On The Future Of Disney And ESPN

My latest article on Seeking Alpha focus on Disney and the future of the business. The full article is available on their website here.


On The Future Of Disney And ESPN

By Brian Langis

Summary

  • Focus on the long-term, 5 to 10 years.
  • Disney’s approach to streaming ESPN and Disney+ could determine the future of television.
  • Disney could be viewed as a service company in the future – that would benefit the stock.
  • The Media segment is Disney’s biggest segment and is under pressure. It will take ESPN+ to replace the losses.
  • In 2006-2007, analysts and shareholders hated Netflix for investing in the streaming platform instead of focusing on DVD rental.

The following article are some thoughts and insights on the future of Disney and ESPN. If you are looking for a DCF model of the next ten years this is not the right article.

I love Disney (DIS). I have two small children and Disney helps with me with parenting. I’m also a Disney shareholder, so is my daughter when I gave her one share at her first Christmas. As a shareholder I do need to follow the company for myself and my family.

Part of the investment thesis is based on Disney’s capacity to transform itself from a traditional TV/Media to digital streaming with ESPN+ and Disney+ (I don’t think Disney has released the name for their streaming platform, so I’m calling it Disney+). A Disney+ app set to debut in 2019 will offer on-demand viewing of Marvel, Pixar, Lucasfilm and other television and movie content. Yesterday Disney released their Q2 results. Below is the revenues break-down by division Q2:

  • Media and networks: $6.14 billion vs. $6.09 billion expected
    Parks and resorts: $4.88 billion vs. $4.69 billion expected
    Studio: $2.45 billion vs. $2.19 billion expected
    Consumer and interactive: $1.08 billion vs. $1.14 billion expected

The Media segment is Disney’s biggest segment and is under pressure (-6% net income last quarter) however the Parks and Studio division is helping absorb the subscriber loss bleeding at ESPN. “The Worldwide Leader” in sports is going through an identity crisis (what’s going on with SportsCenter?), is losing rapidly losing subscribers (peak ~100m vs ~80m today) due to cable cutting , and is hit by escalating rising cost attached to their massive sports-right contracts. To help the transition to digital and to “save” ESPN, the Company unveiled a paid streaming service as ESPN looks to combat mounting subscriber losses that have weighted on the bottom line of Disney. Disney has big plans to sell its stuff directly to consumers (Direct-To-Consumer or D2C). ESPN+ is a first step. D2C bypass intermediaries and allows Disney to control the user experience.

Read the here.

 

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Red Notice

Red Notice.jpgI have a pile of things I need to read and I have a pile of things I want to read. And there’s Red Notice by Bill Browder which was on neither pile. I picked up for $20 at the book store just because it looked good. I actually heard about Bill Browder a couple years ago from his frequent TV appearances. He also had a documentary on Netflix. Here’s a little known fact: Bill Browder is the grandson of the head of the American Communist Party who ran for President a couple times.

Bill Browder has a story and it’s one hell of a story. This book has two parts. The first part, my favorite, is about his early day investments after the breakup of the Soviet-Union. Browder was where nobody else wanted to invest. This mean he bought stuff for ultra-cheap. He would invest in companies at 0.5x P/E and such. Assets where absolutely mispriced. The gap between price and value was extremely large. Capitalism wasn’t a well understood concept and they were basically just giving stuff away for free. Nobody knew how to value anything except for vodka and cigarettes. You could buy companies at a tiny fraction of its oil reserve. The book a couple examples of his investments and it’s fascinating. I kind of wish he made another book only about his investment in Eastern Europe/Russia after assets where privatized.

The second part of the book is the main reason why it was written. It’s the part where Browder goes to war against Putin. Browder was deported from Russia after trying to expose corruption in the country. He hired a lawyer named Sergei Magnitsky to be part of the team to help him out. Then in 2008 Sergei Magnitsky uncovered a massive tax fraud. He found evidence that a group of well-connected Russian officials had stolen a whopping $230m. He was arrested and tortured to make him withdraw his testimony. He didn’t. His conditions grew critical and he died. Then Browder went on a crusade to seek justice. It looked impossible and it wasn’t easy. The Russian says that Browder is the real criminal and has commited fraud. Russian issued a “Red Notice”, like the title, which refers to the extradition request served by Russia on Interpol, demanding Browder’s arrest. It was denied.

Browder is behind the The Magnitsky Act, a law named after Sergei Magnitsky, which was signed into law in 2012 by President Barack Obama. The law is intended to punish Russian officials responsible for the death of Russian lawyer Sergei Magnitsky in a Moscow prison in 2009. The bill received bipartisan support. At the moment, I believe the law has been expanded to cover the globe, not just human right abuse in Russia.

In the book, Browder has an interesting theory about Putin. At first Browder was a Putin supporter. Browder was an activist investor. He would go after corruption and exposed crook at companies and it worked…for a while until it didn’t it. Doing what he was doing as a foreigner it was surprising that nobody killed him. People die in Russia for much less. Browder believed he was protected by Putin at first. When Putin was first elected, he wasn’t the Putin of today. Putin didn’t have all the power. The Russian oligarch did. And Browder was going after the oligarch. Putin and Browder’s interest were aligned. Then the oligarch folded to Putin because he started jailing them and Putin gain the power. That’s when Putin and Browder weren’t working together anymore but it conflicted. So Putin tried to get rid of Browder and it got messy.

“This book reads like a thriller, but it’s a true, important, and inspiring real story. Bill Browder is an amazing moral crusader, and his book is a must-read for anyone who seeks to understand Russia, Putin, or the challenges of doing business in the world today.”Walter Isaacson, author of Steve Jobs and The Innovators

Magic: The Gathering or Stocks?

Last week I posted about Lego’s 7,500+ Piece Millennium Falcon set. You can find one for about $1,000. While on the topic of shopping, I just saw a set of Magic: The Gathering cards going for $199,998 on Ebay. I don’t know anything about the game and I’m not qualify to provide any insights on the cards. However, I do know something about investments and this sounds like a lot of money for a bunch of playing cards. I remember seeing people playing in the 90s, who knew that your cards would be worth something one day? I know that rare things could be worth of money over time, but I had no idea that very expensive playing cards were a thing. For the people who bought packs when it was cheap, good for them. I should have bought that instead of hockey cards. My hockey cards are worth as much as the paper it was printed on.

It’s hard to make sense of sound financial advice when you see things like that. If you want a successful retirement,  we are told to buy some stocks, some bonds, some gold, keep some GICs and invest in some non-correlated assets. We are constantly reminded about how important a diversify portfolio is.

Or you can forget about all that and buy Magic: The Gathering booster packs.

Magic The GatheringMagic The Gathering 2.JPG

LEGO’s 7,500+ Piece Millennium Falcon

I just ran into this on the Internet and here’s a little weekend project in case you have lots of free time. It’s back in stock but they fly out of shelve very fast, explaining the $1,000+ going rate from resellers. It’s probably one of these collectibles, that if left unopened for a very long time, becomes their own retirement account over time.

LEGO has a 7541 Pieces Millennium Falcon on Amazon.

Image result for LEGO 7,500+ Piece Millenium Falcon

Is this the most expensive most Lego set of all-time?

In case you are wondering no I have never completed it and I don’t have it. But it’s cool.

Falcon pieces

Martin J. Whitman – Value Investor

Martin Whitman, an incredible value investor and teacher, passed away at 93 years old (Business Wire). Below are a short compilation of links on the value investing legend. The shareholder letters are great. I learned a lot from Martin. You can more investment wisdom by other great investors archived here.

“The financial world is so complex and unpredictable that a fair amount of our analyses will prove to have been flawed…. A dirt-cheap price is an anchor to windward against misperceiving current situations, or being unable to make accurate forecasts.”

—Marty Whitman

No Cash Left Behind

From the Onion.

*Please look up what The Onion is before sending me emails or commenting.

Greed is Good...

ECN Capital Preferred Shares Is Victim Of Collateral Damage

My latest article on Seeking Alpha is on the drop on value of ECN and its preferred shares on March 16th. It turns out that the drop in share prices has nothing to do with its fundamentals or any related bad news. Below is a short summary of the article. Full article at Seeking Alpha.


ECN Capital Preferred Shares Is Victim Of Collateral Damage

Reposted from Seeking Alpha
By Brian Langis

Summary

  • Both classes of preferred shares fell for unexplained reasons.
  • ECN preferred shares seem victim of collateral damage by the company’s association to Element Financial.
  • The recent selloff provides an interesting investing opportunity.
  • Both classes of preferred shares provide a yield of +7%. More upside once they reset.

 

ECN Capital (OTCPK:ECNCF) [TSX:ECN] is primarily traded on the Toronto Stock Exchange under the ticker ECN.

Note: Dollar amounts are in Canadian $ unless mentioned otherwise. USD-CAD 1.2839 Price of 1 USD in CAD as of March 23, 2018.

I just wanted to drop a short note on the ECN Capital (ECNCF, ECN.TO) preferred shares. Both classes of preferred shares have taken a hit on March 16, 2018. Why it happened is not exactly clear, and this article will dive into the possible causes. I’m not the first one to look at the unusual drop. KT Investments has his take on what happened to ECN Preferreds here. For a more in-depth analysis on ECN Capital, you can read my article here and the one by Montrealer.

In short, ECN is commercial finance company. ECN Capital operates in four verticals: Home Improvement Finance (Service Finance), Manufactured Housing Finance (Triad Financial Services), Rail Finance, and Aviation Finance. It is well managed and is led by Steve Hudson. Hudson’s focus on capital allocation has created value for shareholders, especially when he was the CEO of Element Fleet Management (OTC:ELEEF) (EFN.TO). Hudson eats his own cooking; he owns millions of shares of ECN. ECN is profitable and has plenty of assets to back the preferred shares.

The purpose of this article is to try to make sense of the drop of ECN Capital Preferred Shares Class A and C. ECN Capital Class A (ECN.PR.A) was trading above par back in November with a 52-week high of $26. It’s now down to $22.60. Class C was trading in the high $23 range for most of the year until recently. It’s now trading at $20.60 a share. ECN’s financials are fine, there wasn’t any bad news, and the rise in interest rates should benefit both classes of shares because of their fixed reset features. It’s worth pointing out that other fixed-resets preferred shares have been doing well. So what’s going on with the preferred?

First let’s look at the criteria of each class:

ECN Capital Class A – ECN.PR.A – Reset: Dec 30, 2021. (Issued November 2016) (Prospectus on SEDAR)

  • Shares Capital: 4,000,000 shares @ $25 for $100,000,000
  • 5 Yr Canada Gov Bond + 5.44%. Yield Floor: 6.50%
  • Price: $22.80
  • Current Yield: 7.17%
  • DBRS Rating: Pfd-3 (low)

ECN Capital Class C – ECN.PR.C – Reset June 30, 2022 (Issued May 2017) (Prospectus on SEDAR)

  • Share Capital: 4,000,000 shares @ $25 for $100,000,000
  • 5 Yr Canada Gov Bond + 5.19% Yield Floor: 6.25%
  • Price: $20.73
  • Current Yield: 7.51%
  • DBRS Rating: Pfd-3(low)

Both Class A and C took a tumble this month.

Li Lu – Himalaya Capital

Here’s the latest addition to my investment collection of useful resources. Li Lu manages Charlie Munger’s money and one of the candidate to manage part of the Berkshire Hathaway’s portfolio. He’s a very interesting investor to follow.

Li Lu (Himalaya Capital)

How to Evaluate Businesses

“So how do you really understand and gain that great insight? Pick one business. Any business. And truly understand it. I tell my interns to work through this exercise – imagine a distant relative passes away and you find out that you have inherited 100% of a business they owned. What are you going to do about it? That is the mentality to take when looking at any business. I strongly encourage you to start and understand one business, inside out. That is better than any training possible. It does not have to be a great business, it could be any business. You need to be able to get a feel for how you would do as a 100% owner. If you can do that, you will have a tremendous leg up against the competition. Most people don’t take that first concept correctly and it is quite sad. People view it as a piece of paper and just trade because it is easy to trade. But if it was a business you inherited, you would not be trading. You would really seek out knowledge on how it should be run, how it works. If you start with that, you will eventually know how much that business is worth.” -Li Lu

Li Lu is the only guy that manages Charlie Munger’s money. And he has an incredible story about his up bringing. Twenty-one years ago, Li Lu was a student leader of the Tiananmen Square protests. Now a hedge-fund manager possibly one of the successor to he is in line to become a successor to Warren Buffett at Berkshire Hathaway.

His book seems rare and hard to find. There’s a copy on Amazon: Moving the Mountain. He’s expensive so it’s probably one of these rare books that you might find by accident somewhere. Li Lu also wrote the foreword to the Chinese version of Poor Charlie’s Almanack.

 

California

Here’s my missive on my recent trip to California. Because of its large size, I decided to break down in different posts.

I spent two days in Los Angeles to attend Charlie Munger’s Daily Journal meeting and various related investment events. Then I headed to the San Francisco-Silicon Valley area to have a better understanding of what’s going on in that special part of the world. Here are the posts:

As always, your feedback is welcome,

Brian Langis