As an IAC I want to push back a bit and something I often see with SOTP. You are valuing Dotdash Meredith on current earnings. You noted they are depressed and we are in an advertising bear market. If you look further out (as you would for a normal operating business), there is value there. With IAC, you know that they are going to unlock value via spinoffs - it is their DNA. So if you can withstand the downturn and wait for ad market to turn, they are going to unlock that value. With others stories (CNNE, etc.) you aren't sure.
Yeah, that's a fair point. I'm a bit more skeptical that this actually is a downturn, and we should value any of these players as if these are trough earnings (or close). Don't think Apple is changing its ways and it looks like to at least some extent 2020-2021 performance was an unsustainable peak.
of course, valuing earnings through the cycle right now is close to impossible in so many industries, so intelligent investors can see that issue quite differently.
you do highlight one strong pillar for IAC I should have emphasized more (though, again, it was a *very* long post), which is that management has been here before so many times, and they always come through for shareholders. A lot of cash on the balance sheet too if they want to take a swing or two in a market where valuations are depressed.
Great article. I view sum of parts as similar to potential energy - water behind a dam. Absent change, the potential can be inert indefinitely. If undervaluation doesn't convert into earnings growth or meaningful capital return, there is no next buyer of the shares - it will go up if/when SOTP guys get interested, then right back down again when they all try to sell.
That's a great analogy. CNNE is an interesting one in that context - it's kind of a paper case, but one good thing is that management after Q3 basically said "this valuation is dumb, we're not likely to spend our cash on anything but our own shares, because we're not getting better returns elsewhere."
Of course, they have to stick to that, and one big concern is that they're not necessarily incentivized to do so.
Perhaps my favorite among your excellent posts. I get easily sucked into sum of the parts equities perhaps because they always seem analyzable. The math can work and the distinction of being within a bigger company versus trading separately is largely arbitrary. But they probably need more of a catalyst to really work as an investment (VATE quite catalyst rich so I will be right or wrong on that one with little value trap risk).
yeah, as highlighted here, I've owned a few SOTP cases over the years, and still own one now.
I agree - the math makes it easy to see value, and I think particularly to see a *floor* to value. You think, "this is a 30% discount to the SOTP, there's NO WAY that discount gets to 50%!" Well, sometimes it does.
"The retail business, subscriptions, and advertising are all part of a single operation. Decisions about pricing or the intensive capital spend on logistics absolutely are influenced and informed by the high-margin revenue coming in from Prime and from advertising."
I'll be honest - haven't really done the work for an update (and this is a stock where you need to do the work), but spent some time looking this morning. Looks like the market didn't like Q1 results. Free cash flow of -$77 million, cash declining $62M in the quarter is a pretty big deal on paper - latter figure is ~30% of their market cap before the report.
Infrastructure biz had terrible quarter; management says it's "timing", but anyone who's done this for six months has heard that song before. Sometimes it's true, sometimes management is missing a pretty significant downturn.
But some working capital swings in FCF which should reverse. Don't really see anything, then, that changes the story. Think you have to *really* believe in either the infrastructure biz or the medical opportunity, but the good thing here seems to be that only one of them needs to work out. Given the cycle and the nature of medical product development, that's obviously not guaranteed though.
Hey Joe, well if you'd asked me during the school holidays a few decades ago there's a decent chance I would have replied "The Geyserland Hotel". My parents LOVED that place and we went back year after year. It's very sad to read that it's been permanently closed. Message me directly on Seeking Alpha if you'd like to connect; maybe a chat over WhatsApp (I'll have to brush up on my kiwi accent)?
Bringing my poor poor $IAC . One of the few SOTP that I believe actually worth the play, timing of it though is hard (buy $iac and you get both Joey Levin and Barry Diller for free 😅)
Excellent article.
As an IAC I want to push back a bit and something I often see with SOTP. You are valuing Dotdash Meredith on current earnings. You noted they are depressed and we are in an advertising bear market. If you look further out (as you would for a normal operating business), there is value there. With IAC, you know that they are going to unlock value via spinoffs - it is their DNA. So if you can withstand the downturn and wait for ad market to turn, they are going to unlock that value. With others stories (CNNE, etc.) you aren't sure.
Yeah, that's a fair point. I'm a bit more skeptical that this actually is a downturn, and we should value any of these players as if these are trough earnings (or close). Don't think Apple is changing its ways and it looks like to at least some extent 2020-2021 performance was an unsustainable peak.
of course, valuing earnings through the cycle right now is close to impossible in so many industries, so intelligent investors can see that issue quite differently.
you do highlight one strong pillar for IAC I should have emphasized more (though, again, it was a *very* long post), which is that management has been here before so many times, and they always come through for shareholders. A lot of cash on the balance sheet too if they want to take a swing or two in a market where valuations are depressed.
Great article. I view sum of parts as similar to potential energy - water behind a dam. Absent change, the potential can be inert indefinitely. If undervaluation doesn't convert into earnings growth or meaningful capital return, there is no next buyer of the shares - it will go up if/when SOTP guys get interested, then right back down again when they all try to sell.
That's a great analogy. CNNE is an interesting one in that context - it's kind of a paper case, but one good thing is that management after Q3 basically said "this valuation is dumb, we're not likely to spend our cash on anything but our own shares, because we're not getting better returns elsewhere."
Of course, they have to stick to that, and one big concern is that they're not necessarily incentivized to do so.
Perhaps my favorite among your excellent posts. I get easily sucked into sum of the parts equities perhaps because they always seem analyzable. The math can work and the distinction of being within a bigger company versus trading separately is largely arbitrary. But they probably need more of a catalyst to really work as an investment (VATE quite catalyst rich so I will be right or wrong on that one with little value trap risk).
yeah, as highlighted here, I've owned a few SOTP cases over the years, and still own one now.
I agree - the math makes it easy to see value, and I think particularly to see a *floor* to value. You think, "this is a 30% discount to the SOTP, there's NO WAY that discount gets to 50%!" Well, sometimes it does.
Thanks, an interesting article.
"The retail business, subscriptions, and advertising are all part of a single operation. Decisions about pricing or the intensive capital spend on logistics absolutely are influenced and informed by the high-margin revenue coming in from Prime and from advertising."
Very true!
thanks for reading, this was one I definitely enjoyed writing more than most.
Hi Vince, I'm returning from an overseas trip and catching up on reading; any update on VATE? Thanks!
I'll be honest - haven't really done the work for an update (and this is a stock where you need to do the work), but spent some time looking this morning. Looks like the market didn't like Q1 results. Free cash flow of -$77 million, cash declining $62M in the quarter is a pretty big deal on paper - latter figure is ~30% of their market cap before the report.
Infrastructure biz had terrible quarter; management says it's "timing", but anyone who's done this for six months has heard that song before. Sometimes it's true, sometimes management is missing a pretty significant downturn.
But some working capital swings in FCF which should reverse. Don't really see anything, then, that changes the story. Think you have to *really* believe in either the infrastructure biz or the medical opportunity, but the good thing here seems to be that only one of them needs to work out. Given the cycle and the nature of medical product development, that's obviously not guaranteed though.
ok thanks!
PS: your business partner is in NZ or from NZ?
Hey Mike. I'm in Rotorua, where abouts are you?
Hey Joe, well if you'd asked me during the school holidays a few decades ago there's a decent chance I would have replied "The Geyserland Hotel". My parents LOVED that place and we went back year after year. It's very sad to read that it's been permanently closed. Message me directly on Seeking Alpha if you'd like to connect; maybe a chat over WhatsApp (I'll have to brush up on my kiwi accent)?
Bringing my poor poor $IAC . One of the few SOTP that I believe actually worth the play, timing of it though is hard (buy $iac and you get both Joey Levin and Barry Diller for free 😅)
haha - I will say that there an awful lot of investors I respect who are in IAC!