KJP

I also agree that equity compensation is an expense, so the question is how to assess it. Thepupil has presented a concrete example, so I'll try to get at a more theoretical issue: The stock-versus-flow mismatch of what I've referred to as the "ex post" approach. An essential input into the "ex post" method is the actual share price performance of the firm in the years after the equity comp is given. Changes in the stock price presumably reflect changes in the expected net present value of all future cash flows flowing to the firm's equity. In this sense, the market cap of a firm is akin to a balance sheet/stock figure rather than an income statement/flow figure, and changes in equity prices reflect changes in the overall value of this "stock". So, what the ex post method does is take the overall change in value of the firm (embodied in equity price change) and assign it proportionally to the equity granted in a particular year. An income statement, on the other hand, reflects only (accrual-based) revenue and expense flows in a given year, not changes in the expected cumulative value of the firm's future cash flows. So, doesn't the ex post method distort things by inserting a stock-based measure into a flow-based statement, thereby overstating the true cost of equity comp for companies whose equity price (and presumably underlying value) is increasing rapidly? (A similar problem to putting the full cost of a 20-year asset onto the income statement in the year of purchase.) I believe the JPM method in thepupil's post is trying to get at this problem by taking stock comp out of the flow-based income statement altogether and putting into the stock-based metric of shares outstanding.

I'm also curious about this view. I had a similar discussion in the NVR thread (see March 17, 2020 posts): The ex post, hindsight method of finding the "true" cost of stock comp seems to contain a paradox: The more the stock price goes up (and thus the more equityholders have benefited) the more they appear to have been robbed by "excess" employee comp.

Today: Altice USA Over the last few months: American Outdoor Brands Leatt Corp. Turning Point Brands Nickel 28 Capital Corp.

The research that I have seen to date suggests that at least Pfizer and Moderna significantly reduce asymptomatic cases, which ought to render fewer people infectious. See, e.g., https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3790399 https://abcnews.go.com/Health/pfizer-vaccine-shows-94-effectiveness-asymptomatic-transmission-covid/story?id=76389615&cid=social_twitter_abcn If that common-sense inference is correct, then there should be fewer cases among those exposed to vaccinated as opposed to unvaccinated people. Here's one study that produces that result: https://www.medrxiv.org/content/10.1101/2021.03.11.21253275v1.full-text

Here's a podcast specifically about this thread: https://focusedcompounding.libsyn.com/website/ep-304-thoughts-on-10-different-stocks-reits-msgmsgn-and-a-bull-case-for-amazons-stock

Earlier in the thread, a poster stated that he or she is young and healthy, and thus their chance of dying from COVID was roughly 1 in 1 million. Alas, "young" is one of those words that changes its meaning as you age, so I'm not exactly sure how old this poster is. In any event, I'm 40, give or take a few years, so I was curious if I could estimate my chances of dying from COVID, assuming I have no co-morbidities and the healthcare system is functioning normally. I went at it from top-down and bottom-up methods. Here's what I came up with: Top-Down There are about 41.65 million people in the country aged 35-44. [source: https://www.statista.com/statistics/241488/population-of-the-us-by-sex-and-age/] One plausible estimate I’ve seen is a 30% population-wide infection rate. [source: third chart here: https://covid19-projections.com/path-to-herd-immunity/] That implies that the US has had 12.5 million infections among 35-44 year olds [42 * .3] There have been about 550,000 deaths attributed to COVID in the US. The CDC has age data for 411,261 deaths, and reports 4,670 in the 30-39 age group and 11,562 in the 40-49 age group. To get the number in the 35-44 age group, I added those two numbers, divided by two, and then grossed up proportionally to 550,000: (4670 + 11562)/2 = 8,116 * (550,000/411261) = 10,854 10,854/12.5 million = .0008632 or 1 in 1158. That is unadjusted for any co-morbidities, so the “co-morbidity” death rate must be significantly higher and the “no co-morbidity” death rate must be significantly lower. Bottom-up Here's a study that attempts to control for age and co-morbidities: https://s3.amazonaws.com/media2.fairhealth.org/whitepaper/asset/Risk%20Factors%20for%20COVID-19%20Mortality%20among%20Privately%20Insured%20Patients%20-%20A%20Claims%20Data%20Analysis%20-%20A%20FAIR%20Health%20White%20Paper.pdf It appears to estimate a no co-morbidity fatality rate for 40 years olds of 1 in 1,000 [rough average of relevant age groups in figure 13]. But I think the methodology of the study means that number is too high. From the Methodology section: “For this analysis, we used a longitudinal claims subset of the FH NPIC database [a database of claims from private insurers]. This subset includes approximately 100 million covered lives.” From that dataset of 100 million people, they “identified 467,773 patients diagnosed with COVID19 from April 1, 2020 through August 31, 2020.” There are roughly 325 million people in the US, so that ratio would imply a nationwide total of 1.52 million PCR-confirmed cases (4667,773*3.25) during that four-month period. But according to the CDC, as of March 31 there were 185,867 cases and as of August 31 there were 6,026,542, or about 4x as many PCR-confirmed cases as implied by the dataset (the “Missing Cases”). [source: https://covid.cdc.gov/covid-data-tracker/#trends_totalandratecasessevendayrate] Some of the Missing Cases may arise from the fact that COVID cases are proportionately higher among the non-privately insured, e.g., uninsured, Medicaid, Medicare. But I suspect that a good portion of the Missing Cases arise from the fact that a positive test may not result in an insurance claim, particularly if you have a mild case with no need for medical attention. For example, if I had a positive result from my county testing site, I think that would show up in the CDC numbers, but I don’t think it would give rise to a private insurance claim unless I actually needed follow up care. Let’s assume that 25% percent of the Missing Cases come from population differences and 75% of Missing Cases come from positive tests that do not give rise to an insurance claim because they are very mild. That would take the “adjusted” sample size of COVID positive people in the insurance dataset up 3x without increasing deaths, because by definition these are mild cases. That alone would lower the no-co-morbidity fatality rate among 40 year olds from 1/1000 to 1/3000. Then you’d need to adjust further for (i) the number of infected people who never got tested, (ii) the apparent failure to account for obesity itself as a co-morbidity (see, e.g, https://www.acpjournals.org/doi/10.7326/M20-3742), and (iii) developments in treatment, which are implied by the downward sloping mortality curve on pg. 4 of the insurance study and the “highly statistically significant” time variable in the obesity study in the previous link. After all of those adjustments, I think this study suggests a healthy 40-year old with no co-morbidities probably has no more than a 1/5-10,000 chance of dying from COVID, assuming a functioning healthcare system. That's generally consistent with the "top down" estimate of the no co-morbidity fatality rate being substantially less than 1 in 1158. Sanity check Using the numbers from the "top down" section above, the following equation should hold: 10,854 = (41,650,000 * [Percentage of 35-45 year olds with no co-morbidities] * [infection rate] * [No co-morbidity Fatality rate]) + (41,650,000 * [Percentage of 35-45 year olds with co-morbidities] * [infection rate] * [Co-morbidity fatality rate]). I'll continue to assume the infection rate is 30%. I'll also assume the co-morbidity rate is 50% [for context, the obesity rate alone is over 40%: https://www.cdc.gov/nchs/products/databriefs/db360.htm] And consistent with my rough estimate from the "bottom up" method, I'll assume the no-comorbidity group has a 1 in 5000 fatality rate. So: 10,854 = (41,650,000 * .5 * .3 * [1/5000]) + ( 41,650,000 * .5 * .3 * (co-morbidity fatality rate)) 10,854 = 1249 + [6247500 * (co-morbidity fatality rate)] .001537 = co-morbidity fatality rate = 1 in 650 chance. To a layperson like me, that's not obviously wrong if the top down approach is roughly right that the blended average mortality rate is 1 in 1150 and co-morbidities have a significant effect on mortality. Does anyone seen anything obviously amiss here or is anyone aware of a more rigorous analysis of mortality controlling for age and co-morbidity that comes to a significantly different conclusion? As an aside, this is an estimate of the fatality rate if infected. If the disease becomes endemic, then, absent vaccination, as time goes to infinity, your chances of infection likely approach 100%.

I'm curious what you mean: (i) the alleged symptoms don't exist or include arguably non-objective symptoms (e.g., anxiety), (ii) the alleged symptoms exist but there is no causal link between them and past COVID exposure, or (iii) something else?

Constructive criticism. Thank you for the info*. The conclusion relays an impression of an incomplete picture. It's like if a company would describe the effect of currency movements on its balance sheet by focusing on the differential exposure between the components of the liabilities. The valuation 'narrative' of the last few years is based on a low interest rate environment. Rising rates (i'm not saying this will happen; in fact i think (on a weighted basis) this is unlikely to happen, at least for the 'risk-free' part) would trigger a reappreciation of the asset side also. But individual net exposure may vary and the idea that debt can be inflated away is an attractive one. *The info doesn't seem to include nonfinancial corporate loans (kept on banks' balance sheets) which are still quite a significant amount and which (the last time i checked) were about 85% variable. The increasing rate exposure that scorpioncapital describes also needs to take into account a dynamic aspect with rolling refinancing risk (cost of capital may be higher and more 'floating') and a very unusual bunch of potential fallen angels. I think wabuffo has been making a similar point, assuming I understand his references to aggregate assets. But the dispersion of assets and liabilities is not uniform throughout the population; a few are very very rich and many others are running an "asset light" business model. Is there a way to decompose the aggregate statistics to understand where, say, the middle quintile is with respect to assets and liabilities? I think policy in a democracy/republic would tend to gravitate to what favors that median group, rather than what might make sense if you looked only at the aggregate numbers.

The following is based on nothing but my armchair pontification and is likely worth what you paid for it. Real wealth comes from the amount and quality of good and services in the economy, which in turn is driven over time by investments in and discoveries of new and more efficient technologies/ways of doing things. Inflation -- meaning a general rise in nominal price levels throughout the economy -- provides an impetus for investment, because the alternative of putting it under your mattress will lose value over time. Deflation -- meaning a general decline in nominal price levels throughout the economy -- retards investment, because you can gain relative wealth simply by putting your coin under a mattress and because earning a return on $100 invested today is more difficult when nominal price levels are declining (your customers will have fewer nominal dollars to pay you). So mild inflation creates a gentle push in favor of investment that over time that leads to more real wealth.

Technip Energies

Did you mean to link to the interview of Richard Aboulafia of Teal Group rather than the interview of John Rogers? I couldn't find the Aboulafia interview online. I enjoyed this Q&A from the Aboulafia interview: Answer: "The International Air Transport Association says we get back to the 2019 traffic peak in early 2024. I say late 2022." Question: "That's fast." Answer: "The traveling public now has a half-century-record level of savings waiting to be thrown back at the vacations that they haven't been taking. This is a recipe for the fastest recovery every." Question: "Which companies benefit the most from people flying again." Answer: "I could never pretend to be an investor, but I'm happy to offer five companies best positioned for the recovery comeback: Raytheon, Northrup Grumman, Safran, Lockheed Martin, and Howmet Aerospace." Question: "What do you like about those five." Answer: "Lockheed Martin is the world's most important maker of combat-aircraft products, and that's a strong market. They are also strong in missiles. . . . Northrup Grumman: lots to like, strong emphasis on investing in the future of defense. That focus won them the two legs of the nuclear triad, how the U.S. delivers nuclear weapons, that are being replaced -- ground-based ICBMs ad the strategic stealth bomber." Those two investment theses have nothing to do with Aboulafia's purportedly variant view on the timeline of the comeback in commercial travel, nor anything to do with a "recovery comeback." The questioner never acknowledges this or asks why Aboulafia's top "recovery" picks have nothing to do with his bold call on commercial aviation's comeback. More broadly, what percentage of commercial travel is business travel? Will businesses adapations to COVID have a significant lasting effect on business travel? A good and prepared reporter ought to be asking these types of follow up questions.

+1 +2 I've also been adding here and there to Altria and Lockheed Martin.

I think we were having different conversations. I was still trying to respond to JRM's question about why policymakers don't seek to create deflation, which I understood to refer to a general fall in nominal price levels across the economy. So, on the theory that policy in a "one person, one vote" system is driven by the desires of the median household/voter, I was exploring the situation of that household/voter vis a vis deflation.

If I understand your source correctly, it's an aggregate number across all households. How do you decompose it to look at the exposure of, for example, the median household/voter? Unsurprisingly, the Survey of Consumer Finances shows that the median household is well behind the mean in terms of financial assets and net worth. My original comment was responding to JRM's question about why policymakers don't actively seek to create deflation. Putting aside what would actually have to be done to create deflation, my initial take was that the median household/voter would be opposed to deflation because they are wage earners who would be greatly opposed psychologically to any cuts in their nominal wages and who perhaps are short the dollar due to long-term, fixed rate debts (home mortgage and education loans) exceeding their exposure to financial assets that might benefit from deflation (e.g., bonds), though perhaps this is mistaken to the extent these liabilities can be refinanced into negative rate loans. I had not considered the big pension entitlement asset listed in your source which may benefit some people in this situation. thepupil seems to be asking about the opposite scenario -- inflation/rising rates causing housing prices to decline. This may temporarily affect the homeowners' balance sheet, but if their wages are rising with inflation, don't they get to pay off debts with cheaper and cheaper dollars? So would their income statement look better even if their balance sheet might be underwater for a bit?

Which Fed survey are you referring to? This one? https://www.federalreserve.gov/econres/scfindex.htm

Isn't the individual US consumer/voter also often massively short the dollar via a highly levered 30-year fixed-rate mortgage and, perhaps, other debt such as school loans? And how easy is it to reduce nominal wages alongside deflation?

I would try to find something your child is interested in, e.g., sports --> Nike, cosmetics --> L'Oreal, TV --> Netflix. If the first company "analysis" goes well, then try another more generic company in the same or a related industry. Someone learn a lot just by trying to understand the differences in gross margins between, say, Nike and Jerash Holdings. (Of course, this is stolen from Buffett's lessons about See's Candies, etc.)

It does. Thanks for pointing it out. Maybe I should think less and buy good companies like PGR, but the overanalytical bear in me says at some point people start pricing in a secular decline in premiums due to autonomous driving making driving much safer, and I don't want to own this when that happens. Maybe that's too far off to care about now. If you normalize margins for typical (non-COVID) driving/accident volume (11.5% EBIT margin on premium written was my two-minute back of the envelope) and assume zero investment gains (probably have unrealized losses YTD give rising rates), is Progressive trading at 14x 2020 "normalized" earnings?

A "value" thesis typically relies on regression to the mean. It goes wrong when there is no regression to the mean, just continued progression toward zero (the "value trap"). A "growth" thesis typically relies on the business being able to stave off regression to the mean for some amount of time. It goes wrong when the progression from the mean stalls out too early (or never materializes to begin with).

As a connoisseur of children's programming, I was shocked to learn how many brands and titles these guys own. I'm in WLDBF too, was gonna see if there was a thread and if not start one when I get time. They own 80% of Peanuts among others and have a really interesting vertical integration from content development through consumer products sales. Yep .. a really compelling monetisation story backed by strong execution (former Marvel executive), solid cash flows, really attractive multiple and lots of great kids content that is in demand by Netflix, DreamWorks and AppleTV+ besides one of the largest presence on YT. And a tight float to boot. I like the runway here for sure. Kids content much better for product sales. Their YouTube channels do insane numbers. I like the CEO's focus on quality over quantity for new content creation. Do you guys know where I can find a write-up or can you start a thread on the company? Always interested in Canadian small-caps. Thanks! Not a writeup, but Andrew Walker's podcast with Joe Boskovich on Wildbrain may be useful: https://yetanothervalueblog.com/podcast

I also was underwhelmed by the letter, given the raw material that the events of 2020 gave him. The passage about BHE's $18 billion grid transmission work was interesting. I don't follow the company closely enough to even know what he's referring to. And he didn't expressly compare it to a pipeline, but if you change a few words in the following three paragraphs, he could be describing Transco, which has worked out fairly well for its owners: "Let me tell you about one of BHE’s endeavors – its $18 billion commitment to rework and expand a substantial portion of the outdated grid that now transmits electricity throughout the West. BHE began this project in 2006 and expects it to be completed by 2030 – yes, 2030. The advent of renewable energy made our project a societal necessity. Historically, the coal-based generation of electricity that long prevailed was located close to huge centers of population. The best sites for the new world of wind and solar generation, however, are often in remote areas. When BHE assessed the situation in 2006, it was no secret that a huge investment in western transmission lines had to be made. Very few companies or governmental entities, however, were in a financial position to raise their hand after they tallied the project’s cost. BHE’s decision to proceed, it should be noted, was based upon its trust in America’s political, economic and judicial systems. Billions of dollars needed to be invested before meaningful revenue would flow. Transmission lines had to cross the borders of states and other jurisdictions, each with its own rules and constituencies. BHE would also need to deal with hundreds of landowners and execute complicated contracts with both the suppliers that generated renewable power and the far-away utilities that would distribute the electricity to their customers. Competing interests and defenders of the old order, along with unrealistic visionaries desiring an instantly-new world, had to be brought onboard."

I originally posted this in the Roku thread, but decided to move it here as my ramblings got more and more untethered to Roku. Malone talks briefly about Roku in that podcast. As he explains, Roku is trying to be a middleman aggregator. Elsewhere in the interview he mentions that TCI once went to pre-Jobs-second-act Apple and asked them to design a UI for a hardware device they were trying to build because TCI didn't have the design expertise to do it themselves. I think this is one of the issues Rk was getting at earlier [in the Roku thread] -- any device built by Comcast may be junk compared to what Roku builds. I'm neither long nor short Roku, but I keep posting here [the Roku thread] because I'm baffled by the business, and thus fascinated by it because my bafflement suggests I don't know how this part of the world (among many others!) really works. If I understand Roku's business correctly, it has managed to put a soft lock on consumer screens manufactured by third parties (i.e., TVs) and then charge content companies for access to those screens. Having used a Roku device for many years, it appears to me to be a very basic "thin" layer of technology between the essential hardware (my TV) and the output from that hardware that I actually care about (video content). How is there a $50 billion business -- and if you believe the bulls, a business going to be worth much more in the future -- in doing that? Why are other people in the ecosystem not taking that business for themselves? Microsoft and Windows seems like an obvious analogy. But a general compute OS seems like a more complicated endeavor than a TV OS. And, to my knowledge, Microsoft charged the computer manufacturers; they didn't also charge the third-party software developers for the privilege of writing Windows compatible software. There's also an interesting net neutrality-like issue floating around here. In theory, broadband providers could try to charge third-parties for access to the pipes they have into your house. But the general consensus appears to be that that is wrong and the broadband "platform" into your house should be open to third party content providers for free (or, rather, you as the broadband customer should pay all the cost). But then we also accept that just a bit further downstream it's OK for someone to charge for access to the physical device we use to access that broadband service, e.g., Roku charging content providers for access to your TV or Apple's app store vig for third party content providers to access your iPhone. I wonder if this is one of the reasons Malone "missed" Roku. He obviously knows about the business model of charging third-party content providers for access to his hardware; that's what he did for years by, for example, extracting equity stakes in cable channels in return for being included in the cable packages he offered to his subscribers. That's very similar to what Roku does. He must have seen that. So, what happened? Did he fear that it would be too dangerous from a regulatory perspective for the broadband company itself to do this? It also points out a limit to the Bill Gates observation that Malone quotes early in the interview. According to Malone, Gates once told him to not worry about hardware because any piece of hardware can be emulated by software, and Malone suggests he should have listened to that advice. But what if you can not only charge customers for your hardware, but also charge third party content providers to access that hardware as well? In that world, the hardware would be the distribution bottleneck to be exploited by its designer/manufacturer. That concept seems silly in the world of general computing, the internet, and broadband net neutrality. Yet it seems to be working for Apple. Finally, do these business models also work in part because they extract value in ways that are invisible to the consumer. Consumers understand what they pay for an iPhone; I doubt they understand the cost they indirectly bear as a result of the app store. Likewise, people understand the cost of a Roku device; do they understand the indirect costs of allowing Roku to siphon off profits? Buy-now-pay-later companies like Affirm and Klarna are another one. On the surface, it looks great from the consumer perspective. But as BNPL grows, aren't prices going to rise for everyone to account for the higher merchant discounts BNPL providers charge relative to other payment methods? OK. That's quite enough rambling from me.

Technip Energies (h/t Clark Street) SNC-Lavalin Here and there over the last month: Altria, Berry Global, Lockheed Martin

Here's a short, high-level overview of the last 60 years of defense company performance: https://fortunefinancialadvisors.com/blog/exploring-the-surprising-resilience-of-the-defense-industry/ It doesn't seem like an industry that ought to trade at below market multiples.

Interesting disclosure about the effect of the TCJA's mandatory five-year amortization period of R&D for tax purposes on slide 10 of Lockheed's earnings presentation today: https://investors.lockheedmartin.com/static-files/64e5aa03-9023-423a-8908-2aae8c7015ac My understanding is that for tax purposes starting in 2022, companies must capitalize and then amortize R&D over five years, rather than taking a full deduction for all R&D in the year the R&D expense is incurred. Here's one explanation of this tax law change: https://taxfoundation.org/research-development-expensing-tcja/ For example, if you're spending $10 billion per year in R&D, you've historically been able to get an annual $10 billion deduction. But starting in 2022, your initial annual deduction would only be $2 billion (1 year of a 5-year amortization of $10 billion), resulting in an additional $8 billion of taxable profits in that year relative to prior tax years. I believe this is the source of the additional $2.1 billion and $1.8 billion in 2022 and 2023 taxes referred to in the footnote to slide 10 of the Lockheed presentation. That tax deduction will normalize over five years, though likely always create a bit of a drag relative to 100% immediate expensing due to inflation. As the LMT slide shows, it also could cause some significant near-term declines in FCF.