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I know there is some negative sentiment out there but I have found at least a half a dozen or more small media names that are in the low single digit FCF range. There are also restaurant names in the mid single digit FCF range. In reading some of Grahams early work he seemed to use about a 10% yield for bonds, 12% for preferreds and 15% earnings yields for stocks as good buying points. As myth has pointed out there are many high teen FCF yield firms out there, many mentioned by folks on this board. Packer

Largest Stakes SALM SGA FFH MGAM NRG ACME LNET SURW LICT SSW FUR Petrobank SOQ Smaller Stakes SKM ICO Packer

Either way Intel is laying the framework to stay the course (the cloud doesn't fly) or expand into other areas (security) if the cloud flies. The down case is the cloud doesn't fly and the paid a premium for a CF generating business. If the cloud flies then they will be able to add a value-added aspect to their line-up of chips (security) and prevent price erosion and build another moat for thier chips. Very smart. Packer

They key to the PC market is the business use of the PC. The individual use is an extension of these machines. I don't see businesses using cloud computing due to data security issues. Would you allow a third-party to host your key competitive information? I wouldn't. Given that business are not going to go cloud en mass the only market left is consumer. This market has no margin and only gaming creates a decent amount of cash. In addition, the last mile provider is going to charge for the use of their bandwidth to use the cloud which may than overcome the cost advantage of a cheaper host. If you assume a 5-year life for the client computer and a 50% reduction in a $1k machine, then cost savings per month is $8/mo undiscounted. I think this can be eaten up pretty quick with access charges. In spite of these issues, I think the INTL deal makes sense and has created a buy opportunity. Packer

It is interesting you point out the JV. If that is the case then this makes much more sense. The idea of cloud computing has been around for a long time and has been tried before but for whatever reasons the client with alot of processing power seems to be an acceptable alternative (esp. when folks are willing to pay $1k for a capable client device and do not seem to be too price senstivite). I don't see the advantage of a lower price point in terms of demand in the developed world but can see this in the emerging markets. If PC prices were cut by two with less capabilty, would you buy two or rather have one more capable machine? Either way, the acquistion does not appear to be dilituve and has reduced Intel's price so it has made Intel more of a good buy. Packer

I disagree about making less profit per CPU. Where is the competition from? AMD - the always second ran becasue of the tremendous scale Intel has versus them. I understood the Wind River acqusition (processors) but I am having a hard time understanding McAfee. If they wanted to integragte security with McAfee why not do a JV and utilize McAfee's technology. There is alot more to McAfee (consumer and SMB) than security technology that can bundeled with processors. This only way this makes sense is a use for excess cash which will yield in excess of the 10% FCF yield the firm is currently trading for and given the price they paid I am not sure. Packer

I read Value Lne but only the company profile sections and occasionally the screens. It gives you a good overview where larger firm valuations are and buyback info today and over time. Morningstar has a similar layout but am an old fashioned paper guy and have a hard time visualizing data on a screen. I have to use other sources to get the data on smaller firms (Edgar). Packer

I think putting the goodwill to 0 is extreme given the FCF the company is throwing off. I think a more realistic alterntive is to perform a declining DCF analysis as T-bone describes with conservative assumptions. Once you determine when the decline rate rate will approach 5 to 15% a year like Earthlink and USMO you can apply a 2.5x FCF multiple to it (the current mutliples for Earthlink and USMO). The key questions is when will that occur. Historcially, SPMD has been able to increase FCF as revenue has declined but this can only go so far. The additional complication is the debt. In essance, this a LEAP on SPMD's declining FCF. I have had a hard time in estimating when the steady state decline will begin. I did look at management's incentives (in 10-K) and they are incentivized on EBITDA and revenue not FCF. Packer

You may also want check out "Benjamin Graham on Investing" based on collection of articles he wrote from 1917 to 1927 for the Magazine of Wall Street. It has some interesting perspectives about investing in bonds, preferred stocks and equities. Packer

Another way to look at these two is based upon probabilty of default of debt. If Supermedia does not default and pays down its debt, its value is close to 40 (2.5x 5-yr FCF (assuming 10% decline in FCF per year)) or 52 (2.5x assuming a 5% decline in FCF). The current price of USMO is 2.1 & ELNK is 3.3x with net cash a 4% (USMO) and 13% (ELNK) decline in FCF. The current price places a 60% probabilty of default and Morningstar estimates a 20% probability of default. twacowfca you bring up a good point, so I will check out the proxy and insider ownership to see if the incentizes are alligned to facilitate a declining industry (like USMO & ELNK are) and see what happens to the prices of these 2 stocks. Packer

Thanks for all of your comments/input. I asked Francis at the Fairfax shareholders dinner the question of how you value a declining firms such as Sprint at the time or Supermedia and DexOne today. His response was to project the liquidation value 12 to 24 months from now and buy at a discount from that price. For these two, it would 5 to 6 years to pay down the debt at current FCF levels. This is about the same period as SGA and LNET but both of these firms are not in declining industries. It looks like there is a good amount of uncertainty to estimate the liquidation value in 12 ro 24 months so I may put these in the too hard pile. The Chinese MMOG industry sounds like it has more opportunity but I still need to get more comfortable with investing in China. Packer

I have been bottom fishing and have found 2 industries that appear to be hated with stocks selling @ low FCF ratios. I would like to hear others takes in these segments as my industry insight is limited in for these industries. The first is the US directory business. There are 3 firms who compete in this space (Supermedia, DexOne and Yell) with 2 who have recently exited from bankruptcy (Supermedia and DexOne and FFH holding a sizable position in one (SuperMedia). Supermedia is selling for less than 1x FCF and has had rising FCF over the past few years (2008 to TTM). DexOne is selling for slightly above 1x FCF. Both these firms are in declining indusrtries and have debt loads @ about 3 to 3.5x EBITDA. Paulson also owns large stakes in these. European comps (Yell and SEAT) have debt/EBITDAs of about 5x and trad for 1.5 to 2.0x FCF. PagesJaunes in Froance has about 3.9x EBITDA in debt and trades a 9.0x FCF. Has anyone been looking at these? Another area is MMOG companies in China. There are 2 that appear cheap Shanda Interactive and Perfect World (both 4 to 6x FCF). Both are audited by PwC. How does one protect yourself against fraud in China? Look for reputable audit firms? Second, has anyone looked into this space. I looks like a great way to monitize gaming and not have to worry about pirating. It appears to be popular with the teen age croud. Any comment appreciated. TIA. Packer

My main point was the money was spent to get a product (a hard chip that the gov't required) that had a demand and the offshoot is what was commercialized. Part of the reason was the state of the art requirements of the cold war that pushed the technology to its limits and the gov't was willing to pay for it to fight the cold war. I do not know of a gov't development project that had developed a commercial product whose end product was a successful commercial product (no defense or other gov't use) which is where alot of the "green" technolgy money is going (subsidies to uneconimic technologies). Packer

The one thing about the internet and other "state" inventions though is they were focused on a national defense purpose and thus had a economic reason to exist that was independent of its current use. Thus it had dual uses. First as national defense asset and eventually as a backbone for other services. I was involved in a defense satellite porject that had similar characterisitcs (the waveform was state of the art to protect it from USSR threats and many of the features were later used in cell phones. Not all these projects can be transferred. I worked on another integrated circuit project whose substrate was silicon on sapphine (so the chips could withstand a nucluer event and not short out), the chip was produced for its purpose but no commercail applications are known to date. I have yet to see a "state" invention that met its intented purpose and created new industries. That is why am skeptical of much of "green" energy project money as it is being influenced by "non-econimic" factors and lobbyists. When you will be better off to hire a lobbyist than to develop a better project or service then the process is in trouble. Much of that money is picking winners in implementation of projects and providing subsidies for uneconomic sources of energy that will someday be found to be obsolete. It is human nature to want to be right and on the cutting edge of new technolgied but no one is smart enough to pick the winners and you are fool if you believe you can. I was re-reading Philip Fischer's "Conservative Investors Sleep Well" and he had a great quote (from the mid to late 1970s - when the market for venture captial was limited) - namely "If this does not happen, all that is left is to try to go ahead with what needs to be done in the way that, both here and abroad, has always proven so costly, wasteful and inefficient then - by government financing, with management under the dead hand of beareaucratic officaildom." People and ideas do not change only those who do not study history are bound to repeat the errors of the past. Packer

I agree on an absolute basis but we live in a relative world of choices. I would rather have my money in the stable free democracies and non-state capitalist countries of US/Canada/UK/Australia than in the state directed economies of China/Brazil/Japan and others. If you look at history, the state capitalist countries may speed up thier catching up but do not develop the skill for the long-term run. The firms become dependent upon the state planning. This has happened to Japan and will also happen to China. At worst, this approach creates dependence and corruption at best it becomes a large waste of money. The Economist this week has some good articles about this subject - Leviathan Inc. (the state goes back into business). Packer

If not the US where are you going to go? The more statist economies of the emerging market where you are an outsider? The slower growth econmies of Europe? Of the alternatives available the US/Canada/Australia looks the best but not perfect alternatives. Packer

I believe your question has to do with the tax treatment versus the financial reporting (book) treatment. Currenlty, both the US and Canada allow intangibles to be amortized for tax over 15 years in the US and similar but not exact the same length in Canada but only for tax asset purchases (which are different than book asset purchases). To clarify, an acquistion can be either an asset or stock purchase for tax purposes but all acquistions are now accounted for as asset purchased for financial reporting purposes. I can find out if you want to know exact amount. For financial reporting, the numbers you will see in the financial statement, goodwill is not amortized and identifiable intangibles are amortized over thier expected life (which estimated by managment as a part of the PPA process after an acquisition). Packer

Does anybody know of any of these instruments are available to individual investors. FFH has taken a huge bet (similar to CDSs) with these contracts. Packer

I am also confused as to Berkowitz's purchases. As for AIG, if you look at their board it is composed of non-insurance types (which I question the wisdom decisions made by this group who is light on insurance experience - the only financial services guy (Golub resigned a while back)). His argument for AIG and C is that the gov't has forced them to write-down thier book to below FV. The last time I looked at C and the other investment banks/banks, if you pulled out the trading profits, there was no profitability. Accrording to Berkowitz interviews, he counts the cash and tries to kill the company. In this case I miss where both of those steps are. Packer

I agree. Even though it may be helpful to know a recession is coming, how is that going to help you invest? There are so many moving parts and uncertainties it is like predicting climate change (nice to know) but what do about it is very uncertain. It may be more helpful to the politicians than the stock analysts. At least with valuation levels of particular stock you can focus on what directly matters to a stock. I don't disagree with a double-dip but I think folks are too senstitive to a slow down due to the last downturn (looking in the rear view mirror). Some things may get cheaper but when large cap steady stocks are trading @ 10% FCF yields assuming 0% growth and some smaller firms can be found in the 20 to 45% FCF yield range with no growth, then the response should be to buy the cheap stocks. Waiting for the bottom to me has been a loser game. The nice thing about this type of analysis and reliance on it is that it creates these cheap stocks. Packer

I held REXI for awhile then sold recently becasue I did not trust management or unsedstand how they did not make any money. They appeared to get lucky in selling their leasing company last time and managment gave themselves low priced warrants in a recent financing to meet covenants. I also had a hard time seeing how they did not make money with the asset management products they provided (thier cost structure is high and profitability is dependent upon generating more revenue in a tough market). Tilson had a good REXI rationale in his last book but it to date has not come to fruition. It looks like the ToPRs they manage with end with new regs not counting ToPRs as tier I capital. Packer

Wouldn't a metric be the number of cheap stocks you can find? Packer

kumar I apologize must have read more into your comments than you suggested. I think what many are missing is that we have been in a bear sideways market for 10 - 11 years already. Large caps have good yields versus interest rates (which you could not say in the early 80s) and there are some compelling smaller firms that I just cannot believe are trading at the multiples they are (this is the cheapest multiples on a FCF basis I have seen. Some examples, SALM (a small radio company with a large component (50%+) of block programming - consistent recurring revenue) trading for 2.4x FCF or SGA (a mid-sized radio/TV operator) trading at 4.2x FCF and these firms have very modest amounts of debt. Higher but still supportable debt level include ETM (3.7x FCF) and ROIAK (5.0x FCF). Then you have cable/TV with SBGI (3.9x FCF) and SURW (3.5x FCF) and LNET (2.0x FCF) all with reasonable debt levels. If you don't like these, try some entertainment names like NASCAR track operator TRK (5.1x FCF) or slot machine maker MGAM (3.9x FCF). Then there are some with more downside risk due to market erosion (newspaper) like GCI (3.5x FCF) and MNI (1.4x FCF). These are all firms with low capital requirements and high ROICs. The downside to these is if we go into GD 2 these firms may have some problems which I doubt we will. Then there is rural telecom with FTR (5.1x FCF) Q (5.1 x FCF), LICT (4.1x FCF) and CIBL (1.7x FCF). Then there is insurance (Harry's rankings ) - SUR @ 19 to 23% return/yr on MV of equity, NATL @ 18% to 23% return/yr, Lancashire @ 19% return/yr on MV of equity and FFH @ 18% return on MV of equity. Then there are real estate/infrastructure firms who are growing CF nicely have good prospects and are selling at a discount to NAV like BAM (10% CF yield & 33% disc to NAV) and Wheelock (22% earnings yield & 43% disc to NAV). These are just in the US. For the bears, what is the reason you are bearish? Macro or are you not finding cheap stocks? If is macro, I would submit that it is impossible to predict this and you should focus on the bargains out there. Since the macro hurt the markets last time, I think folks are too focused on it this time. Packer

Are you kidding me? The US is less innovative than China and India. How many Chinese and Indian innovations do you use? The system that has been developed here (US/Canada/UK) is the most innovative in the world and based upon decentralized control versus centralized control. We have the easiest market to enter (which protects innovation so the inventor will be compensated) and competition makes the goods that trade here the best in the world. Biotech research, alternative energy and many other types of research is performed everyday. Just because we can't see where the innovation will come from doesn't mean it will not happen. It was the same in the 1970s/1980s. Not many people though the PC would revolutionize the world in the 1970s/80s. Would you want to develop these innovations in China and India and have the gov't make your share the wealth and your innovation with the state? In addition, in both of these state capitalist systems (planned innovation) are efficient at catching up, providing commodity factory services and engineering of existing systems (more similar to the early days of Japan/S.Korea) but when new unplanned innovation is required, these systems will fail. In addition, China is on a treadmill (it needs to create jobs for the gov't not be overthrown) that will eventually fail. That I think explains many of their actions with Iran and many other questionable nations. Packer

You are right about appraisals and ratings (they are estimates of value) and if folks were held legally liable for their conclusions they would either not give them or charge a litigation premium for the work. I agree holding folks accountable but using the court system is a mistake. A better way may be to have a professional organization develop guidelines and have gov't participation. I think this is the first among many unintended (or maybe intended) consequences of these "comprehensive" legislative monstrosities. I can see why the Repubs did not want to touch this stuff with a 10 ft pole. Packer