On Freston, Redstone, and Viacom

On Monday, Sumner Redstone fired Viacom’s CEO, Tom Freston. Yesterday, Viacom announced that its Board of Directors had appointed Philippe Dauman President and CEO and Thomas Dooley Senior Executive V.P. and Chief Administrative Officer (a newly created position). Mr. Dooley’s role is expected to be similar to that of a Chief Operating Officer.

Both Dauman and Dooley are members of Viacom’s Board of Directors. They served in key positions within the previous incarnation of Viacom, which was split into two separate public corporations, Viacom (VIA) and CBS (CBS), approximately eight months ago. Sumner Redstone is the Chairman of each company. Viacom’s new CEO, Philippe Dauman, will report to Mr. Redstone. Thomas Dooley will report to Mr. Dauman.

Although The Financial Times went with the no nonsense headline “Freston Removed as Chief of Viacom”, I fear The Wall Street Journal may have had the more accurate headline: “Ouster of Viacom Chief Reflects Redstone’s Impatience for Results”. In fact, I couldn’t have said it better myself. Of course, I was planning on writing more of a personal opinion piece than a front page article (the story made the front page of both the FT and the WSJ). Still, I can’t fault The Wall Street Journal for putting the painfully obvious in big print.

The Journal article (which is a good outline of the whole affair) won’t encourage faith in Sumner Redstone among Viacom’s shareholders. It begins by quoting Mr. Redstone’s assurance (given just six weeks before) that he could imagine “no circumstance” under which he would fire Mr. Freston. Cut to Monday, at Sumner’s estate, where Tom Freston, a 26 year company veteran, is told he has managed to lose his job, just eight months after being given the helm of the new (CBS-less) Viacom.

The most obvious objection to Mr. Freston’s firing is simply that he wasn’t given enough time. There are billions of people on this planet and it took more than eight months to produce the majority of them; so, I imagine doing something truly remarkable, like steering a media company through troubled, transitional waters, takes quite a bit longer.

The other objection is that Freston had already proved himself a capable executive. He may not have been able to answer the question “What have you done for me lately?”. But, he had built up quite a reputation at MTV. Recent results have taken some of the shine off that golden boy (the channel, not Freston, who is no golden boy at age 60).

MTV is more than a golden boy; it’s Viacom’s crown jewel – accounting for about 70% of the company’s revenue and nearly all of its profits. The aforementioned Journal article fears “Mr. Freston’s departure could lead to a wider shake-up at the company, particularly within MTV networks, much of whose management has been with the company for years and is intensely loyal to Mr. Freston.”

Those fears are rational. Any time an executive …

On The Twenty Best Financial Blogs

24/7 Wall Street has compiled a list of the twenty best financial blogs. The list, presented in no particular order, included this blog. I’m also glad to say it included several of my favorite blogs such as Value Discipline and Bill Rempel’s blog (formerly Absolutely No DooDahs). All of the blogs on the list are quite good.

While checking out those blogs on the list that I hadn’t yet read, I found something worth sharing. In a comment to a post on Frank Barnako’s Media Blog, there’s a link to a great little Netvibes module that will allow you to get all of the available feeds (18 of the 20) in one easy step – and view them all in one place. Of course, you’ll have to register at Netvibes.com to use it. But, it’s worth it just for the module.

On a related subject, Bill Rempel (author of Absolutely No DooDahs) has moved his blog to a new location. I’ll update the directory later this week; for now, just know that he’s moved and he’s worth reading at his new location (where you’ll already find some new posts).

Finally, I’ll go through 24/7 Wall Street’s list and add those blogs that aren’t yet part of my Value Investing Directory to that directory. They are all very good blogs. Now that they’ve been collected in one place, there’s no excuse for any continued oversight on my part. Expect the directory update later this week.

Read 24/7 Wall Street’s List of The Twenty Best Financial Blogs

Read Comment Containing Link to the Netvibes Module

Register at Netvibes.com (required to use above module)

Visit Bill Rempel’s Blog

Visit Value Discipline

Visit 24/7 Wall Street

Visit Frank Barnako’s Media Blog…

Collection of Company Specific Posts

For new readers, here’s a collection of the longer company specific posts I’ve written this year:

An Analysis of Blyth (BTH)

An Analysis of Cascade Bancorp (CACB)

An Analysis of Energizer Holdings (ENR)

An Analysis of Fifth Third Bancorp (FITB)

An Analysis of Journal Register Company (JRC)

An Analysis of Journal Communications (JRN)

An Analysis of Lexmark International (LXK)

An Analysis of Overstock.com (OSTK)

An Analysis of TCF Financial (TCB)

An Analysis of Valley National Bancorp (VLY)

An Analysis of Wells Fargo & Company (WFC)…

On Blyth

Blyth (BTH) calls itself a “home expressions company”. Most people call it a candle company. Neither description is entirely accurate.

Blyth can rightly be called the world’s largest scented candle company, because larger competitors like S.C. Johnson and Sara Lee (SLE) are primarily engaged in other businesses. Like its smaller rival The Yankee Candle Company (YCC), Blyth is primarily a scented candle company. However, unlike the Yankee Candle Company, Blyth has substantial non-candle related operations – hence the “home expressions” designation.

I’m not sure what a home expression is; but I’m pretty sure coffee doesn’t qualify. From that fact alone we can safely say Blyth isn’t really a home expressions company (last year, Blyth acquired Boca Java, an online retailer of coffee, tea, and hot chocolate). Blyth may not be a pure play scented candle company or a pure play “home expressions” company; but, that doesn’t mean it’s merely a hodgepodge of unrelated businesses.

There is a method to Blyth’s madness. From the manufacturer’s perspective, candles, ceramics, frames, vases, coffee, and gourmet food are very different products. But, from the customer’s perspective, they serve a similar purpose. Essentially, Blyth sells personal indulgences to women at affordable prices. That’s a big business in the U.S., Canada, and Europe. It also happens to be a good business.

Profitability

Since 1998, Blyth has had an average return on assets of 10.33% and an average return on equity of 18.55%. Regular readers of this blog know that I like to use a third profitability metric from time to time. One of the best ways to measure the inherent profitability of a business (independent of its current capitalization structure) is to use the pre-tax return on non-cash assets (PTRONCA). Over the past decade, Blyth has had a PTRONCA of about 19.21%, which is very good – although far from great.

To put that 19.21% PTRONCA into perspective, think of it this way: independent of its capitalization structure, Blyth generated a little over nineteen cents for every dollar invested in the business (before taxes).

Essentially, this means that if Blyth hadn’t utilized any debt whatsoever it would have had a return on equity of roughly 12% (after taxes). Although a 12% return on equity doesn’t sound all that impressive, achieving a 12% ROE without using any debt would actually represent a solid performance for most public companies under most economic conditions.

Of course, over the last decade Blyth actually averaged a much higher return on equity (18.55%). During this period, Blyth utilized a material (but far from egregious) amount of debt. As a result, the company surpassed its own stated goal of achieving a 15% annual return on equity.

Based on Blyth’s past ROA and PTRONCA, it appears to be a good business. If we put aside GAAP accounting for a moment and look at the economic earnings of the business, we’ll see that Blyth has actually performed a bit better than its reported net income figures suggest.

Cash Flow

Blyth’s free cash …

On Pilgrim’s Pride and Gold Kist

On Friday, integrated poultry producer Pilgrim’s Pride (PPC) publicized its offer to acquire smaller rival Gold Kist (GKIS) for $20 per share. The offer values Gold Kist at roughly $1.16 billion including the assumption of $144 million in debt. The $20 a share cash offer represented a nearly 55% premium over Friday’s closing price of $12.93.

Since the offer was made public, the market price of Gold Kist’s shares has risen to $19.88.

Going Public

On Friday, Pilgrim’s Pride put out a press release that included the text of a letter delivered to Gold Kist’s board (that same day). In the release, Pilgrim’s Pride claimed it has “substantial current liquidity” and that its financial advisors have given the company “further assurances” that Pilgrim’s Pride has the ability to finance the transaction.

The release also suggested the transaction would be accretive to EPS in the first full year following the merger; the combined company would enjoy approximately $50 million in anticipated synergies. During 2005, Gold Kist had sales of over $2.3 billion while incurring Selling, General, and Administrative costs (SG&A;) of just $112.2 million. So, these anticipated synergies would likely come from the cost of goods sold line. Pilgrim’s Pride suggested as much in the release by stating such synergies were “expected to come primarily from the optimization of production and distribution facilities and cost savings in purchasing, production, logistics, and SG&A;”.

A Fair Price?

The letter to Gold Kist’s board is generally unremarkable, being full of the usual platitudes such as “value creation for our respective shareholders, employees, business partners and other constituencies”. Considering the price at which Gold Kist currently trades, the limited expected synergies, and the fact that the current proposal is for an all cash deal, it seems far more likely Pilgrim’s Pride is looking to create value for its shareholders by capturing the wide spread between the market price of Gold Kist and the company’s value to a 100% owner.

Pilgrim’s Pride shouldn’t be faulted for trying to exploit such an opportunity. However, investors shouldn’t view the deal as a value creating combination when it is clearly an opportunistic attempt to buy something for less than its worth.

The letter did state that Pilgrim’s Pride is “willing to discuss alternative forms of consideration, including a mix of cash and Pilgrim’s Pride common stock”. We’ll see what this means in the days ahead.

I suspect it means some small amount of stock as a sweetener rather than a radically different mix of cash and stock. The reason for this is obvious. Shares of Pilgrim’s Pride are probably worth a lot more than their quoted price; so, a deal consisting of a large amount of stock in place of cash would actually be a big step up in the true amount of economic consideration given in exchange for Gold Kist’s operations.

Valuation

Now, some may argue that this deal is aimed in large part at capturing synergies rather than exploiting a difference between the price and …

On Homebuilders

Bill of Absolutely No DooDahs began his May 31st post entitled “My Homeys” by writing the following:

“Rarely has there been a single segment or industry as universally loathed as the one I’m writing about today. Almost every stock I’ve screened from this industry has double-digit negative 52-week returns and short ratios over a week to cover. This industry’s P/E is below 5.5 on average, and its PEG and Price/Sales are 0.4 and 0.5 respectively. This industry’s Price/Book ratio is hovering close to 1.3, a rarity for a set of businesses with double-digit Return on Assets. I’m talking about, of course, the homebuilders.”

Bill has written three excellent posts about homebuilders. I highly recommend reading them, especially because you will find I’ve sprinkled quotes from those three posts throughout the post you’re reading now. There’s no need to re-invent the wheel. If Bill said it better first, why shouldn’t I quote him instead of struggling to find a different way to say the same thing?

Here are Bill’s three posts (in chronological order):

My Homeys

I Value My Homeys

DHI – One of My Homeys

A Contentious Topic

Although nearly three months have passed since Bill wrote that paragraph, it remains an appropriate introduction to a contentious topic. I’ll try to take the discussion in a slightly different direction by presenting some questions (and hopefully a few answers) that seem most likely to help investors form actionable judgments about the homebuilders.

Naturally, the first question is why housing in general and homebuilding stocks in particular are such a contentious topic. Two culprits immediately spring to mind: self-interest (enlightened or otherwise) and the financial media (almost certainly otherwise). These two forces have a hand in the forming and fomenting of a great many controversies. So, it’s hardly surprising to find them at work here.

The self-interest is genuine. Many Americans own a house. Some Americans own more than one house. This second group is probably somewhat more likely to watch CNBC, read The Wall Street Journal, etc. So, the financial media takes that kernel of genuine self-interest and blows it ups.

The manner in which it does this is particularly interesting, because it affects the way Americans in general and investors in particular think about the subject.

Discussions of the housing market often involve talking heads and statistics. The talking heads naturally present opposing views. The statistics are, of course, meaningless without a point of reference.

Obviously, a series of historical data could provide such a point of reference; however, a series of historical data is complex, backward-looking, and above all else not a good way to keep an audience’s attention. In contrast, estimates are simple, forward-looking, and a bit more exciting. So, estimates win out. Not just in the reporting on the housing market, but in financial reporting as a whole. Estimates pervade the financial media.

While they can be very useful, estimates do carry the unfortunate side effect of turning shades of gray into either black or …

A Question About One of Phil Fisher’s Books

A question was posted in the Value Investing Encyclopedia about one of Phil Fisher’s books. I couldn’t answer it, because I’ve never owned an original copy of Conservative Investors Sleep Well. I was hoping one of the blog’s readers might be able to answer this question:

Geoff,

Amazon says that Conservative Investors Sleep Well is 180 pages long, but the version in Common Stocks and Uncommon Profits and Other Writings is only 50 pages long. Do you know whether this is an abridged version?

Josh

If you know the answer to this question please click the “comments” link below. Thanks.…

Some News Items and Worthwhile Articles

News

The nation’s largest rent to own operator, Rent-A-Center (RCII), will acquire Rent-Way (RWY) for $10.65 a share in cash. Rent-A-Center values the transaction at $567 million – much of the purchase price is attributable to the assumption of long-term debt. Rent-A-Center is certainly an interesting business; the stock was quite a bit cheaper a year ago.

Press Release

Warren Buffett’s Berkshire Hathaway (BRK.B) reported its financial results for the second quarter of 2006. As had been widely reported, catastrophe writing increased substantially.

Reuters / 10-Q

Investors

Leucadia National (LUK) made a few changes to its investment portfolio. Leucadia added shares of Eastman Chemical (EMN), started a new position in Lucent (LU), reduced its holdings in Parkervision (PRKR), and sold out its position in UAL Corporation (UAUA).

GuruFocus / 13-F

Bill Miller of Legg Mason Value Trust (LMVTX) said that fund had a “dreadful” second quarter. His quarterly letter to shareholders cited two very different mistakes regarding homebuilders and energy stocks. Value Trust was too quick to invest in homebuilders – and too slow to invest in energy companies.

Miller acknowledged that Amazon (AMZN), eBay (EBAY), Yahoo (YHOO), Expedia (EXPE), and Google (GOOG) “have traded off on some degree of angst about company-specific near-term issues.” However, in his opinion, “these companies represent superior economic franchises with the ability to earn above the cost of capital as far as the eye can see, and the market’s myopic, obsessive focus on what is going on for the next three or six months doesn’t alter the business value.”

Baltimore Business Journal / Quarterly Letter

Blogs

About a week ago, Rick of Value Discipline wrote an excellent post entitled “Returns Accrue When Accruals Don’t”. The post discusses the relationship between net income and cash flow from operations. I highly recommend reading both the post and the three comments to it. It’s a very important concept – and as Rick points out, it’s not the sort of thing you’ll hear about on CNBC.

Post / Visit Value Discipline

Bill of Absolutely No DooDahs takes on another important yet rarely discussed topic, share buybacks. I can’t say I agree 100% with every point Bill makes in his post entitled “Buying it Back Yet Again”. However, I do agree with his method of taking a logical look at an operation most investors simply assume is as wholesome as apple pie. Buybacks are a topic I really should take up on this blog at some time, especially because some of Bill’s criticisms are perfectly valid.

Post / Visit Absolutely No DooDahs

George of Fat Pitch Financials notes that he bought some Realogy (H), one of the two spin-offs from Cendant (CD). Realogy and Wyndham Worldwide (WYN) were spun off from Cendant in the hopes of unlocking shareholder value.

As many articles, broadcasts, and blogs have noted, breaking up conglomerates has become almost as popular as assembling them. Well, that’s probably an overstatement. Breaking up a …

Quarterly Newsletter

The latest newsletter issue (for Q2 2006) is now out on PDF. Those who purchased the issue should have received an email with the PDF attached. If you had purchased the issue and have not yet received the PDF, please email me.

The printed copies of the newsletter will probably arrive in about two weeks. The exact delivery date will depend on where you live. If you live overseas, it will likely take quite a bit longer.

I hope you enjoy the latest issue.

As always, feel free to email me if you have any questions. I know the new suggested prices presented at the end of each write-up may be a bit confusing at first. However, I do think this method is preferable to providing no guidance whatsoever or to trying to apply a rigid buy / sell / hold system.…

Conclusion of Charlie Rose’s Series on Warren Buffett

The third and final part of the Charlie Rose Show’s series on Warren Buffett aired last night. You can view all three hours (which aired on Monday, Tuesday, and Wednesday of this week) at Google Video.

On a related topic, I just noticed a USA Today article that noted Charlie Rose is also working on a documentary about Buffett. I hadn’t heard anything about that before.

Anyway, the series is (like most of Charlie’s interviews) much more satisfying than the average television piece. However, the series is not a study of Buffett’s investment record or the philosophy that helped him achieve those results. It’s about Buffett the man.

Of course, some of the questions can’t help but lead into topics that are closely related to the investment area, because that is his life’s work. For instance, the interview with Buffett and Gates together touches on investing more than you might expect, because they discuss the way Buffett thinks – including why he hasn’t invested in Microsoft.

If you’re interested in Buffett, you’ll enjoy the series. However, if you’re looking for a discussion of investing that gets into real specifics, you may be disappointed.

I enjoyed the series very much. It’s the sort of thing that may work even better if you watch it online when you have the time to spare.

It’s a leisurely affair. You have to be open to the idea that you’ll be taking in bits and pieces about the man over a few hours, rather than hearing him answer questions about Berkshire’s future, the latest acquisition, etc. one after the other. That’s not really how Rose works normally – and because this series was forged from a series of interviews, there is even less immediacy than usual.

Visit CharlieRose.com

Visit Google Video: The Charlie Rose Show…