The Ozymandias Effect
Plus: Rakon, US Earnings, Netflix, Paramount and more
Fortune 500 - what were the top US companies in 1955? “The Ozymandias effect”
One of the oft-repeated investing maxims is “buy companies that will exist in 50 years”. There is an assumption - dangerous I think - that quality lasts forever. Apple is great, so own Apple forever, etc. Here’s a list of the top 20 US companies in 1955.
I spent a lot of time last night reading about the world’s oldest companies (it will surprise nobody that they are mostly located in Japan). It’s a great Wikipedia entry — read it here. Most of the oldest are hotels or booze makers — human nature never changes.
Anyway, take a look above and look at what were the titans of industry in 1955 — General Motors exists in some form, though now it’s 168 in the S&P 500 (a long way down from #1!). CBS eventually was absorbed by Paramount (more on Paramount below) — old Bill Paley, who ran it for years, eventually was surrounded by sycophants who wouldn’t tell him the truth — CBS ended up buy businesses like Fender, which have little to do with TV. Oh dear. US Steel was recently bought by Nippon Steel for just north of $14bn. USA, USA?
Point is - quality doesn’t last forever. Looking at history many of the “big names” have fallen into the realms of the footnote. Because we are a literate lot here, worth quoting Shelley, that Victorian rapscallion —
My name is Ozymandias, King of Kings;
Look on my Works, ye Mighty, and despair!
Nothing beside remains. Round the decay
Of that colossal Wreck, boundless and bare
The lone and level sands stretch far away.”
Rakon — It is now day 138 and the board has said nothing. You have to feel bad for the “mum and dad” shareholders here, who are probably sitting at the Bunnings Warehouse Cafe in Timaru wondering what is going on…
Just Delisted — Noting that Just Life group is proposing to delist from the NZX and relist on the USX. Mgmt estimates the co will save ~$400,000 by doing this. This comes hot on the heels of the NZX ASM last week. It just goes to show that there’s little incentive to be listed on the NZX…$400,000 (or whatever the number is) — that’s a real cost to a smaller company.
US Earnings Ssn
It’s US earnings season — I admit I’ve been tardy with ya’ll on this…let’s start with American Express because it’s a bellweather of how uh-merica is going — first, the good — EPS increased +39% and total revenues increased +11%. This is all great (I prefer owning Visa and Mastercard, but I’m sure Grandpa Buffett is very happy with this result). Here’s the less good stuff — and no, it’s not “hell is coming” — but do note that net write-off rates have increased to almost pre-Pandemic levels, as have 30+ days past due (20 bps away from that pre-Pandemic 1.5%). It’s not “the sky is falling” type stuff, but it probably points to some underlying economic weakness.
Look at the broader data below — credit card delinquencies in the US are now ticking higher than Pandemic rates. Now, it’s a long way from GFC-level delinquencies (~7%), but that acceleration is a little alarming.
The data is skewed the same way from 30 days past due rates (Amex’s 30 days past-due rate of 1.3% is better than the 1.9% we see here — that’s indicative of Amex’s superior management).
End of the world? Hardly. Worth keeping an eye on, though…
People didn’t like that Netflix stopped sharing subscriber numbers
Netflix actually had pretty good earnings — EPS came in at $5.28 per share vs. $4.52 — new subscribers came in at 9.3 million (man, Bill Ackman must be kicking himself right now, in his modernist glass lair). The stock fell 9% on earnings, though, because the streamer said they’re no longer going to disclose subscriber numbers. This feels like some kind of 5D Jedi mind chess to me — all of Netflix’s competitors use subscriber numbers as a key metric — I guess the gambit is, what metric you gonna use when we take that away? And remember that Netflix currently wears the crown of Streaming King Of The World. If anything, that metric is going to mess with WBD/DIS/PARA/etc.
I did find this note from Pivotal Research to be hilarious though:
"We remind investors that AAPL stop disclosing iPhone unit growth in 4Q 2018 and after a short period of stock consolidation the stock materially outperformed the market and we believe while '25+ subscriber growth will slow we still see a long runway for subscriber/ARPU growth going forward," Wlodarczak said.
Yes, pick one of the most successful companies of the last ten years and compare it to that — bonus points, pick a physical product versus a subscription. Genius.
Netflix still trades at a high multiple — about 36x fwd earnings. Disney trades at 22x, Paramount at 12x, WarnerBrothersDiscovery at 7x EV/EBITDA (I hate EBITDA, but WBD doesn’t actually make money because it has a huge iceberg of debt).
Credit where credit is due — Netflix management have done a good job of turning it around since the dark days of losing subscribers and Ackman having a little freakout. But the numbers under the hood are weaker than you might think — APAC YoY grown shrank 4% ex Fx, while LATAM YoY growth shrank the same amount. EMEA sat flat at 0%. Most of the growth came from the Americas, where the YoY growth was +7% and average revenue per subscriber grew 0.63 cents, or $1.30 from four quarters ago). I think the same challenging streaming dynamics for streamers still exist — nobody is going to pay for all the services (who can keep up?) so streamers are in a constant war of attrition to attract eyeballs. I don’t love that as a dynamic.
More streaming — Zaz’s big pay day
WarnerBrothersDiscovery CEO Zaz is a good operator albeit a brutal one. He went into the bananas set-up of WBD with a mandate to slash its debt. Currently WBD has a mammoth $44.2bn of debt — it paid down $1.2bn last quarter, and $5.4bn in 2023. He’s accomplished this by slashing and burning everything that doesn’t make money with a Deathstar-like accuracy (that included Newshub — I imagine a Greg-like figure fired everyone, awkwardly and painfully):
It’s helpful to think of WBD as a publicly traded private equity buyout — it’s debt, with an equity stub. In theory, when that debt is paid down, the equity should provide rivers and rivers of cashflow (in practice, I think there’s a case to be made that WBD is merged with Comcast’s media assets before those promised rivers of cashflow happen). My point here is that Zaz is doing what he said he’d do. He’s been rewarded in kind, with a $49.7mn payday. Pardon.
A forty nine point seven million dollar payday.
WBD made a 16 cent loss per share last quarter.
Studio revenue fell 17% for the quarter.
The net loss for the company for last quarter was $400mn.
I stand by what I said — Zaz is doing what he said (in the words of Doja Cat — “I said what I said”). But $49.7mn feels egregious for a firm which still has a lot of debt to pay down and still doesn’t make a profit. By way of comparison, CostCo’s CEO made $16.8mn in 2023 — CostCo’s net profit for FY23 was $6.29 bn. I still like WBD and PARA, for different reasons, but man — they are not helping themselves paying out a salary like that!
Paramount…
Sometimes you just wish the company was sold, but then I realise that I am probably living in some form of groundhog day and the Shari/Apollo/Ellison acquisition Olympics continues apace. Here’s an update of where we are at.
Sony — as of four days ago they are “in talks” and “discussing” buying Paramount, alongside Apollo. Apollo previously had previously floated a $26bn offer to buy Paramount. Now they are mulling a bid alongside Sony, which would be in the form of an all-cash offer and majority owned by Sony.
David Ellison — his SkyDance Media is also bidding for the co, albeit via a bid for National Amusements, which is the controlling shareholder of Paramount (it’s Shari Redstone’s holding company). Ellison was previously granted an exclusive 30 day negotiation window (closes May 3rd — May the 4th be with you?). This deal is mooted to be a lot more complex — would likely be a recapitalisation of Paramount, meaning Ellison, his father Larry (he of Oracle) and likely Shari herself would inject capital into the newly revived Paramount, “backed” by SkyDance’s fresh eyes and money (either way, this means goodnight Irene to current CEO Bob Bakish, who has done an admirable job of navigating a leaky ship).
The problem is a Ellison deal may be fantastic for Shari and co, but it may not be that fantastic for existing shareholders. SkyDance is tiny — they are not Sony, or even Lionsgate. Shari gets a payday (though likely has to keep some chips on the table — I don’t see her getting away scot-free); long-suffering common stockholders pin their hopes on a recapitalized, but still tiny, media co. The problems that plauged the co before still exist — a streaming service that is very minor; an uneven slate of movies; a linear TV business that is a melting icecube. As deal with Sony, on the other hand, creates a kind of mega-studio — Sony’s studio business is big in itself, and its strategy as the “arms dealer” of the streaming age (it’ll sell its stuff to the highest bidder) fits well with Paramount’s existing strategy — nobody needs another streaming service, but a mega-movie studio would be a powerful entity in its own right.
Bits and bobs
Kering — Is Pinault the right man for the job? (Bloomberg)
FTC sues to block merger between the makers of Michael Kors and Coach (FT)
Why can’t you get a restaurant reservation? (NY’r)