How Google Kills the NY Times

On the Trade Desk (TTD) conference call earlier this month, the first analyst question highlighted the upcoming changes to Google Chrome and asked about the effects they may have on the ability of advertisers who use cookies to track and target visitors.

Apple has already made similar changes, as CEO Jeffrey Green explains:

“Apple made some changes called ITP to their browser where they decided to just block [off] the use of all third-party cookies about a year ago and replace it with what they call ITP, which was essentially an algorithm that would decide what third-party cookies would be allowed to persist instead of both first and third parties doing well no matter what or existing on the browser no matter what.”

However, this change does not significantly affect Apple’s revenue to the same degree as it may for Google, since Google makes “95% of its money through advertising,” and Chrome has a much larger market share.

Going forward, Chrome users will be able to turn-off third party cookies.  And though Green does not expect many users to take advantage of this new feature, it does expose a potential vulnerability to their main revenue source.

As Green concludes:

“I think if there’s any meaningful adoption of consumers opting out, it will then beg the question or force the discussion with companies like The New York Times between them and their users to say if you get rid of targeted advertising, you turn $8 CPMs into $4 CPMs and I can’t run my business anymore…

If they were to take away targeted advertising and what is an $8 CPM on The New York Times today turns into a $4 CPM, then the New York Times is going to be out of business. That’s what’s at stake.”

Less Repairable Cars

The research question at top of mind today is: how has Copart (CPRT), a “global leader in online vehicle auctions,” been able to grow revenues far faster than GDP growth over the last ten years?  It has increased market share in its most mature market, the U.S.  It has entered new markets: UAE, Brazil, Germany, and Spain in 2013; Bahrain and Oman in 2015; Ireland and India in 2016, and Finland in 2018.

Yesterday’s quarterly earnings conference call though revealed an additional factor–“less repairable cars.”

As they say:

“Repair costs, particularly for new cars, are trending now at a rate exceeding that of inflation. An increase in the number and the average cost of replacement parts, the growth in pre and post repair scans and the supplemental damages they’re identifying, the lack of capitalized repair capacity and the consolidation of the repair market by the three major MSOs are all leading to a rise in repair cost. We believe the industry is simply trending to less repairable cars.”

Higher repair costs push insurance companies to declare more vehicles as total losses.

“Organic growth in the salvage market is driven, we believe, by an increase in total loss frequency. Published statistics suggest a total loss frequency of 19.9% for the first quarter of calendar 2019, an increase of 2.6% over the same quarter last year.  This metric measures the percentage of estimates written that result in total losses. What is not reflected in this metric is the increase in the instances in which insurance companies salvage cars without ever writing a repair estimate.  Our conversations with insurance company executives as well as the current trends and assignments lead us to believe that the growth of total loss frequency is higher than that published.”

If this analysis is correct, one would expect to see a variety of secondary and tertiary effects show up in related industries over the next decade–at the very least, among auto insurers, automakers, and auto parts purveyors.

On Taxing Duties

Mark 2017 as the year that voting rights began to matter once again.  The trend began many years past with the separation of share classes, and it imagined an inevitable future in which equity ownership was docile, impotent, and utterly passive.

Exhibit A of our new dawn was the IPO of Snap’s voteless shares.  Following the observed path of its tech brethren–Google, Facebook, et al.–it tried to do one better.  Why yield public investors any votes at all?  For its youthful boldness, the index overlords exacted their punishment, thereby abandoning it to that lurking nemesis from over the sea.

Let Exhibit B be the thinly veiled boardroom battle at Uber.

And for Exhibit C, I present Liberty Tax (Nasdaq: TAX), controlled by founder and “former CEO” John Hewitt.  Amid this particular boardroom battle, Mr. Hewitt’s voting rights have afforded him delicious privilege.  Namely, the privilege to “[engage] in an array of inappropriate conduct, both personally and involving business matters, while serving as Liberty Tax’s CEO and Chairman,” and continue to control the company despite the Board’s attempts to terminate him.  In this case, when the dust ultimately settles, Liberty will have lost the service of at least four Board members and two company executives.

Take sides as you must, but do pay homage to the personal sacrifices demanded by the skirmishes of this grand conflict.

On this day may Liberty’s minority shareholders yield gratitude for John Garel’s service.

Disclosure: No position.

Joe Papa Gets Paid(?)

If a tree falls in the woods, does it make a sound?

If Valeant’s stock falls to $11 per share, did he really get paid?

The WSJ ran an article yesterday detailing the 2016 compensation of Valeant’s CEO Joe Papa.  I suppose the Editor’s thinking ran something like this: 1) its proxy season, 2) I’ll task an intern to find high CEO compensation even though the company’s stock price is low, 3) provoke reader outrage, 4) bring in the eyeballs, and 5) … profit?

Seems a decent strategy and allows abundant storylines.  It teases with envy.  It challenges the scales of justice and that old yarn about “pay for performance.”  Mark this reader intrigued–they hooked me.

Of course, when I looked at the proxy, the evidence there made it difficult to sustain that “Valeant (VRX) CEO Joseph Papa made $63 million in pay last year, according to documents the former pharma darling filed Thursday with regulators.” (CNN)

Yes, p. 57 does show that neat table with the Total Compensation figure — $62,717,846.  Case closed, right?

Perhaps, if you are that brand of journalist who tweets, baits clicks, and makes myths.

Yet, in this case, the proxy notes reveal some truths that may be even more interesting than standard fiction.

Of the $62.7 million, $8 million was “to compensate [Papa] for equity-based compensation he forfeited in connection with the termination of his employment with Perrigo.” (54)

$52 million of his compensation was comprised of stock and option awards.  And there are three components: PSUs (performance stock units), RSUs (restricted stock units), and options.  All vest at various intervals over the four remaining years of Papa’s current contract.

Interestingly, the 933,416 PSUs (valued at $29.8 million) “will vest on the fourth anniversary of the commencement date based on the achievement of the following share prices… : (a) if the share price on the vesting date is below $60, none of the PSUs will vest…” (54)  Suffice it to say that a share price of $60 is a long way from today’s $11.

The 373,367 RSUs (valued at $12.1 million) “will vest on the fourth anniversary of his commencement date subject to Mr. Papa’s continued employment through the vesting date…”  Four years is a long time in public equity markets, but suffice it to say that $VRX needs a much higher stock price than today’s to reach the RSUs’ imputed value.

Lastly, the 682,652 options (valued at $10 million) “will vest as to 25% of the total award on each of the first four anniversaries following the commencement date, subject to Mr. Papa’s continued employment with the Company through the applicable vesting date.” (55)  Since the strike price on these options is $23.92, Mr. Papa again has some serious work to do to realize any compensation from these.

As an additional footnote, recall that “Mr. Papa was required to purchase $5,000,000 worth of Common Shares by no later than the first anniversary of his commencement date. Mr. Papa has satisfied this obligation.” (54)  Based on his disclosed share count (202,000), it seems Mr. Papa paid roughly $24.75 per share for his initial stake.  Papa’s first year of employment then was rather expensive for someone “paid” so much; that fickle Mr. Market dinged him roughly $3 million for his “show of confidence.”

All in all, I will not disagree–Mr. Papa will do very well for himself if Valeant’s stock price ascends above $60 per share.

Of course, if that price stays around here, or if it only manages to double in the next four years, it would seem that Mr. Papa was not actually paid his $62.7 million after all.

Disclosure: No position.

Warren Buffett Loads Up on Apple

So… I guess you’re telling me it’s

Alice Schroeder’s opus The Snowball recalls a story about Benjamin Graham, Warren Buffett’s teacher and mentor.  The year was 1956, and Ed Anderson–a chemist who liked to coattail Graham’s investments–walks into the Graham-Newman office.

“Anderson had come in because he was thinking about buying another share of Graham-Newman, but he had noticed an oddity and he wanted to ask about it.  Graham had loaded up on shares of American Telephone & Telegraph.  It was the least Graham-like stock imaginable–owned, studied and followed by all, valued fairly, with as little potential as it had risk.  Was something going on? he asked Warren…

From watching the firm’s trading patterns and keeping his ears open, [Warren] had already figured out that Graham was going to shut down his partnership.” [199]

Fast forward to 1968… After a epic run managing the Buffett investment partnerships (a “1 in 1 billion event”), the last chapter of that story eerily finds Buffett also purchasing shares of “the blandest, most popular stocks that remained reasonably priced: $18 million of AT&T…” [316]

Of course, the clearest analogue to yesteryear’s AT&T has to be today’s champion and market behemoth–Apple.  To note on this day that Buffett has loaded up on 40 million shares of $AAPL leaves this investor with a sense of foreboding…

If the pattern is to repeat, I guess something has now reached an end.

Disclosure: As of today, I am long Berkshire Hathaway shares and short call spreads in Apple.

Pioneer Energy Services Unsecureds

Today’s post repeats many of the themes from our last.  A company in the energy sector?  Check.  Plenty of unsecured debt outstanding?  Check.  Unsecured trading substantially below par?  Check.  Revenues down nearly 50% YoY?  Check.  No signs of relief on the horizon… check.

“Pioneer Energy Services Corp. provides drilling services and production services to a diverse group of independent and large oil and gas exploration and production companies throughout much of the onshore oil and gas producing regions of the United States and internationally in Colombia. We also provide two of our services (coiled tubing and wireline services) offshore in the Gulf of Mexico.” (latest 10-Q)

Pioneer has a secured $350 million Revolving Credit Facility with Wells Fargo at present, with $110 million outstanding as of 7/30/15 and $21.3 million in committed letters of credit.  Borrowing availability as of July 30th was $218.7 million, and Pioneer was in compliance with all the covenants under the facility, which matures in Sept 2019.

Pioneer also has $300 million of senior notes outstanding which bear a coupon of 6.25% that mature in March 2022.  These notes Mr. Market currently values at roughly 60 cents on the dollar.  Similar to Cloud Peak, the market value placed on Pioneer’s unsecured debt is less than the availability on their credit line.

On the equity side, Pioneer had 65.5 million shares outstanding as of July 15, 2015.  After talking a $71 million pre-tax impairment charge in Q215, the company has a book value of $406 million at 6/30/15.  At today’s $3 per share price, Mr. Market values the equity a bit below $200 million.  (For those so inclined, it would appear there is no cost to borrow.)

Pioneer does have some capex commitments for the remainder of the year, roughly $65-75 million, to acquire “five new-build drilling rigs, nine well servicing rigs, eight wireline units, routine capital expenditures and certain drilling equipment which was ordered in 2014 but requires a long lead-time for delivery.” (30)  Pioneer did show $63 million in cash on the balance sheet at 6/30/15, and they are actively marketing some idle rigs for sale.

In the recent Q215 results conference call, management candidly described the challenges for Pioneer in this low energy price environment:

“…it is a soft market and there is not a lot of demand, there is not a lot of demand in drilling. And I think that it’s building for a definite recovery probably beginning in 2016 if not at the end of the year, but it’s probably going to be slow and we have got to manage our business as if it’s going to be slow and lower for longer and keep our cost structure tight and that’s what we intend to do.  So, I think we are anticipating a little bit more pain in the third quarter…”

Not exactly a ringing endorsement.  As Dr. Michael Burry might say… ick.

Disclosure: I own some of Pioneer’s 6.25% 2022 unsecureds.

Cloud Peak Energy and Coal Valleys

From Dr. Michael Burry’s School of Ick Investing today I have a one-time, g78151bai001exclusive offer for you… a coal miner… aptly named… Cloud Peak Energy.

Cloud Peak enjoys the privilege of being one of the only U.S. coal “pure plays” with a share price greater than $1 (as of 7/24/15).  With 61 million shares outstanding, at today’s $3 per share, it carries a market cap of roughly $183 million.

Perhaps more interesting to me though is Cloud Peak’s unsecured debt.  Its 6.375% 2024 bonds have offers near 62 (with $200 million outstanding).  And their 8.5% 2019 bonds show offers near 70 ($300 million outstanding).

So it would seem that Mr. Market values the enterprise, based on its publicly traded securities at $183mm + $124mm + $210mm = $517 million.

Based on Cloud Peak’s Q1 EBITDA, that valuation may not yet be entirely compelling.  Yet…

“As of March 31, 2015, no borrowings were outstanding under the credit facility and we were in compliance with the covenants contained in the Credit Agreement.  Our aggregate borrowing capacity under the Credit Agreement and the A/R Securitization Program was approximately $539.9 million at March 31, 2015.” (42)

So the market value of the enterprise today is less than their availability on the credit line.  A rather rare occurrence in today’s markets.  But it’s coal… ick.

Disclosure: No position.