The FT Alphachat Podcasts serve two purposes on our holiday travels. They let me catch up on some engaging content. And they put my mildly insomnolent wife into a deep sleep.
Hence I found myself listening to an interview with Michael Mauboussin on a recent slow, end-of-a-long-weekend drive from the NSW South Coast to Sydney. Mauboussin was speaking with the FT’s Cardiff Garcia about the implications of his experience writing his recent paper titled 30 Years: Reflections on the Ten Attributes of Great Investors.
As an adjunct professor of finance at Columbia Business School for the past 23 years, few individuals are better qualified to hypothesize on the topic (Columbia’s value investing program boasts many of the world’s great investors as graduates). At the risk of being susceptible to confirmation bias – one of the many psychological biases Mauboussin suggests good investors need to be aware of – I loved the podcast and the paper.
My favorite section focused on position sizing. Investors spend a lot of time talking and thinking about individual stocks, yet very little time on how to integrate them into a broader portfolio in the most efficient manner. Yet my experience lines up with Mauboussin’s. There is as much profit in managing position sizing as there is in finding the original idea. We need to get the initial risk/reward trade-off right. And we need to aggressively manage exposures as information comes to hand and probabilities change.
But this post is about the power of comparison (number four in the paper). Generating excess returns, says Mauboussin, requires comparing expectations with fundamentals. It is not about finding a good story. It is about comparing the expectations built into the share price with the fundamentals in the real world, and trying to profit when large gaps appear.
Sometimes that can be as simple as lining up a company against another similar business. Let’s look at a couple of current examples.
Webjet vs Flight Centre – Battle of the Travel Agents
First up, Webjet (WEB) and Flight Centre (FLT).
Before we start, note that I asked Why Anyone Uses Webjet back in 2010. The share price is up fourfold since, so what would I know.
That small aside, Flight Centre has an enterprise value of roughly $2.5bn, excluding customer cash. In the 2016 financial year, it sold $20bn worth of travel-related products, converted almost 10% into revenue and generated $360m of earnings before interest and tax (EBIT).
Webjet’s enterprise value is just north of $1bn, so the market is ascribing it 40% of the value of Flight Centre. Total sales were $1.6bn (8% of Flight Centre) last year, revenue margins were roughly the same (9.5%) and the company generated $30m in EBIT.
Yes, Flight Centre looks like a mature, bricks and mortar business at the mercy of the internet. Yes, Webjet is online and growing fast. But for two-and-a-half times the price, you get 10 times the revenue and ten times as much EBIT. Which would you rather own?
GTN vs Macquarie Media – Who owns the Radio Waves?
If you live in a major city in Australia, you are probably familiar with GTN’s (GTN) service. They fly helicopters over the major cities and report down to frustrated commuters on peak hour traffic conditions.
GTN sells its traffic reports to most capital city radio stations. In exchange it receives broadcasting spots either side of the traffic report, which it then sells to advertisers.
The company listed in 2016, and today has an enterprise value of roughly $600m.
Revenue in 2016 was $167m. The P&L is a mess because of the float and accounting for prepaid contracts, but a generous interpretation would be $25m or so of underlying EBIT last financial year.
For one GTN, you can buy more than three Macquarie Medias (MRN). It probably shouldn’t be listed at all – Fairfax (FXJ) and John Singleton own 90% of the shares between them – but it is, and the market is ascribing it an enterprise value of just $180m. For that you get $136m of revenue and $23m of EBIT, numbers not dissimilar to GTN.
Why does the market think GTN is worth three times as much?
I don’t have the faintest idea. GTN has international assets and plans to grow in the US. They recently signed a long-term contract with Southern Cross Media (SXL), the largest owner of radio assets in Australia, which removes some risk. But, in 2UE, 2GB, 3AW, 4BC and 6PR, Macquarie Media owns some of the best radio assets in the country.
And the provider of traffic reports needs the radio stations a lot more than the radio stations need traffic reports. You can buy a lot of helicopters for $600m (GTN’s are worth about $6m total). And Google Maps is a perfectly adequate backup. It is hard to imagine a world where the radio stations allow GTN to make a fortune reselling their advertising space.
For the moment we don’t own Flight Centre or Macquarie Media. The latter is too illiquid, and the former isn’t quite cheap enough. But comparing them with their darling compatriots, I know which ones I wouldn’t own.