spend, and license all the content to third parties, generating healthy margins. The market's ignoring the fact that basically every branch of the decision tree comes to a better positive outcome than where we are at present. Although restructuring cost, including content write-offs, are around 4.3 billion, the business generates 6-10 billion of free cash flow annually. The balance sheet is in a reasonable spot, with a manageable leverage perspective. The actual cash charges are just a subset of the numbers and can easily be manageable.
AT&T's Mismanagement Costs Them $1.2 Billion Payment to Warner Brothers Discovery: Poor management and a lack of strategic alignment can lead to costly consequences. Making uncomfortable decisions to optimize value and profitability may be necessary for the long-term success of a business.
Discovery has blamed AT&T's mismanagement for the poor result and AT&T has agreed to pay 1.2 billion to Warner Brothers Discovery. There was a mismatch in the strategic direction between AT&T and Discovery. Despite limited information exchange, AT&T went ahead with projects that Discovery did not want to pursue, leading to bizarre outcomes like canceling projects or launching them despite billion-dollar burn rates. CEO David Zaslav is making uncomfortable decisions to optimize the value of content and deliver better profitability. The 3.5 billion of cost synergies comes with bad headlines, but it is the right thing to do for the business, leaving it in a better place. Despite higher interest rates, the 14-year average term and the low rates provide an opportunity to generate free cash flow and accelerate the de-leveraging process.
Long-term Debt, Streaming Services, and Successful Acquisition Strategies: A Look at Two Stocks: Investing in companies with a focus on long-term growth strategies, such as successful streaming services and consistent acquisition strategies, can lead to significant earnings power over time. It's important to consider historical earnings estimates and stock prices when making investment decisions.
Investing in long-term debt at low rates could lead to real benefits over time. The value of Warner depends on the success of its streaming service and growth trajectory. Lithia is a successful company with a consistent acquisition strategy that has significantly grown its earnings power over the past decade. Even with gross margins falling back to 2019 levels, Lithia should still generate a significant amount of EPS. The stock price for Lithia needs to touch over six times earnings for the company to reach its underlying earnings estimate, which historically has only happened during crises.
Lithia's Opportunity in the Growing Online Used Car Industry: With its extensive network of 300 dealerships, Lithia is in a prime position to succeed in the expanding e-commerce used car market. Small competitors lack the resources to compete, making Lithia's undervalued stock a valuable investment opportunity.
Lithia, a franchised auto dealer and provider of new and used cars, service and parts work, has a profitable history and is well-equipped to address the growing demand for online e-commerce based offering in the used car industry. Lithia can leverage its 300 stores as storage, logistics, and reconditioning centers for an online e-commerce business and blanket the United States, providing nationwide coverage. Most of Lithia's competitors are one, two, maybe three store auto dealers who have no chance of succeeding in an online world. Thus, Lithia, being one of the largest auto retailers with only 1% market share, is well-positioned to benefit from the shift towards e-commerce in the 2 trillion dollar market, and the stock is undervalued.
Lithia's Potential Acquisition of Carvana Poses Challenges: Lithia, despite being the largest auto dealer, only has a small market share. Their potential acquisition of Carvana is costly due to their $7 billion debt. Lithia's success stems from consolidation and exceptional leadership but faces risks with electric vehicles impacting profits.
Lithia is a major player in the auto dealer industry, but despite being the largest, they only have just over 1% market share. The biggest challenge with acquiring Carvana, a potentially valuable company, is the $7 billion debt they have, making it an expensive acquisition. One of the reasons Lithia has been able to acquire dealers at attractive prices for so long is due to franchise laws and OEM agreements. Lithia has consistently differentiated themselves by consolidating back-office systems, benefiting from scale, and having a remarkable leader in CEO Brian Deboer. However, one of the biggest risks associated with Lithia is electric vehicles as a big chunk of auto dealer profits come from service and parts.
Lithia's Dealership Strategy and Growth Potential: Despite risks like limited acquisitions and new OEM competition, Lithia's dealership strategy shows room for growth with ~2,300 more stores to acquire. Oakmark and other value investors prefer ROI- focused companies like Lithia.
Lithia's strategy of buying dealerships has risks, such as limited potential for further acquisitions and new OEMs selling directly to consumers, but there is still room for growth, with Lithia only owning 300 of the 2,600 identified stores. While they have shifted their focus to being a national retailer through their driveway brand, they still prioritize ROI and opportunistic acquisitions. Value investors like Oakmark prefer companies like Lithia to reinvest in their business and earn excess returns, rather than just returning capital to shareholders. Lithia's financials show occasional declines around acquisition periods, but overall, they have been throwing off free cash flow and growing rapidly.
Lithia Motors’ In-House Finance Company & Expansion Plans.: Lithia Motors has built a successful in-house finance company, generating free cash flow of $1-1.5 billion next year. With plans to acquire dealerships and achieve a 25% return on investment, Oakmark believes in the potential for increased company valuation.
Lithia Motors has been successful in building an in-house finance company, which looks to be a separate entity and is funded with equity capital. Excluding this, the free cash flow of the company looks to be around $1 billion to $1.5 billion next year, yielding between 15% and 20% on the current stock price. The company has reduced shares through buybacks and plans to use a meaningful portion of its free cash flow towards acquiring dealerships to further build out its network and achieve a 25% return on investment. The potential for disruption lies inside a traditional business, which is often valued at zero. Oakmark believes that there's a reasonable chance of success, which if accomplished, will increase the value of the company to be worth multiples of the price paid for it.
Oakmark Fund's Approach to Adding Value through Stock Selection and Communication with Shareholders: By focusing on stock selection, trimming positions, and providing transparent communication with shareholders, Oakmark Fund aims to achieve better performance and help investors make informed decisions.
Oakmark Fund aims to add value by focusing on stock selection and holding fewer securities than the average mutual fund. Typical holdings are around 2% in Oakmark and 4% in Select. After a stock performs well, the position is usually trimmed to avoid letting the market take it to a higher waiting as the risk return gets less attractive than the rest of the portfolio. A well-informed investor who reads Oakmark's commentaries is less likely to make the mistake of buying high and selling low, leading to better performance. Oakmark's website, oakmark.com, features quarterly commentaries, industry-leading communication with shareholders, and writings from other members of their investment team.
