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From value investing to modern value
Tano Santos
David L. and Elsie M. Dodd Professor of Finance
Columbia Business School
Heilbrunn Center for Graham & Dodd Investment
May 2020
…………………………………………………………………………………………………………………………………………
VALUE INVESTING … FOR PEOPLE IN A HURRY
…………………………………………………………………………………………………………………………………………
Risk Management•Margin of safety
•Some diversification•Patience – Default strategy
The Value Investing Process
Search•Cheap•Ugly
•Obscure and otherwise ignored
Valuation•Assets
•Earning Power•Franchise
Review•Key issues
•Collateral evidence•Personal biases
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Value and growth
Asset ValuesAV
Earnings Power ValuesEPV
Franchise ValuesFV>0
Barriers to entry?
yes
no
Franchise ValuesFV≤0
Growth creates value
Growth destroys value
Tano Santos Heilbrunn Center4
Risk Management
…………………………………………………………………………………………………………………………………………
Value and growth
Asset ValuesAV
Earnings Power ValuesEPV
Franchise ValuesFV>0
Barriers to entry?
yes
no
Franchise ValuesFV≤0
Growth creates value
Growth destroys value
Tano Santos Heilbrunn Center5
Risk Management A bit about this today
…………………………………………………………………………………………………………………………………………
OF SHOCKS AND TRENDS …
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Managing the stock: The many taxonomies of risk
Temporary Permanent
IdiosyncraticManagement
Operational
Industry
Input prices
Technology
Regulation
Import penetration
Aggregate
Recession
Depression
Inflation/deflation
Political
Tano Santos Heilbrunn Center
Nature of risks
On shocks: classification
…………………………………………………………………………………………………………………………………………
Managing the stock: The many taxonomies of risk
Temporary Permanent
IdiosyncraticManagement
Operational
Industry
Input prices
Technology
Regulation
Import penetration
Aggregate
Recession
Depression
Inflation/deflation
Political
Tano Santos Heilbrunn Center
Nature of risks
On shocks: classification
How to think about technology and value? • Disruption and value creation• Example: The payments industry and Adyen
What triggers regulation? • Regulation and value creation• Example: Should we regulate AMZN, FB, …?
What are the effects of import penetration on local industries?
• Import substitution and value creation• Example: The bankruptcy of FBI
What are the effects of a drop in oil prices?• Example: Energy and value traps
…………………………………………………………………………………………………………………………………………
Managing the stock: The many taxonomies of risk
Temporary Permanent
IdiosyncraticManagement
Operational
Industry
Input prices
Technology
Regulation
Import penetration
Aggregate
Recession
Depression
Inflation/deflation
Political
COVID-19
Tano Santos Heilbrunn Center
Nature of risks
On shocks: classification
�
…………………………………………………………………………………………………………………………………………
Adverse shocks: Is the shock permanent?
Yes No
Short term impairment• Cycles in demand• Temp. disruptions
in the supply chain• Temp. disruptions
in operations• Management turnover• Lawsuits …
Do they eliminate barriers to entry?
Yes No
Permanent impairments • Patent expiration • Technological / process innovations• International trade openness• Expropriation …
Limits to profitability• Regulation• Bounds on practices
• Bundling, pricing …
MARGIN OF SAFETY
HORIZONREINVESTMENT
Are there barriers to entry?
Yes
No
Are the shocks industry-wide?
Yes
Survival
No
Exit
Is the firm highly levered?
No Yes
Exit
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On shocks: risk management
…………………………………………………………………………………………………………………………………………
On shocks: What do disruptions (permanent shocks) do?
1. They kill a particular economic activity
Example: Technology – Horse carriage and the car
Example: Regulation – The jitney craze of of 1914 – 1918
2. They transform how a particular economic activity either supplied or consumed
Example: e-retailing,
Example: The payments industry
3. They unbundle how particular economic activities are either supplied or consumed
Example: advertising and news
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On trends: What do trends do?
● Trends refer to the widespread adoption of practices, behaviors and institutions that are already operational in another:
– Country
– Sector
– Demographic groups
● It is the process of diffusion rather than of disruption
– It is predictable and dominated by the trend rather than by the fluctuations around the trend
● It is irreversible, though it can be overtaken by another trend
● Companies benefit from that trend if, and only if, their business operations are protected by barriers to entry.
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SHOCKS
13
…………………………………………………………………………………………………………………………………………
Customer
Merchant
Product
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The evolution of the payments system
Product
…………………………………………………………………………………………………………………………………………
Customer
Merchant
“Cash”gold
Product
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The evolution of the payments system
…………………………………………………………………………………………………………………………………………
Customer
Merchant
Cashcoin
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The evolution of the payments system
Royal Mint
The KingProduct
…………………………………………………………………………………………………………………………………………
Customer
Merchant
Product
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The evolution of the payments system
Royal Mint
CoinProduct
CoinGold
The KingCapital
Revenue?
Coin (taxes)
Services
Services
Coin (taxes)
Cashcoin
…………………………………………………………………………………………………………………………………………
Customer
Merchant
Product
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The evolution of the payments system
Royal Mint
CoinProduct
+seignorage
Coin
Gold –
inflation tax
The KingCapital
Revenue!
Coin (taxes)
Services
Services
Coin (taxes)
Cashcoin
…………………………………………………………………………………………………………………………………………
Customer
Merchant
ProductCheck
Customerbank
Check
Cash – t/2
Check
Cash + t/2
Merchantbank
Clearing
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Check
Cash
Cash
Check
The evolution of the payments system
…………………………………………………………………………………………………………………………………………
Customer
Merchant
Presents Card
Customer/issuing bank
Authorizationrequest
Merchantbank
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The evolution of the payments system
Credit card
Authorizationrequest
Authorizationrequest
Product
Credit card: An open systemStep 1: Authorization
…………………………………………………………………………………………………………………………………………
Customer
Merchant
Presents Card
Customer/issuing bank
Authorizationrequest
Merchantbank
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The evolution of the payments system
Credit card
Authorizationrequest
Authorizationrequest
yes
yes
yes
Product
Credit card: An open systemStep 2: Authentication
…………………………………………………………………………………………………………………………………………
Customer
Merchant
Presents Card
Customer/issuing bank
Merchantbank
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The evolution of the payments system
Credit card
Payment – Interchange fee
Product
Credit card: An open systemStep 3.a: Clearing & settlement: 24 – 48 hrs
Payment – Interchange fee –– Assessment & processing fee
Debit
Payment – Interchange fee –– Assessment & processing fee –
– Merchant Discount Rate
…………………………………………………………………………………………………………………………………………
Customer
Merchant
Customer/issuing bank
Merchantbank
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The evolution of the payments system
Credit card
Payment (+ interest)
Credit card: An open systemStep 3.b: Clearing & settlement: end of the month
…………………………………………………………………………………………………………………………………………
Customer
Merchant
Customer/issuing bank
Merchantbank
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The evolution of the payments system
Credit card
Credit risk
Credit card: An open systemWhere is the risk?
Fraud, CNP risk
…………………………………………………………………………………………………………………………………………
Customer
Merchant
Presents Card
Customer/issuing bank
Merchantbank
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The evolution of the payments system
Credit cardProduct
Credit card: An open systemIndustrial Organization – 1
MastercardVisa
CitiChase
Bank of America …
Citi Merchant Serv.Chase Paymentech
BofA Merchant Serv.Wells Fargo Merchant Serv.
…………………………………………………………………………………………………………………………………………
Customer
Merchant
Presents Card
Customer/issuing bank
Merchantbank
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The evolution of the payments system
Credit cardProduct
Credit card: An open systemIndustrial Organization – 2
Non-merchant bank acquirersIndependent Sales Org. (ISOs)
…………………………………………………………………………………………………………………………………………
Customer
Merchant
Presents Card
Customer/issuing bank
Merchantbank
Tano Santos Heilbrunn Center
The evolution of the payments system
Credit cardProduct
Credit card: An open systemIndustrial Organization – 3
Citi Merchant Serv.Chase Paymentech
BofA Merchant Serv.Wells Fargo Merchant Serv.
MastercardVisa
CitiChase
Bank of America …
Fiserv (First Data)FIS (Worldpay)
Global Payments (TSYS, Heartland)
Non-merchant bank acquirersIndependent Sales Org. (ISOs)
…………………………………………………………………………………………………………………………………………
Customers
M1
Customer/issuing bank
Merchantbank
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The evolution of the payments system
Credit card
Credit card: An open systemIndustrial Organization – 4
Non-merchant bank acquirersIndependent Sales Org. (ISOs)
M2 Mn…
POS Infrstr.Payment
Aggregators
…………………………………………………………………………………………………………………………………………
Customers
M1
Customer/issuing bank
Merchantbank
Tano Santos Heilbrunn Center
The evolution of the payments system
Credit card
Credit card: An open systemIndustrial Organization – 5
Non-merchant bank acquirersIndependent Sales Org. (ISOs)
M2 Mn…
SquareStripePaypalAdyen
MastercardVisa
Citi Merchant Serv.Chase Paymentech
BofA Merchant Serv.Wells Fargo Merchant Serv.
Fiserv (First Data)FIS (Worldpay)
Global Payments (TSYS, Heartland)
CitiChase
Bank of America …
POS Infrstr.Payment
Aggregators
…………………………………………………………………………………………………………………………………………
Customers
M1
Customer/issuing bank
Merchantbank
Tano Santos Heilbrunn Center
The evolution of the payments system
Credit card
Credit card: An open systemIndustrial Organization – 5
Non-merchant bank acquirersIndependent Sales Org. (ISOs)
M2 Mn…
SquareStripePaypalAdyen
MastercardVisa
Citi Merchant Serv.Chase Paymentech
BofA Merchant Serv.Wells Fargo Merchant Serv.
Fiserv (First Data)FIS (Worldpay)
Global Payments (TSYS, Heartland)
CitiChase
Bank of America …
POS Infrstr.Payment
Aggregators
…………………………………………………………………………………………………………………………………………
Customers
M1
Customer/issuing bank
Merchantbank
Tano Santos Heilbrunn Center
The evolution of the payments system
Credit card
Credit card: An open systemIndustrial Organization – 6
Non-merchant bank acquirersIndependent Sales Org. (ISOs)
M2 Mn…
MastercardVisa
Chase PaymentechSquarePOS Infrstr.Payment
Aggregators
…………………………………………………………………………………………………………………………………………
Merchant Gateway Risk management Processing
Acquiring bankCredit cardIssuing bankAuthorization
………………………………………………………………………………………………………………………………………
Where is Adyen in the payment process
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TRENDS
33
…………………………………………………………………………………………………………………………………………
Trends: Taxonomy
34
Trends
The consumer The firm Governance & Institutions• Wealth accumulation• Demographic changes• Behavioral changes• Technology adoption
• Business process adoption• Automatization• Direct to consumer• Standardization• HR practices• Compliance
• Regulation• Market adoption• Political trends
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Trends: The death of the movie theater
35
$10.00
$10.50
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
1,000
1,100
1,200
1,300
1,400
1,500
1,600
1,700
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Tickets Sold (in millions; left) Box Office (adjusted for inflation; in billions; right)
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US: Tickets sold (in millions) and Box office receipts (in billions). 1995 – 2019 Source: The Numbers
…………………………………………………………………………………………………………………………………………
Trends: The death of the movie theater
36
0
5
10
15
20
25
30
35
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Walt Disney 20th Century Fox Paramount Pictures Sony Pictures Universal
US: Major releases by big studios. 1995 – 2019 Source: The numbers
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Travel agencies: Stock Prices: This year
37
0
2
4
6
8
10
12
1/2/20 2/2/20 3/2/20 4/2/20
TUI AG: Stock price (€)
1000
1200
1400
1600
1800
2000
2200
1/2/20 2/2/20 3/2/20 4/2/20
Bookings: Stock price ($)
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…………………………………………………………………………………………………………………………………………
TUI AG: Stock price (£): 03/17/2006 – 04/21/2020
38
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
03/17/06 03/17/07 03/17/08 03/17/09 03/17/10 03/17/11 03/17/12 03/17/13 03/17/14 03/17/15 03/17/16 03/17/17 03/17/18 03/17/19 03/17/20
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TUI AG
39
-800
-600
-400
-200
0
200
400
600
800
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20002001200220032004200520062007200820092010201120122013201420152016201720182019
Revenues (left) EBIT (Operating Income; right)
TUI AGRevenues and operating income (mns. of £)
2000 – 2019
0.0
5.0
10.0
15.0
20.0
25.0
200620072008200920102011201220132014201520162017201820192020 (A
pril)
EBIT: Guidance (€
622) divided by 5EBIT:FY
2019 EBIT
TUI EV/EBIT2006 – 2019
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Is it growing?
40
-6
-4
-2
0
2
4
6
8
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Rate of growth of international arrivals. Source: UNWTO
Tano Santos
1.5bn visitors
Heilbrunn Center
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The “Travel” business: A bird’s eye view
41
The “Travel” Business
Tourism
Mass AdventureWildlife
Cultural Religious
Corporate travel
Households Firms
Tano Santos Heilbrunn Center
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The “Travel” business: Exposure to Coronavirus
42
The “Travel” Business
Tourism
Mass AdventureWildlife
Cultural Religious
Corporate travel
Households Firms
Short
Long
High High High High High
HighLow Low Low Low
Tano Santos Heilbrunn Center
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The “Travel” business: Main economic determinant
43
The “Travel” Business
Tourism
Mass AdventureWildlife Cultural Religious
Corporate travel
Economies of scale
Limited supply
Safari Venice Middle EastSpain
Industry Retreats Conferences
World Mobile Congress
AEA/AFA
Firms’ balance sheet
You know …
Tano Santos
…………………………………………………………………………………………………………………………………………
Tourism: Is this a good country for tourism?
44Tano Santos Heilbrunn Center
…………………………………………………………………………………………………………………………………………
Tourism: Is this a good country for tourism?
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…………………………………………………………………………………………………………………………………………
Tourism: Is this a good country for tourism?
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…………………………………………………………………………………………………………………………………………
Tourism: The value chain
47
Tourist
Travel Agencies
Transportation
Hotels & Accommodations
Transportation
Amenities & services
Expedia (Travelocity, Worldwide Travel, Orbitz, …)Bookings (priceline, agoda, …), BCD , Amex, CWTTUI Group, Trip.com, Google Travel, …
American, Delta, United, Air France/KLM, Ryanair,Tui Airlines, IAG, China Eastern, China Southern, ...
Wyndham, Marriott, Hilton, Best Western, Accor, JinJiang, Hyatt, InterContinental, Airbnb, …
Local arilines (Vueling,Wow, Ryanair, Norwegian, …)Car rental (Hertz, Avis, …)Trains, public transportation, …
Insu
ranc
e, a
dver
tisin
g, …
Tano Santos Heilbrunn Center
…………………………………………………………………………………………………………………………………………
Tourism: The value chain
48
Tourist
Travel Agencies
Transportation
Hotels & Accommodations
Transportation
Amenities & services
Insu
ranc
e, a
dver
tisin
g, …
Tano Santos
Barriers to entry: Sources of customer captivity
High: Network externalities
Low: Rewards programs
Traditional: Low: Rewards programsAirbnb: High: Network externalities
Low: Rewards programs
High: inelastic supply
Heilbrunn Center
…………………………………………………………………………………………………………………………………………
Tourism: OTAs
● How do you book a hotel in Rome?
1. OTA
• Bookings, Expedia
2. Metasearch/aggregator
• Trivago, TripAdvisor
3. Alternative
• Airbnb
4. Direct booking
• Le Meridien Visconti
5. Search engine
49Tano Santos Heilbrunn Center
…………………………………………………………………………………………………………………………………………
Tourism: OTAs
● OTAs: Business models
1) Merchant model
• OTA buys blocks of rooms at a discount and resells them for a profit
• Customers pay the OTA in time of booking and the OTA pays the hotel at checkout.
• 20-30% fee
• Example: Expedia
2) Agency model
• Middleman and no payment upfront
• 10-15% fee at checkout from hotel
• Small versus large hotels (think Europe)
• Example: Bookings
50Tano Santos Heilbrunn Center
…………………………………………………………………………………………………………………………………………
Tourism: OTA
● OTAs match customers with hotels
– The logic of platform economics
– Example: Mastercard or Visa
● Problem
– Most travelers start their trip by searching locations, amenities and hotels in … Google.
– Would Google steal the business away?
• How much does the travel industry pay Google in marketing expenses? $14bn
• Value of travel industry payments to Google (annuity) at 10% with 5% growth: $280bn
– Cost of reproducing the network?
• Operating margins of a network at work next
51Tano Santos Heilbrunn Center
…………………………………………………………………………………………………………………………………………
OTAs: Bookings: Operating margins
52
-10
-5
0
5
10
15
20
25
30
35
40
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Bookings: Operating margins. 2000 – 2019 Source: Annual Reports
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…………………………………………………………………………………………………………………………………………
OTAs: Bookings: Revenue and operating income growth
53
0
10
20
30
40
50
60
70
80
90
100
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Sales Operating income
Bookings: Revenue and Op. Income growth (MA4) . 2008 – 2019 Source: Annual Reports
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…………………………………………………………………………………………………………………………………………
OTAs: Bookings: EPV
item FY2019
Revenues 15,066.0Operating Margin 35.5
Op. Income 5,345.0Adjustments
Performance marketing 4,419.0
Brand Marketing 548.0Adj. Op. Income 5,893.0
Tax Rate (%) 22.8NOPAT 4547.1
Discount rate (%) 10.0EPV Op. Buss. 45,470.8
Cash 7,330.0Debt 9,251.0
EPV Equity 43,549.8Market cap
(05-11-2020)56,730.0
Market cap(03-23-2020)
47,303.2
54
0.0
10.0
20.0
30.0
40.0
50.0
60.0
200220032004200520062007200820092010201120122013201420152016201720182019
Bookings: EV/ebit
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