3 Attractive Stocks to Buy -- At a Sizeable Discount - Forbes

5/10/2015 3 Attractive Stocks To Buy -- At A Sizeable Discount - Forbes

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3 Attractive Stocks To Buy -- AtA Sizeable Discount

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AN INTERVIEW WITH

David A. Perkins, CFA

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

Dave Perkins: Weitz Investment Management is an independent, employee-

owned 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.

Wallace Forbes Forbes Staff



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 so-

called 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.



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?



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.



This article is available online at: http://onforb.es/1AjJtFJ 2015 Forbes.com LLC All Rights Reserved

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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3 Attractive Stocks to Buy -- At a Sizeable Discount - Forbes