Broeb22
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Posts posted by Broeb22
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I have been buying Markel. Never thought I would be given a chance to get it at a cheap price again, but here we are. Looks like it's slightly better value than Berkshire to me as well.
Some on this board hate FRFHF/FFH, but what are your thoughts on MKL relative to FFH? Do you just like the S&P500 plus portfolio returns Markel delivers better than the deep value dumpster-diving Prem prefers? FFH seems pretty cheap right now too, and I've considered adding to my baby position.
There is a whole lot more pessimism built into FFH right now because people don't believe the investment results will be good going forward. From 60% of book, they don't have to be great to get a decent return in the equity. But I think investing is hard, and Prem is fundamentally a good investor who made a couple large bad bets (particularly deflation hedge which might have become pretty valuable around now) which really dented performance. If you back out the losses from that large bet, results are only mediocre since 2010.
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I guess I would guess that's where I would attribute lower margins for longer to founder preferences.
I wonder if older companies like Oracle maybe faced less competition from less well-capitalized competition, which allowed them to price things for profit earlier.
If you think about it, why would you go and compete directly against maniacs like Bill Gates and Larry Ellison if there was a profitable segment of the market that you could exploit without getting in their way.
Purely speculation, but if you view all of this in the lens of the wild west, the 90's was probably the time when a significant portion of people figured out that there was gold there. They saw the profits of Microsoft and Oracle and said I want some of that.
Now the gold is still there, but you have to be a lot smarter about avoiding the gaze of the giants while you're small so they don't crush you, because a lot of the landscape has been or is being settled.
Idk...I'm just spitballing here. Hopefully I'm a half-decent devil's advocate.
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With those anecdotes as examples, the final point I would make is that the software company financials are somewhat reflexive in my opinion. This is kind of leadership-team dependent, but I would say broadly that everyone learned a lesson from Jeff Bezos, which is that you should spend aggressively to continue digging the moat around your product and expanding the use cases for the product. This makes it even more challenging to identify the winners from the losers ahead of time based on traditional consolidated financial metrics because if someone is succeeding they will push the gas pedal on expanding their business. So those 5-years from now projections can sometimes be elusive because a really, really successful company might push out that day of fully monetizing their customer relationships whereas a less successful company that sees its growth stall out may face pressure from investors to monetize the product more in the present, which can be a self-fulfilling prophecy of mediocrity. I think each management team needs to come to that realization themselves and understand "Am I a niche product?" or "Am I a platform for several technologies"? Most VC-funded founders will obviously do everything they can to avoid the "Shame" of just being an app, but in reality many will end up there or be swallowed up by the platforms like Salesforce, Google, Amazon, Facebook, Microsoft, etc.
Thanks for the long post. I appreciate it. :)
I guess maybe asking a related but different question - when I look at MSFT financials in 1992, it showed a company with 2.8bn in revenue and 1bn of EBIT/OI. Obviously it was still growing quickly, so it's not like they were sacrificing revenue for profitability. When I look at the a huge SaaS player like CRM now, I see 17bn of revenue and 450mm of EBIT/OI. Obviously a bit of apples and oranges since lots has happened in the past thirty years, but I'm trying to figure out why these scaled SaaS companies are not more profitable at this point. So is there a SaaS company that has shown what "normalized" P&L might look like? I'm really curious to the trade off between topline growth and bottom line profitability, and to your point, are they building a castle like Bezos or substituting growth to mask an unprofitable (or not very profitable) business model?
Microsoft is probably one of those platform companies I should have included that are so dominant they almost can't help but be profitable. For what its worth, they might have evaded antitrust scrutiny for longer if they weren't so damn profitable.
Salesforce is one I've wondered about for some time. I would expect them to be more profitable, but if you look at their free cash flow, they generate 4.3 billion minus 1.8 billion for stock options minus 650 million CapEx. So ~$2 billion is not nothing. I would add back their D&A to EBIT (and subtract Capex) (D&A is ~3x CapEx) because they have done a lot of acquisitions so Amortization would be high. I don't necessarily think those acquisitions are bad if you think about them as line extensions in the same way you would Diet Coke as a line extension of Coke. To me, and after looking up these numbers again, Salesforce is just overvalued at about 70x EV to FCF. But 50% south of here with the double-digit organic growth they likely have and that's more interesting, but you still have to look at it like a Nifty Fifty type company to justify 35x. I'd be willing to bet they're growing organically about 12%, so that 35x multiple looks pretty attractive if you assume growth continues for 5 years. That is closer to a time frame I can bet on, whereas at 70x, I need 10 years of 12% growth just to get to a terminal multiple north of 20x. The one thing I ignore is that at 2 billion in FCF they're at a 12.5% margin. If there is a company not named Amazon that can compete with Microsoft in the enterprise Saas space, its probably Salesforce. If you look at Salesforce and get their margins in the direction of MSFT, you could justify long-term margins doubling to 25% or higher. I'm not saying I'd bet on that, but clearly some market participants are by valuing CRM that high.
I've made the point elsewhere on COBF but the accounting distinction of expensing employee costs vs. capitalizing CapEx means that looking at Saas companies on GAAP profitability will always leave you way behind. If I asked you what year Walmart went FCF positive after going public in Oct. 1970, would you be surprised that the answer was around Y2K? But they showed GAAP profitability the whole time so no one questioned that they were a legit business.
Sorry, got on a tangent there.
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Does anyone have a good resource to read about the framework for how to think about these SaaS companies from an investor's perspective? I get that incremental margins are super high and customers are sticky, and ROIC can be extremely compelling, but most analyst models I see are based on some model where profitability and cash flows don't come in until 5 years from now and then shoot through the roof. While I certainly acknowledge that as a possibility, the key aspect that I don't understand is the stickiness of the customer base, or the moat around these businesses. Low capital intensity and high margins are great, but doesn't that mean that the next company doing something in the space will have similar advantages? I feel like i'm missing something in this puzzle that's critical to understanding at least how some portion of the investing public thinks about these opportunities...
I think human laziness as commented below is part of it, but what company would you want to work for if every 6 months you had your IT department telling you, hey, this core part of what you do that I spent weeks teaching you and troubleshooting for you, we're changing it again. Unless a software is dramatically better than its competitor in terms of performance or cost or both, the incumbent has a huge advantage because if you're expending all this effort as an organization for some minor incremental gain, its not worth it to most people.
Unfortunately, the best advice I can give on this is to find helpful anecdotes, i.e. talk to customers who did and didn't make the switch.
I'll give a few examples that may be helpful.
I work at a manufacturing company where we have an ERP system that is a low-cost solution because mgmt doesn't want to invest millions in SAP. The IT director has said she has seen companies literally go out of business due to poor ERP implementations (these are generally smaller companies), so the barrier to changing that system for us is high.
As an example of a technology that is dramatically better that has gained acceptance, I would point to expense reporting. We use Rydoo, an app that I can simply take a photo of my receipt throw the receipt away, fill in some simple categories (rental car, airline ticket, etc.), and then submit, and I throw the receipt away right there. It's dramatically easier for users and for the payables clerk than whatever paper-based system we used before. When Bill.com went public, I read it and immediately compared it to Rydoo in understanding whether the solution is better. Based on what I read, Bill.com could be better because it handles all payables, not just expense reporting. So Bill.com solves a much larger problem than Rydoo and thus could be displaced.
You see Workday and Ceridian and a few other Human Resources IT systems taking share from incumbents, such as Paychex and ADP. When you read some of the stories comparing the functionality of payroll processing for these various services it becomes immediately obvious why the change is happening. For ADP/Paychex, payroll processing was a pretty manual, time-intensive process that was incapable of providing real-time visibility into the payroll period. By comparison, and I might be falling for the marketing bluster of Workday/Ceridian, as a payroll specialist at any company, you can run a report at any time to understand where payroll is trending, who is maybe abusing overtime, etc. From what I understand, this was simply impossible in the old system. With that said, we used Ceridian last year, and they fucked up big time once, which led us to switching to Paycom. Ceridian double-paid every employee in the company once. For most companies paying payroll is their largest expense so you can imagine the huge red flags this created within the company. With that said, the rollout of Paycom was not very smooth. They struggled to get the log-in terminals at each site working on time (which taxes plant mgmt., IT, HR, etc.) and I personally got pissed when the 401K integration between Paycom and our 401k provider was not working, so none of my 401K contributions were showing up in my account for 2 months. That snafoo could be a huge liability for a company because as a fiduciary of the plan they are responsible for depositing those funds in a timely manner, or else my company is on the hook for any gains in the investments I had requested in my 401k plan.
Finally, during my days as an analyst, while trying to understand CDK before it spun out, I was able to talk to the IT director at a local dealership, and in short every question I asked him was basically responded to with well that department would have to completely learn a new way to process a loan application, or the service department would have to completely change. So, rightly or wrongly, there was huge internal resistance to change, despite CDK baking in inflation+ price increases.
With those anecdotes as examples, the final point I would make is that the software company financials are somewhat reflexive in my opinion. This is kind of leadership-team dependent, but I would say broadly that everyone learned a lesson from Jeff Bezos, which is that you should spend aggressively to continue digging the moat around your product and expanding the use cases for the product. This makes it even more challenging to identify the winners from the losers ahead of time based on traditional consolidated financial metrics because if someone is succeeding they will push the gas pedal on expanding their business. So those 5-years from now projections can sometimes be elusive because a really, really successful company might push out that day of fully monetizing their customer relationships whereas a less successful company that sees its growth stall out may face pressure from investors to monetize the product more in the present, which can be a self-fulfilling prophecy of mediocrity. I think each management team needs to come to that realization themselves and understand "Am I a niche product?" or "Am I a platform for several technologies"? Most VC-funded founders will obviously do everything they can to avoid the "Shame" of just being an app, but in reality many will end up there or be swallowed up by the platforms like Salesforce, Google, Amazon, Facebook, Microsoft, etc.
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There a certain age bias in this current situation , both on terms of health as well as financial risk. Zell has a lot more to lose than to win at this Point than let’s say a 30 year old private equity guy.
First, he has a much higher chance to get killed by this disarrayed, second with this being an unprecedented situation l he really doesn’t know how this plays out economically. So he won’t play until he sees it, plain and simple.
Compare this to a 30 year old private equity guy who probably is willing to roll the dice with other people’s money and if it doesn’t work out, he is just going to try again a couple of years later with a different shop.
The different starting situation and incentives lead to different decision making bias.
Does the 30 year old not have significant career risk in doing that? I think Buffett and Zell have been relatively straight shooters (particularly Zell) about the opportunities they see at any point in time. I don't think they would have any reason to waver now unless they truly saw a wide range of outcomes. Also, Buffett was about 78 when he went through the Great Recession, so taking his comments and assigning some risk-averse age argument doesn't hold water to me.
It's kind of interesting Buffett's comments about $137 billion not being that much in the context of worst-case outcomes. That is a way different tone than his "we only need $20 billion to survive even the worst catastrophe" , and suggests to me he thinks coronavirus will be a huge issue for insurers, not dissimilar to what Dupperrault and others have said.
Maybe these guys are simply operating in areas (insurance and real estate) where there is close to maximum uncertainty right now about how things play out. During 2008 perhaps Buffett could pick up bargains because he knew his insurance subs were not as exposed to 2008 risks as the current insurance business is to the fallout from the pandemic?
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Broeb, you're missing one point. It's not actually the airlines you're bailing out. It's the airlines' bondholders.
Can you elaborate on why that distinction is important?
I think LC covered it pretty well. But what you are essentially doing is socializing losses. The bondholder got paid to take on some risk that's why it got paid interest. How is it ok that because the bondholder didn't handicap its risks well now the taxpayer has to pick up the tab? In what way is that equitable?
I don't want to really dive into politics. But you just know that once this is done and behind us we'll get back to cutting medicare and social security because we can't afford it. So basically grandma ends up subsidizing bond investors.
This can be said about most cases of bailouts but it's specifically acute to airlines because these companies always find a way to get themselves into trouble. So as an airline bondholder you really should be thinking about all kinds of risks when you were buying those bonds. It just happened that it's this risk that showed up instead of another.
The other thing is that the US has bankruptcy laws. AND they work very well. Airlines in particular are very familiar with the process. So why not let the market take its course. As LC pointed out, air travel will still be there. The planes won't vanish, pilots won't perish, etc. What would change is the owners of the capital structure. So the only reason we have an airline bailout is to socialize bondholder losses.
Great points rb and LC.
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Broeb, you're missing one point. It's not actually the airlines you're bailing out. It's the airlines' bondholders.
Can you elaborate on why that distinction is important?
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"If we're going to bail out corporate America every time something bad happens, then perhaps we need to institute stress tests for each industry that force them to hold certain amounts of capital."
I agree that American industry is generally overleveraged. if we eliminated the tax deduction for interest (and gave on for dividends) then you would see much more resilient industries imo.
however, this nationwide shutdown is not just "something bad happening". this couldn't be planned for. but I agree if there was less leverage there would likely be better performance under stress.
The same could be said for 9/11. The same will likely be said about some other "unforeseeable" event that occurs every 10-20 years and results in airline equity values being impaired when people stop flying for some reason. The point is that when you have billions in debt, aircraft leases, and unfunded pension liabilities, you are financially levering up an operationally leveraged business. It should be a surprise to no one that results have been so horrible. If they were net cash would results have been significantly different in this instance? Probably not. Most businesses won't do well when their customers decline by 80-90% within 1 month. But at this point, that is kind of a feature of the airline industry.
Would you say the same thing about an insurance company that got surprised by a once in a generation hurricane or earthquake? Whoops we didn't know this could all come crashing down for everyone at the same time. Please bail us out. Maybe airlines need to be required to have some kind of capital buffer since when airlines struggle, it tends to happen to everyone at the same time.
I'm not sure the right answer, but as a taxpayer I am not really excited about us bailing out most of an entire industry that knew it had operational leverage. If anything, at least having to keep capital caps some of the upside for the shareholders of these businesses that are now asking the American taxpayer to cap the downside.
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The industry really needs to be thought of, in terms of different holding horizons.
Short (0-2 yr), medium (3-6yr), long terms (7yr+)
Long term, it's hard to see why we do NOT have more passenger 'flag' carriers, and freight 'flag' carriers. Oligarchs, with one of the players being the state. Specialist niches (bush pilots, off-shore rig servicing, etc.) with combined military/private overlap. Stable, robust, net benefit to all, and the size/number of 'survivors' market determined.
Short term. Industry collapse, lots of BK's, lots of job loss.
China is still down 50-60% post Covid-19, 80% during Covid-19. A country where the distances between cities, and the state of the inter-city infra-structure, pretty much requires that you fly. Not the same thing in many other parts of the world, where you can travel by high-speed train instead. https://www.flightradar24.com/blog/air-traffic-at-chinas-busiest-airports-down-80-since-the-beginning-of-the-year/
To bring operating leverage back to 'normal', at least 50% of the industry has to go. To bring financial leverage back to 'normal', will require dilution of at least 25%+. The smart thing is to just sell, and let the market do its thing. Buy back on better terms, once the BK's/restructurings have worked their way through.
Precisely as WEB has just done.
SD
It's pretty damning of the business model as a whole that every time some "unforeseeable" catastrophe occurs that airlines go belly up very quickly (w/o government support). In the past, there was a somewhat legitimate argument that airlines were under-pricing their services due to an overcompetitive market structure. Now, the industry is very consolidated and most would argue that pricing has not been too aggressive because airlines have been making gangbuster profits for years. Still, something "unforeseeable" comes along and the industry takes a nosedive.
Admittedly, coronavirus has been a very extreme stress test, but I believe that a more minor event that dropped passenger traffic would still be crippling to the current set of competitors.
Its surprising that Buffett would buy into a business with extreme operating leverage and significant financial leverage.
If we're going to bail out corporate America every time something bad happens, then perhaps we need to institute stress tests for each industry that force them to hold certain amounts of capital. As a taxpayer, I have a big problem with the degree to which we are bailing out corporations (and their executives). I would rather "tax" corporate returns on capital and minimize the risk of this kind of mass bailout than socialize the risk that was knowingly borne by shareholders and their managements.
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The only homebuilders I would look at owning in this environment are NVR and GRBK.
What's your take on GRBK and owning them in this environment?
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For what its worth, I found this work to be highly opinionated without much in the way of actual data to support their perspective.
My personal experience having worked in finance in a mid-large city and now manufacturing in a more rural area is that many, many work processes continue to need to be improved/automated from the status quo, and the wave of adoption is adoption is a long, slow process.
I believe the author states that TAMs are wildly overstated, and I would agree that the founders' need to paint a pie-in-the-sky growth outlook to get VC dollars results in these wild TAM estimates.
To be clear, I'm not arguing tech SAAS companies are under- or even fairly valued, but simply that this author did not provide interesting or compelling evidence that there is some kind of competitive environment phase change happening that would cause SAAS companies to grow more slowly.
If the argument is that coronavirus somehow causes tech to be hurt anymore than any other industry, I could argue the exact opposite; namely, that the distance created by coronavirus and remote working validates the prior investments in software and cloud-based apps, and moving away from on-premise, paper-based work processes. Almost every half-decent software business probably accelerates its growth medium-term and pulls forward adoption because of this pandemic.
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I've had to eat my own cooking (literally not figuratively) but other than that I'm doing alright.
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The markets are forward-looking so today's number was already priced in to some extent. Apparently folks thought it would be worse. Maybe it will be.
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FTV
FSV
MA
ROP
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In fairness, I actually committed the sin you just described by selling these more levered names, but I plan to re-buy after the wash sale period.
CVET - pet product distributor with about $100 mil OCF and over $1 billion in debt
MOD - Commercial HVAC OEM for datacenters (CyrusOne is a big customer I think), and an auto business they are trying to partially separate. Separation has been challenging because they are trying to keep the off-road part of that business which shares mfg. facilities with the on-road auto biz. They claim pro forma cash flow after the separation of auto will be very high relative to market cap. I don’t recall the debt figure but it’s a transforming auto name with some debt.
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Bought some AMOT.
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Dragon's Milk
That's probably calorie-dense so great for the apocalypse
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I gotta say that it is so much more enjoyable to be investing during times like this when I can rely on my own more Stoic view of the world. It is way better than at my previous employer where despite all the marketing bullshit about investing for the long term and the benefits of being away from the noise, on days like today, the office was a complete shitstorm and my prior manager created an immense amount of stress for no reason.
We also were buying stocks we had only taken cursory looks at. Very little use of a watchlist of well-researched companies, again, despite the actual existence of a watchlist which we talked about with clients and in letters, but in practice rarely used in structuring our day-to-day work.
Good riddance to that bullshit.
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Planning to add DDOG during this correction
It's kind of funny in these Fed liquidity-driven times for a couple of down days totaling about -4.5% return to be considered a correction.
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Yea CRISPR will/is changing everything. There are so many offshoot and modifications from the base technology that its quite incredible. I have a few friends in grad programs at some of the top biomedical engineering programs and everyone says the same thing; that CRISPR is now the foundation for pretty much every application they study. Finding areas to invest is hard though. IP is somewhat vague. The companies working on it trade on potential revenue thats like half a decade or more out, at best...and nothing is even remotely cheap. BEAM Therapuetics I like as well, but its in the same boat.
My first instinct with stuff like this that is relatively new (at least new to being commercialized in any significant way) is that there are likely to be better mousetraps built over time.
Based on what you know is this kind of software the kind of thing that would have network effects, where one researcher in CA thinks hey I found something promising so I'm going to send it to my buddy in Boston, and they'll need the same software to be able to see the same things? That would be great. I wonder if these softwares won't end up being part of a menu of choices to find new drugs. What I mean is Schrodinger says they their recommendations are physics-based. Maybe that type of software views the world of drug candidates a certain way. Then another type of CRISPR software with some other foundation might be better suited for other applications.
From what I read, Schrodinger believed their software was better than others because their software can analyze all potential physical relationships between atoms, even ones that haven't ever been tested. The other CRISPR softwares are more based on actual attempted molecules by other scientists, so they kind of function like machine learning where the more molecules that are input into the software by other scientists the more the software "knows".
This probably sounds like gibberish, and it probably is, but its a fascinating area of research/business. The idea that biotech could become a lot more like any other type of manufacturing has profound implications for the pace of drug discovery and ultimately the cost to bring drugs to market, which could reduce the prices of previously very expensive treatments. There was a great Andreesseen Horowitz presentation on this a couple months ago.
This is your brain on venture capital
in General Discussion
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I think there is potential for significant competitive advantage in creating a network that makes delivery better, if it makes delivery better. Despite what some might argue, I am probably never going back to ordering a taxi because Uber/Lyft are so much more convenient that I would probably pay a premium to a taxi. Uber/Lyft made transportation a better experience IMO. They also made the driver experience better by making it a more flexible job, eliminating expensive medallions, etc.
The open question for me perhaps is how are the food delivery services making the experience better than the status quo? Is calling up my favorite restaurant and going to pick it up that much different than having someone deliver it? I see the two-sided network effects very clearly with something like Uber, but food delivery not so much, especially if restaurants are eating the delivery cost. It is at best another form of advertising for them in that world.