Buffett Tax Hypocrisy

Business & Politics

Buffett Tax Hypocrisy

October 10, 2016

In response to Donald Trump rightfully calling out the absurdity of Hillary Clinton aligning interests with the greatest corporate tax evader of all time, Warren Buffett released details of his personal tax return today.

I guess I should not blame Buffett for thinking he can ‘pull one over’ on the American electorate, given that it is the American electorate that has given us Donald Trump as the ‘only’ viable alternative to Hillary Clinton…but wow. It does not take much investment and/or financial acumen to realize that Warren Buffett is one of, if not THE greatest corporate tax evader in American corporate history. Two very basic examples…

(1) Berkshire Hathaway purchased a convertible preferred in Gillette back in the 90’s (off the top of my head), which was subsequently converted into common stock and eventually sold to Proctor & Gamble at a large premium…generating a significant long-term capital gain for Berkshire. But rather than selling its PG stock like a good US citizen in order to generate more tax revenue for Treasury, Buffett decided to hold BRK’s PG stock until earlier this year when BRK swapped all 52 million shares for one of PG’s business units, Duracell battery.

You see – the American corporate tax code allows for this type of “non-cash” asset swap to be treated as a “reorganization” for tax purposes…thus BRK was able to avoid paying the long-term deferred tax liability associated with its PG marketable security via a swap for a wholly owned private business that will more than likely never be sold…and thus the tax liability will NEVER find its way to Treasury.

(2) Even more blatant…Berkshire outright stated in May 2009 that it would utilize the ‘tax loss carry forward’ from the realized loss on its COP shares.

* * * * * * * * * * * *

I abhor Trump and Clinton. But come on Mr. Buffett. Really?

Generals: QVC Group Idea Write-Up

QVC Group 

Idea Write-Up 

October 7, 2016


The views and information I provide are for informational purposes only; are not meant as investment advice; are subject to change without notice of any kind; do not constitute an offer of products or services with regard to any fund, investment scheme, or pooled investment; nor do they in any way, shape or form represent the views of my employer.


  • Recent PPS: $20.05 (10/5/16 closing PPS)
  • FD Shares Out: 481 million (2016E)
  • Market Cap: $9,644
  • Total Debt: $6,398 (2Q16)
  • Cash: $394
  • Enterprise: $15,648


  • Stock 30% off its 52-week high; trades for 11.43x 2016 earnings at $20 PPS; worth $26 minimum.
  • As Boyar pointed out in its SA QVCA report, hedge fund hotel status leading cause of weakness.
  • Contacts close to the business say “There was even less going on (badly) in 2Q16 than appears”.
  • QVCA management confirms with focus groups indicating AMZN not even on the radar as an alternative.
  • Stock likely re-rates to a 15x PE ($26) rapidly, thus does not pay to wait for more weakness.


Via Seeking Alpha.

The GuruFocus Interview That Never Was

17 Mile

The GuruFocus Interview That Never Was

October 4, 2016


I have been due for a re-introduction to the 17 Mile blog/’project’ and I thought the invitation to do an interview with GuruFocus provided a good opportunity for a re-introduction and review. However – after submitting my answers to the interview I was informed that GuruFocus would only post the interview if I used my real name. No worries – it was a good opportunity to codify my thoughts, and the interview that never was is provided below…


GuruFocus: How and why did you get started investing? What is your background?

17 Mile: Before getting started, just a quick disclaimer that the views and information I provide are for informational purposes only; are not meant as investment advice; are subject to change without notice of any kind; do not constitute an offer of products or services with regard to any fund, investment scheme, or pooled investment; nor do they in any way, shape or form represent the views of my employer. With that out of the way…

I grew up 110% focused on sports, and was only modestly interested in political and economic-related topics by the time I entered college. And to be honest, it took until junior year for me to really get serious about my post-collegiate future.

I switched from a Political Science concentration to Public Administration my junior year in order to add a full suite of Finance classes to my schedule without extending my time in school. Fall semester Accounting 101 was my first Finance class, which for some reason led me to Google who Warren Buffett was! The first paper I read on Buffett outlined his “value-oriented” investment strategy that entailed determining what a business was worth and buying with a margin of safety. I was instantly hooked; and by the following spring I was building DCF valuation models alongside an intensive self-study of Benjamin Graham’s Security Analysis. My DCF work centered on Washington Mutual in May 2008 – an interesting time…

In the wake of Lehman Brothers I gathered a tiny base of capital from friends and family to launch a value-oriented strategy. With the market depressed and my investment hero telling the world to “Buy American. I Am.”, I believed my timing was next to perfect. But into the March 2009 bottom I was down almost 50%, giving me my first taste of the psychological side of investing. By April 2009 I was back above water and decided to return the money before moving into the real world.

From May 2009 thru March 2011 I worked as a regional bank credit analyst before taking a job at a registered investment advisor. My role at the RIA has evolved from that of a junior-level generalist equity analyst responsible for covering existing portfolio names and generating new ideas, to that of a senior-level generalist + quasi CIO responsible for broad investment strategy development & implementation and portfolio management + member of a firm-level corporate strategy team.

Very early on I learned and embraced the fact that the ultimate investment strategy is the Berkshire Hathaway model: a wholly owned business or set of businesses that form a platform for further acquisitions while generating a perpetual stream of cash for public equity investments. Now of course Buffett has taken this model to untouchable levels of intricacy, but the basic model is beyond brilliant, as it removes the inherent strains on fixed-AUM portfolio management. The principle underlying the model is the “builder” principle. All of the great wealth creators over time are builders first, financial engineers second (if at all): Buffett, the Koch brothers, Masayoshi Son, Charlie Ergen, etc.

I attempted to launch my own version of this model when I worked as a credit analyst, sending a buyout proposal to the CEO of one of the bank’s clients in late 2010 upon learning he was looking for a company-friendly exit strategy. Sadly, I never heard back. But this is an extremely long ‘game’, and the Berkshire model remains my ultimate long-term professional goal.

Including the initial foray into the market in December 2008, thru mid-2014 I spent approximately 5.5 years ‘finding myself’ as an investor outside of the ‘plain vanilla’ RIA world. This period of time culminated with the June 2014 launch of 17 Mile, a blog that I have since used to publicly document my personal investment process broadly, and my decision making process managing two personal investment strategies specifically (“17 Mile” and “17 Mile Global Equity”).

“17 Mile” – started June 15, 2016 – is a highly aggressive value-oriented, event-driven absolute return strategy designed for no more than 5-10% of a total portfolio. The benchmark/goal is simple: double in value as quickly as possible. A tough market + too much exposure + myriad trading conflicts collided in early 2016 to bring down this strategy (from a performance standpoint), and I was forced to restructure my thought process. While incredibly painful and embarrassing, it was the best thing that could have happened, given that I have 4-5 decades remaining in my career.

While there are numerous lessons to be had from the last 2+ years of managing the “17 Mile” strategy, first and foremost was the inappropriate mixing of goals: I took the highly aggressive portion of my total investment portfolio and tried to hold that out as a model of my core investment style, which is far less aggressive and very long-term oriented.

“17 Mile Global Equity” – started May 1, 2016 – is simply the “17 Mile” strategy ex. the use of leverage, and with strict portfolio management rules. My personal goal is to beat the DWCFT by 5% per annum over all trailing periods greater than 3 years, net of hypothetical fees (a 1% management fee and a 15% performance, net of a 6% hurdle, for the sake of comparison to hedge fund strategies that are reported net of fees).

GF: Describe your investing strategy and portfolio organization. Where do you get your investing ideas from?

17M: I do not know the exact statistic, but the average stock fluctuates something like 50% from low to high over any given 12-month period. Even if not precisely accurate, the guiding principle is that an enormous number of opportunities arise over 12-18 months; and if one is extraordinarily passionate, analytically intense and psychologically cold-blooded, I believe this framework renders Warren Buffett’s “20 Punch Card” philosophy moot for the “enterprising investor”. So in simple summary, outside of my buy & hold retirement accounts – which are run via the Berkshire model (cash goes in every month, so there is no need to dance in and out of opportunities) – I look for relatively high quality businesses that are temporarily out of favor with attractive 18-36 month risk/reward profiles.

There are not enough adjectives in the English language to describe how incorrect it is to draw a distinction between “growth” and “value” investing…yet we all do it! Amazon (NASDAQ: AMZN) trading at 50% of a fair value that is comprised of 95% future growth opportunities is no different than Transocean (NYSE: RIG) trading at 50% of a fair value comprised of 100% cold-stacked Ultra Deepwater rig net PP&E. Point is – if there is a moderate to extreme amount of pessimism surrounding a company, industry or sector, there is a good chance I will take a look regardless of the ‘growth’ or ‘value’ orientation.

There are two types of entry points into these 18-36 month set-ups. (1) The classic “Dogs of the Dow” strategy where a beaten down stock that has missed 2-4 straight quarters of earnings is so low/cheap that it has no choice but to rally 50%+. This strategy is a pain, as it often requires one to endure months of stock price ‘bleeding’ resulting from “premature accumulation” (to quote Bruce Berkowitz). I am getting better at managing these set-ups, but still have plenty to learn.

Quick example: Cummins (NYSE: CMI) was down almost 40% in 2015 alongside declines in the Brazil and US truck markets, but is up over 45% YTD in 2016 despite at best ‘firming’ fundamentals.

(2) An “entry catalyst” into an attractively valued business with strong fundamental momentum, where the “entry catalyst” has a rubber band effect over a well-defined duration. While the rubber band may not snap back sooner than a stock price purchased under the “Dogs of the Dow” strategy, the downside is typically very well defined, allowing for out-sized positioning.

Quick example: Charter Communications (NASDAQ: CHTR) declined 10-20% in early- to mid-2015 once the Comcast/Time Warner Cable deal fell thru as the market began to price in deal-related complexity of a Charter-for-TWC bid. The stock traded down to below $170, and standalone fair value was conservatively circa $200. A true win-win investment set-up, as a TWC deal break would provide deal ‘relief’, while a TWC deal was a long-term fair value game-changer. The stock now trades for almost $270.

Portfolio Organization

In my “17 Mile Global Equity” strategy I maintain ten positions at minimum; go no higher than 10% on initial position size; and do not let positions grow to more than 15% of the portfolio.

Idea Sourcing

My primary idea generation source is reading physical newspapers. Not on a phone or tablet – but actually getting ink on my hands. I maintain a “Scratch Notes” page on my blog that I use to catalogue my notes on pertinent articles – which ironically I never really go back and review, but the actual process of taking notes helps immensely to ingrain what I read.

While heresy in Warren Buffett land, I also read a mountain of ‘Street’ research every week, as it allows me access to untold multiples of information that I otherwise would not be privy to. I do not really care about ‘Street’ conclusions, I just want information and a sense of how bullish or bearish the market is on a particular company/industry/sector.

Lastly, the combination of the blog and Twitter has allowed me to develop a solid investment network from which I derive a reasonably steady stream of ideas and analysis. It is tough to balance the powerful network effect of “Finance Twitter” with the need to shut off the ‘machines’ in order to focus, read and think quietly in a room; but if balance can be achieved, it is enormously valuable, in my opinion.

GF: What drew you to that specific strategy?

17M: Very early on in my career I was drawn to Dan Loeb’s event-driven style. And while it may simply appear that I am cloning him by saying I have an event-driven investment ‘personality’, in my experience it is extremely difficult to mimic an investment style/strategy that I am intrinsically uncomfortable with.

Over the years I have honed my ‘personality’ via my own experiences and learning/drawing from other investors. Specifically, David Tepper’s trading ‘touch’ around true deep value situations, and Stan Druckenmiller’s ability to go big when the odds are overwhelmingly in your favor.

GF: What books or other investors changed the way you think, inspired you, or mentored you? What is the most important lesson learned from them? What investors do you follow today?

17M: Early on I read anything and everything I could find on Dan Loeb, David Einhorn and Bill Ackman, in addition to every single Warren Buffett letter (BPL and BRK) multiple times over.

The single greatest lesson I learned from my early readings was to become my own investor. The investment process is intensely personal – and in my opinion there is likely no single greater danger in the investment business than NOT listening to one’s self.

GF: How long will you hold a stock and why? How long does it take to know if you are right or wrong on a stock?

17M: 100% depends on the strategy and the performance incentives in place. At my day job I manage 30-40 stock portfolios populated with high quality businesses that I want to let compound their intrinsic value over 10-20 years; while in my highly aggressive “17 Mile” strategy I will sell a stock that is up 15-20% in a month if the stock begins to ‘behave’ like it wants to decline.

It takes months/quarters/years to know if you are wrong on the fundamental thesis; but if you are in tune with a stock’s ‘behavior’ – a big if, as most fundamentally-oriented investors actively shun chart watching – you can know very, very quickly.

GF: How has your investing approach changed over the years?

17M: I have simultaneously become more patient with highly attractive investment set-ups and more impatient with poorly ‘behaving’ stocks.

GF: Name some of the things that you do or believe that other investors do not

17M: There is almost no such thing as an original thought in today’s day and age of rapid fire information flow; but I would venture to say that among traditional “value-oriented” investors I am one of the few that believe this ‘game’ is 70% portfolio management, 30% stock selection.

It has been said about George Soros that he was only moderately better than his peers, if at all, in his analysis of situations; but what set him apart was his ability to cut his losses and go big when the odds were in his favor. My investment ‘personality’ leans in this direction, so my bias is toward the importance of portfolio management.

GF: What are some of your favorite companies, brands, or even CEOs? What do you think are some of the most well run companies?

17M: Those questions are best answered with the portfolio I would put together were I unable to touch it for the next forty years (roughly in order of position sizing): Visa/Mastercard, Wells Fargo, Berkshire Hathaway, ExxonMobil, Deere, United Technologies, Mondelez, Pepsi, McDonalds, Johnson & Johnson, General Dynamics, and General Electric.

GF: Do you use any stock screeners? What are some efficient methods to find undervalued businesses apart from screeners?

17M: No. Read and develop an investment network.

GF: Name some of the traits that a company must have for you to invest in, such as dividends. What does a high quality company look like to you and what does a bad investment look like? Talk about what the ideal company to invest in would look like, even if it does not exist.

17M: A simple business with high returns on capital and multi-decade secular growth potential; multi-decade track record of industry-leading returns on capital; robust earnings power hidden by a ‘bad’ segment; ‘hidden’ assets; presence of a long-term oriented, operationally focused activist investor; presence of an owner-operator with an exemplary track record.

A high quality company is one that has a materially better than average probability of generating its current (high) return on capital – within a reasonable band – 10+ years from today.

I am actually a pretty bearishly oriented investor – and while I do not actively ‘short’ stocks with real money, I play a short seller on paper and thus have a wide swath of what I consider to be ‘bad’ investments in mind at all times…

Frauds and fads are most likely the worst investments over time; but I do not really troll in that arena, so I cannot speak intelligently about them. My ‘bad’ investment focus tends to focus on where market sentiment toward a company/industry/sector is out of control on the upside.

Nike (NYSE: NKE) is a great example of a ‘compounder’ that everyone and their brother was extrapolating top-line growth + margin expansion + share shrink into infinity over the last several years. This extrapolation resulted in increasing justification for premium PE application to EPS figures with multiple layers of embedded double counting. Admittedly I am a stickler for ‘clean’ valuation work – as I believe the investment business is too uncertain to simply apply valuation multiples pulled out of the air (though many would say that the uncertainty is precisely why one should not be overly precise in their valuation work, citing Munger’s quote that he “…has never seen Buffett do a DCF…”) – but this type of extrapolation and sloppy valuation work is nails on a chalk board to me. Nike is a fantastic brand/business with a very high probability of possessing its current ROIC 10+ years from now; but shareholders likely face multiple (many?) years of stock price underperformance from current levels, in my opinion.

Amazon (NASDAQ: AMZN) is a great example of the ideal company: a high ROIC business that can deploy capital well in excess of annual earnings power over many years. And while Visa and Mastercard possess better core businesses than AMZN, the economics of their industry do not allow for reinvestment of earnings power…hence V/MA shareholders must ‘suffer’ with a 10% growth rate + 80% annual payout.

But while AMZN shareholders likely possess a greater runway for business value growth over the next 10-20 years than do V/MA shareholders, I believe the sentiment toward AMZN’s business prospects is quite literally out of control at present. Yes, looking out 20 years current shareholders will likely do just fine – but looking out 1-3 years, I see nothing but potential disappointment for the AMZN stock price as the Company continues to build out its Retail distribution network and Public Cloud infrastructure. I believe the near-daily enthusiasm around AAPL’s seemingly impenetrable stock price in September 2012 is a very, very, very good template for navigating current AMZN sentiment.

GF: What kind of checklist do you use when investing? Do you have a specific approach, structure, process that you use?

17M: Outside of the normal due diligence process of reading anything and everything I can on a situation/company/industry/sector I do not. I cannot reiterate enough how an investment set-up must fit your investment ‘personality’ and hit you over the head like a ton of bricks. For me, checklists tend to obfuscate the ‘ton of bricks’ conclusion I am seeking.

GF: Before making an investment, what kind of research do you do and where do you go for the information? Do you talk to management?

17M: Again, the standard due diligence process of company filings, presentations, transcripts, ‘Street’ notes, and talking to other investors more knowledgeable about the situation/company/industry/sector than myself is pretty straightforward. Though I am constantly striving to hone the day-to-day process, make it more efficient, cover a wider swath of companies, etc.; but that just comes with time and effort.

GF: How do you go about valuing a stock and how do you decide how you are going to value a specific stock?

17M: Amazon is a good example. I use a 5-year DCF model to value Amazon Retail and an industry comp price/sales multiple on 2017 sales to value Amazon Web Services. In the DCF model I assume 20% top-line growth and a 22.5x terminal PE on year 6 NOPAT.

GF: What kind of bargains are you finding in this market? Do you have any favorite sector or avoid certain areas, and why?

17M: The market as a whole is hellaciously overvalued based on historical valuation metrics; but there are pockets of moderate to extreme pessimism in some moderately good businesses. For lack of a better descriptor the Specialty Pharmaceutical industry is setting up quite nicely for a big post-election “Dogs of the Dow” run, in my opinion. Stable to growing cash flows are cheap due to the regulatory/pricing overhang, and once we get thru the election and year-end tax loss selling the rebound could be swift beginning 1/1/17 (perhaps even by mid-December the buying begins due to the mechanics of getting losses off the books before year end). I have a decent allocation to this area at present, but am ramping up my coverage into the likely year-end selling.

The Media space is near and dear to my heart, as it has an abundant near-, medium- and long-term M&A ‘event’ potential, highly skilled owner-operators with decades of well-documented success, and now almost 24 months of pessimism baked into stock prices. Perhaps tax loss selling provides a bit of pressure into year-end, but I believe downside from current levels is extremely limited. My paper trade long/short pair would be long FOXA/short AMZN J

GF: How do you feel about the market today? Do you see it as overvalued? What concerns you the most?

17M: As stated in the previous answer, based on historical valuation metrics the market is extremely overvalued. However, a very good case can be made that historical valuation metrics are not applicable due to aggregate tax policy and interest rates. So perhaps the market is only modestly overvalued. Regardless – as long as the US economy avoids recession, downside should be limited to no more than 20%.

From a medium-term standpoint the market is in very, very good shape. The post-February rebound exhibited all of the typical signs of the beginning of a cyclical bull market rally; but if there was any doubt – which I had an abundance of, unfortunately – the post-Brexit market behavior emphatically confirmed the cyclical bull market.

Short-term the market is working off excess optimism – but for those looking at this weakness as the start of a new cyclical down leg I would point to the new all-time highs in the NYSE equity-only advance/decline line.

GF: What are some books that you are reading now? What is the most important lesson learned from your favorite one?

17M: To be honest I do not read many books, as daily company due diligence, my job responsibilities, writing and networking take up an enormous amount of time; and I am actually trying to cut back even more in order to achieve better balance. However, I am slowly working thru “Good for the Money” and “More Money Than God”, with the latter containing fantastic overviews of Paul Tudor Jones and Stan Druckenmiller’s respective investment styles.

GF: Any advice to a new value investor? What should they know and what habits should they develop before they start?

17M: Start investing real money ASAP; read a lot; and do not coattail other investors at the expense of developing your own investment ‘personality’.

GF: What are your some of your favorite value investing resources or tools? Are there any investors that you piggyback or coattail?

17M: The Wall Street Journal and Financial Times are my favorite resources/tools.

Coattailing in its purest form – simply buying because another investor owns a stock – is a horrific practice.

ValueAct Capital, Trian Partners and Pershing Square (yes I said it) are three of the better long-term oriented, operationally focused activist funds out there that can materially change the fundamental business outlook of a company.

For deep value/special situation idea generation, Appaloosa (David Tepper) is a fund to pay attention to. Again – an idea has to fit your own investment ‘eye’, but at bare minimum their involvement can materially change the risk/reward profile of a situation.

GF: Describe some of the biggest mistakes you have made value investing. What are your three worst investments? What did you learn and how do you avoid those mistakes today?

17M: My biggest mistake (or set of mistakes) came from late 2015 into early 2016. I am a contrarian at heart and love the physical act of going against the market by buying into a stock price that is declining for what I believe to be uneconomic reasons; but in late 2015 and into early 2016 I bought far too aggressively into the WMB/ETE deal-related debacle against a horrific market backdrop. In my aggressive “17 Mile” strategy I put myself in a position where I could not survive a worst-case scenario, which led me to commit the ultimate investment sin: making myself ‘path dependent’ to the point where I let short-term volatility permanently impair long-term capital.

There is nothing wrong with being aggressive as long as appropriate risk management protocols are in place. But you have to respect the market backdrop. Quite literally anything can happen in a weak market. In this limited space, that is the key lesson from the WMB/ETE situation.

GF: How do you manage the mental aspect of investing when it comes to the ups, downs, crashes, corrections, and fluctuations?

17M: Staying diversified and taking a multi-decade view across my total investment life. Within the “17 Mile Global Equity” strategy, modest position sizing and diversification give me great comfort in riding out market volatility; while within the “17 Mile” strategy staying on top of market conditions and cutting off losers as quickly as possible allows me to navigate market volatility.

GF: If you’d like to share, how have the last five to ten years been for you investing wise?

17M: I would say mixed success. I have a lot to prove going forward.

Generals: Amazon.com High-Level Valuation Analysis


Generals: High-Level Valuation Analysis

September 23, 2016


  • Recent PPS: $804.70
  • Shares Out: 490 million
  • Market Cap: $394,303
  • Net Liabilities: $5,579
  • Enterprise: $399,882


Amazon is an unbelievable business case study; and I would put the compilation of Bezos’ annual letters up there with Warren Buffett’s as 110% required reading for anyone and everyone interested in business and investing. Likewise – as in the early days of Buffett’s Berkshire Hathaway, where a masterful owner/operator was staring down decades of virtually unconstrained growth potential, A) it does not pay to bet against the stock, and B) one should have a working fair value/entry point on hand at all times for when the market begins to doubt the long-term outlook.

At the moment, however, the market is far from doubting the long-term outlook for AMZN; and I believe the expectations currently embedded in AMZN’s stock price are likely to disappoint recent shareholders for the foreseeable future. Again – I will never bet against the stock; but as a potential long-term owner I want to be cognizant of the expectations embedded in the stock price before taking a position.

This is a very short high-level look at AMZN’s valuation designed to provide context…which in my opinion is sorely lacking. In other words, too much in the way of ephemeral TAM estimates, indefensible EBITDA multiples (indefensible for lack of a better term…I mean most EBITDA multiples are just assumed, and not tied back to a DCF-backed valuation), and nonsensical definitions of free cash flow.

17M AMZN Analysis September 2016


Yesterday I enlisted the help of “Finance Twitter” via four valuation input polls (I have my own assumptions, but wanted to gauge the distribution of expectations):

  1. AWS Fair Value: $200B, $150B, $100B
  2. Amazon Retail ‘Intrinsic’ EBIT Margin: 6%, 5%, 4%
  3. Amazon Retail 5-Year Sales CAGR: 25%, 20%, 15%
  4. Amazon Retail Terminal PE in 5 Years: 35x, 30x, 25x, 20x

On a weighted-average basis the results look as follows:

  1. AWS Fair Value: $144 billion
  2. Amazon Retail ‘Intrinsic’ EBIT Margin: 4.82%
  3. Amazon Retail 5-Year Sales CAGR: 18.3%
  4. Amazon Retail Terminal PE in 5 Years: 24.95x

Using the poll-based inputs + a 25% tax rate + an 8% discount rate + ignoring interest expense/excess cash/debt/etc, I arrive at a total fair value of $674 per share (details provided in PDF above).

While at last closing price AMZN is only 19% this poll-based fair value, I believe the AWS fair value is likely on the high side…and after discussing with some folks on Twitter yesterday, ‘intrinsic’ EBITM is likely south of 4%…


My personal fair value is approximately $558. I use a 20% Retail Sales 5-year CAGR, a 22.5x 5-year Retail terminal PE, 30% tax rate, 10% discount rate, an ‘intrinsic’ EBITM of 4%, but leave the AWS fair value the same at $144 billion.

If AWS is ‘only’ worth $100 billion today, my fair value falls to $468.


“Free cash flow” is, IMO, one of the most misused terms/phrases in the market. Not to be picky – but Buffett’s original definition of “FCF” (using a newspaper company as an example, I believe) was a simple series of adjustments to the income statement in order to arrive at normalized level of distributable earnings power. In other words, assuming an appropriate maintenance level of capex and normalized working capital that keeps earnings power flat in perpetuity, what can a company fully distribute to shareholders assuming no reinvestment in growth capex/working capital. That’s the pure definition of FCF, on which you base a fair value price/earnings ratio.

The next-best definition of FCF is currently distributable FCF. So for a mature company such as Pepsi that is growing at say 6% a year, assuming a 30% ROE Pepsi’s currently distributable FCF would be 80% of earnings (to generate 6% growth at a 30% ROE, Pepsi would only need to retain 20% of normalized earnings power). Currently distributable FCF is best used in a FCF yield calculation (if distributable FCF is paid out 100% as a dividend, the calculation is easy – the dividend yield).

* * * * * * * * * * * *

Jeff Bezos is (clearly) not dumb. He knows that the marketplace A) loves easily calculable metrics (because *its* lazy), and B) loves free cash flow…in all of its forms (because FCF *=* earnings power). As such, Mr. Bezos uses a highly manipulated definition of free cash flow in order to tick both boxes:

Free Cash Flow = Operating Cash Flow – Cash Capital Expenditures

Of course for good measure, he throws in FCF less principal repayments and FCF less principal repayments less assets acquired under capital leases.

Bezos’ baseline FCF definition is absurd on two fronts – and he knows it: 1) material stock comp expense is included in operating cash flow, and 2) capital lease-financed capex is reported ‘below’ the capex line. Stock comp expense is a capital markets transaction, and should be deducted from operating cash flow; and capital lease-financed capex is no different than cash capex financed via public market bond issuance.

But the market doesn’t really care because both stock comp and capital lease-financed capex are “NON CASH”. Yay.

More than anything this is simply a rant. I want Bezos to retain every single dime of ‘intrinsic’ earnings power, as the PV of AMZN’s growth opportunities is far higher than anything investors could produce themselves by reinvesting distributed cash flow back into the capital markets. Plus it’s more tax efficient. But for goodness sakes, enough with the absurd FCF definition(s).

As found in the PDF above, AMZN’s cleaned up FCF generation (‘currently distributable’ definition) looks as follows:

  • 2013: -$2.2 billion
  • 2014: -$5.5 billion
  • 2015: -$844 million
  • LTM 2Q16: -$1.1 billion


In simple summary, in my opinion there is too much optimism currently priced into the stock. While the growth runway is enormous, it is very difficult to handicap the fundamental business value with a high degree of precision, and I believe those looking to enter the stock (speaking for myself) are best served to wait for when there is widespread doubt around various aspects of the business.

Hindsight is 20-20, and I didn’t take a position thus what I am about to say is next to moot…but in late 2011 I did a valuation similar analysis (at the time it was only Amazon Retail, for the most part) using a 4% ‘intrinsic’ EBITM, 25% growth rate and a 15x terminal PE and arrived at a fair value materially higher than where the stock was trading. Again, I did not take a position – but the point is that the time(s) to buy the stock is/are when it is trading materially below an easily defensible fair value estimate. 

AWS valuation and the cost of distribution to meet Prime-led demand growth are the two key areas I will be watching for doubt to begin creeping into the stock price.

US Telecom Data Pricing (and DISH…of course)

17 Mile

US Telecom Data Pricing (and DISH…of course)

September 5, 2016


(Short write-up, more akin to the note-taking found on the Scratch Notes page.)

The debate about the value of DISH’s vast spectrum holdings centers on the following dynamic: is the US telecom spectrum ‘crisis’ severe enough to push the Big 2 (Verizon and AT&T) to ‘play ball’ with DISH before DISH’s 2020 spectrum build-out deadline(s). But this dynamic misses – almost entirely – the argument Charlie Ergen has been making now for years: the true value in DISH’s spectrum holdings lies in the fact that the industry will look vastly different 5-10 years from now.

There is no spectrum crisis under the industry’s current construct. And DISH has explained ad nauseum the build-out deadline(s) are not an issue, as in a worst-case scenario they spend $3 billion to meet the minimum requirements. As such, time is likely better spent discussing future industry dynamics and how Charlie Ergen may or may not be out of his mind…


For an American “DINK” (Dual Income, No Kids), a monthly “TMT” (Technology, Media, Telecom) bill could look as follows:


  • 1 ‘Medium’ 4GB data plan: $50

Time Warner Cable

  • Internet: $70 ($65 promo normalized by $5)
  • Video: $65 ($60 promo normalized by $5)
  • Total: $135 (compare to full triple play at $130 promo…)

Streaming Services

  • Netflix: $10
  • Hulu: $10
  • HBO GO: $7.50 ($15/month used for 50% of the year)
  • Amazon Prime: $10
  • Total: $37.50

Total TMT bill: $222.50/month

(I make no attempt to depict the average US monthly TMT bill down to even the nearest ten dollars, let alone the nearest couple. Too many moving parts. But the above should at least be in the ballpark, particularly on a relative basis as shown below.)

Percentage Breakdown

  • Phone data: 22%
  • Internet: 31%
  • Video: 29%
  • Streaming: 17%

In light of the various rapidly changing industry dynamics, it’s interesting to observe the end-user experience of the current TMT landscape via the lens of the monthly bill. Two observations: 1) it is easy to see how streaming services can be considered complementary to the traditional cable bundle video product at only 17% of the monthly bill; 2) it is (yugely?) surprising that the Telecom industry gets a nearly free pass on its data pricing practices. Consider…

A 4GB Verizon plan costs $50 per month versus unlimited data from Time Warner Cable for $70, and comprises 22% of the monthly TMT bill. For a family of 4-7 people, that $70 TWC bill remains fixed and performance does not suffer; whereas the Verizon data bill would quickly escalate to the ‘Large’ plan of 8GB + 2GB/line for $70, or the ‘XL’ plan of 16GB + 2GB/line for $90.

As an outsider observer I could be wrong…but I believe this data pricing dynamic is precisely what Charlie Ergen is attacking with his spectrum strategy and referring to in comments regarding future industry structure. The traditional cable bundle more than likely will continue to bleed subscribers until Millennials reach a fuller employment rate and/or the cable companies become a bit more technologically savvy and creative on the pricing side (I believe Charter will lead this charge, FWIW); but I believe Telecom profitability is in far greater danger, as consumers begin to rethink locking themselves into a capped data plan for almost the same price as their monthly Internet bill for unlimited data + nearly-everywhere wifi.


Two WSJ articles regarding recent industry data pricing moves and my notes on them:

T-Mobile, Sprint Bring Back Unlimited Data (WSJ 8.18.16)

  • T-Mobile will stop selling monthly data packages
  • Sprint dropped the price of its unlimited data plans
  • AT&T is offering unlimited data to TV subs
  • T-Mobile and Sprint lower the quality of data for all users on unlimited data plans
  • AT&T and Verizon lower speeds to 2G for those who exceed their data caps
  • New T-Mobile plan costs $70/month for 6GB, or $160 for a family of four for 24GB

T-Mobile, Sprint Unlimited Plans Are Full of Limits (WSJ 8.30.16)

“Take T-Mobile. The carrier said Monday its T-Mobile One plan is ‘a radically simple subscription to the mobile internet at one low price’ with ‘unlimited everything.’ The carrier’s website is decorated with an oversize infinity sign.”

“But the more than 450 words of fine print on T-Mobile’s site describe the caveats. Video is delivered at a lower quality, internet speeds might get throttled after using 26 gigabytes in a month, and if a device is turned into a Wi-Fi hot spot, a practice known as tethering, it could be slowed.”

“Sprint launched its “Unlimited Freedom” plan in mid-August with limits on video, music and gaming streaming. On Friday, the company added “Unlimited Freedom Premium,” which is $20 more a month and allows for higher quality streaming than the original offering.”

“For the smaller carriers, these new “unlimited” plans are also a subtle way of eventually raising prices. They start at $60 or $70 a month, and the companies say they might eventually eliminate cheaper options with limited data.”


At present, the consumer is in a bit of a box from a telecom standpoint. The smartphone is now such an integral part of everyday life that everyone ‘needs’ one – thus everyone ‘needs’ a data plan. And as the second article above indicates, it is only a matter of time before the Telecom industry locks in this monopolistic position by raising the minimum monthly data charge. But capitalism should take care of this via the Cable industry’s wide open ‘wifi everywhere’ opportunity. No, the wifi coverage while on the move is not comparable to the mobile networks LTE coverage; but in buildings, there is almost no need to utilize phone data.

The Telecom industry can continue to ‘in-fill’ its coverage with small cells, convert legacy spectrum to LTE, and wait for game-changing 5G technology; but the former two options only keep up with current data usage, and 5G is several years away at minimum. As such…

…All roads continue to point to the need for significantly more mobile network capacity in order to offer the type of data plans that can compete with the Cable industry’s monopoly on high quality, unlimited data.