5/10/2015

3 Attractive Stocks To Buy -- At A Sizeable Discount - Forbes

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Wallace Forbes Forbes Staff

MARKETS

3/11/2015 @ 1:05PM 30,078 view s

3 Attractive Stocks To Buy -- At

A Sizeable Discount
Comment Now

A N INTERVIEW WITH

David A. Perkins, CFA

Co-Portfolio Manager, Weitz Value Fund, Weitz Investment Management, Inc.

Dave Perkins: Weitz Investment Management is an independent, employeeowned firm with approximately $6 billion in assets under management. Our
investment philosophy is rooted in common sense we look for attractive
companies and seek to purchase their shares at a sizeable discount. Valuation
is our North Star. We are disciples of Ben Grahams idea of buying stocks only
when presented with a sizeable margin of safety. We study individual
businesses one at a time and build portfolios from the ground up,
concentrating our investments in our best ideas. Were big believers in active
management at Weitz that thoughtful stock picking wins over time. All of
our employees invest a meaningful portion of their liquid net worth in the
Funds alongside our shareholders. We win and lose together.
Wally Forbes: Sounds good.
Perkins: Ive got three stock ideas that Id like to share that make up a
significant portion of our invested assets at present.
Forbes: Wonderful.
Perkins: I should start off by saying that everything we do at Weitz is team
first because we believe our shareholders are best served by drawing on the
sum total of our collective knowledge. I would like to acknowledge my
colleague, Drew Weitz, who is the source of the first two stocks Im going to
cover today. He ably leads our media effort, which has been a fruitful area for
us since the firm was founded roughly 32 years ago and remains so today.

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21st Century Fox (NASDAQ: FOX) is a name thats probably familiar to many
of your readers. It is one of our favorite investments at present. Weve actually
owned it before, as shareholders of News Corp from 2008 to 2010.
Roughly a year and a half ago, News Corp split itself into two separate
publicly-traded companies. A publishing business focused on newspapers,
which still carries the News Corp name, and 21st Century Fox, which was our
favorite portion of the combined enterprise at the time.
Today, Fox owns the Fox Broadcast Network, and 21st Century Fox movie and
television studios. But the bulk of the companys earnings and cash flow, and
the central pillar of our investment thesis, is its strong collection of cable
networks. These include Fox News, the FX Network, Fox Sports One, which
was formerly the Speed Channel, National Geographic, and a host of regional
sports networks including the Yes Network, which many of your readers in
New York will be familiar with.
We began buying the stock back in October as the debate around the future of
paid television continued to build. We believe, as Foxs management team
does, that the present ecosystem will remain in place in the near and
intermediate term. Cable network owners like Fox earn monthly fees
affiliate fees in industry parlance from the large TV distributors like
Comcast, Time Warner Cable, and Cox Communications in exchange for the
right to carry their programming. Your monthly cable or satellite TV bill is
essentially a collection of these affiliate fees.
From an investors perspective, these fees represent attractive streams of
largely recurring revenue as most paid TV customers view television as a
staple in their lives. Fox owns very attractive news and sports content, two
areas that remain valuable to advertisers and media distributors alike as they
tend to draw live and engaged audiences.
Theres undoubtedly a transition taking place in how and where media
consumers are spending their time and money. Netflix, Hulu, and other socalled streaming video platforms are increasingly viable options for portions
of the market that dont desire 50 or more channels, or for those that simply
want a smaller cable bill. However long and whatever path the transition
takes, we believe that valuable content will always have a place, and that Fox is
particularly skilled at creating and licensing it.
In the nearer term, we especially like the visibility of Foxs affiliate fee growth
opportunity, as well as the opportunity for greater distribution of Foxs
international channels. The potential success of Fox Sports One and Two as
potential competitors to Disneys ESPN Networks provides room for upside
longer term.
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James Murdoch and Chase Carey are both capable managers, and sit in the
enviable position of having the opportunity to deploy a lot of excess cash over
the next several years. We like Fox in the low to mid-30s, which is close to
where its trading today. We believe its shares are worth somewhere in the $45
to $47 range at present.
Forbes: Any sort of a time horizon on that objective?
Perkins: Our investment discipline focuses on the next three to five years, so
were looking out beyond just the next 12 months. We expect Foxs underlying
business value to grow over that period of time as well, so that $45 to $47
should be higher in several years if weve done our homework correctly.
Another way to think about the opportunity using a similar framework is that
we would expect to earn an annualized total return in the upper teens if Foxs
stock price closes the gap between its price today and our estimate of business
value, over the next three to five years.
Forbes: Thats a bit of all right.
Perkins: Lets stay within the media ecosystem and talk a little bit about
Liberty Global (NASDAQ: LBTYA). Liberty Global is our largest holding at
present. It is a provider of cable TV and broadband services throughout
portions of Western Europe. Weve owned Liberty Global continuously since it
was spun out of the old Liberty Media parent in 2004.
Cable and media distribution in general have been mainstays in our portfolios,
as have companies run by Liberty Globals founder, John Malone, whom we
hold in high regard. Roughly 80% or so of Libertys profits come from five
western European nations: Germany, Belgium, the UK, Switzerland, and
Holland. Mr. Malone, whos widely regarded as the father of the cable TV
industry in the U.S., has called Europe, The best cable market in the world.
The pay TV and broadband ecosystem is generally less competitive than in
North America. In places like Germany, the UK, and Belgium its cheaper for
consumers, its less mature with penetration rates at about 41% of all
households versus 84% in the U.S. and content providers like 21st Century Fox
generally have less leverage over distributors. So we believe that the cable
companies sit in an advantaged position, given the bandwidth of the pipe
that they bring into the home. In addition, they can typically provide
significantly faster broadband speeds for things like streaming video, and
have ample capacity as TV becomes more interactive in the future.
Forbes: Are they pretty well set to concentrate on the European market? Or
are they looking for any further diversification physically?

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Perkins: We think theyre likely to stay most focused in Western Europe.

They do own some relatively valuable wireless assets in Latin America, but
their primary areas of investment over the next several years, we think, will
remain within Europe.
So, back to the thesis. We think their competitors, namely the DSL-based
Telecom and wireless competitors, will generally struggle and do struggle at
higher levels of data usage, placing them on the wrong side of an increasingly
data hungry world. And we think the cost of replicating Liberty Globals
physical network infrastructure serves as a highly attractive barrier to entry.
In light of our three to five year investment horizon remember were looking
to own stocks, not rent them management quality is of significant
importance to us. This is particularly true of businesses that produce a lot of
excess cash like Liberty Global, which can either be used to enhance or detract
from the value of an enterprise.
Following several years of fairly significant reinvestment in its core business,
Liberty Global entered 2015 on the cusp of a fairly significant increase in
excess cash flow generation. Recently however, they identified an attractive
opportunity to reinvest in the UK market at what look like extremely attractive
returns. We applaud this kind of behavior. Liberty Globals CEO, Mike Fries,
is among the most capable executives we have invested alongside, and we
continue to believe that he and his team will be excellent stewards of the
companys excess cash flow. We own the companys non-voting K shares,
which trade around $52. They offer what we believe is a relatively attractive
discount to our base case business value estimate, which is in the $62 to $63
range.
Ive got one final idea from the healthcare industry Id like to share.
Forbes: Great.
Perkins: We find the pharmacy benefit management business to be a
particularly attractive portion of the healthcare value chain. And I think the
last time we spoke, Wally, I discussed Express Scripts, which is the largest
PBM (pharmacy benefit manager) and remains an on-going investment for
us. We recently added shares of Catamaran (NASDAQ: CTRX) as well,
however, which is the industrys third largest independent pharmacy benefit
manager.
Just by way of quick review, pharmacy benefit managers primary
responsibility is to remove costs from the healthcare system by managing the
cost of drugs, which today represents about 20% of U.S. healthcare spending.

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Customers such as large employers, pensions, and government agencies buy a

customized service when they contract with a PBM like Catamaran. This
means PBMs are typically creating a plan that fits each customers unique
needs. Overall, U.S. prescription growth, which has been somewhat lethargic
in recent years, is still remarkably consistent in the aggregate. 70% of all
prescriptions are for maintenance medications. This provides Catamaran and
its peers with a nice, steady flow of medications to manage that one could
liken to a subscription of sorts.
The industry is also a healthy oligopoly with relatively rational pricing,
reasonable competitive differentiation between the existing players, and
plenty of opportunities for growth for everyone. There are two things in
particular, though, that attract us to Catamaran. The first is the emergence of
so-called specialty pharmaceuticals. These are high-cost biologic medicines
like Sovaldi, a cure for Hepatitis C that has been in the news an awful lot of
late. These medications should make the PBMs role that much more
important over the next several years. Specialty pharmaceuticals are likely to
increase the rate of drug cost inflation and force customers to consider using
more of the traditional services that PBMs provide. Catamaran has a specific
opportunity inside its existing base of customers to provide additional
services, including formulary compliance, specialty drug purchasing and
fulfillment, and mail delivery, among others.
Second, Catamarans legacy business, SXC Health Solutions, provides the
technology backbone for a significant number of the remaining small
independent PBMs, which collectively represent about 25% of U.S. scripts in
the aggregate. Catamaran is a natural home for many of these smaller players
as operational scale continues to become more important.
Catamaran has a long and successful track record as an acquirer and we
believe it is poised to emerge as the third and likely final large independent
PBM. We began purchasing shares in the low to mid-40s, and the stock sits
today around $50. We believe its business is worth right around $60 per share
today and poised to continuing growing nicely going forward.
Forbes: A very interesting set of ideas, Dave, and I appreciate your taking the
time to share your thinking with us.
Perkins: You bet, Wally. Thanks for the opportunity.
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