valuexvail 2013 - ethan berg
TRANSCRIPT
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A Search for
Ethan BergG4
Advantaged ValueInvestments
VALUEx VailJune, 20th 2013
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Pricing
AnomaliesAre All
Around Us
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The Creation of Strategy
WhatConstitutes
end-customer
value?
Whatconstituteschannelvalue?
What arethe
strategicallydistinct
segments?
Howattractive
is eachsegment?
How do ourcosts compare
to ourcompetitors?
How do ourcapabilitiescompare to
ourcompetitors?
What arethe
economicdrivers of the
industry?
What is thescope of the
industry?
What are theimplications for
theorganizationpursuing the
choice?
How will ourcompetitors,
customers andsuppliers reactto our actions?
What are theeconomicimplications of
the choice?
Position AWith
Advantage X
Position BWith
Advantage Y
Customer Insight and Action Costs andCapabilities
Industry Evolution Economicsof Choice
ChannelRelative
Attractiveness CostsIndustry
Structure Internal
ExternalIndustry
DefinitionCapabilitiesSegmentationEnd-
Customer
ValueAnalysis
SegmentationRelativePosition
IndustryAnalysis
CompetitiveDynamics
EconomicsStrategicChoice
Source: Monitor Company
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There is often a disconnect between stockprices and how the company is evolving
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CompetitiveAdvantage
Low
High
Low HighGood Value(Cheaper)
Advantaged Value
Check Point
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In business, I look for economic castles
protected by unbreachable moats.
-Warren BuffetBerkshire Hathaway Annual Report, 1995
Porters Competitive Advantage is 500+ pages!
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Gents: I have decided to keep
your grand piano. For somereason unknown to me it givesbetter results than any so far tried.Please send bill with lowest price.
Yours,
Thomas Alva Edison June 2nd 1890
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Gents: I have decided to keepyour grand piano. For somereason unknown to me it givesbetter resultsthan any so far tried.Please send bill with lowest price.
.
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Wow! This
thing soundsgreat!
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Steinway: Customer Value
Customer SegmentsPurchase
Criteria+Professional/Serious User (6)Furniture (8)Institutions (i.e. Julliard) (8)
Families (70)
VoiceSize, WoodDurability, Price
Price
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>100Patents
Craft
Methods
12000
Parts
10 ToneRegulators
WoodTechnician
s All
WoodAction
MasterPiano
Technicians
3rdGeneration
Skilledemployees
Relationship95% ConcertPerformers
Informe
d Testers
1,500
Unpaidendorsers
Exclusive Use of
ArtistNames
SteinwayHall
TechnicalExcellence
SteinwayConcertService
Steinway
VillageFactory
Steinway Activities System: Costs and Capabilities
SteinwayVillageFactory
FinestRaw
Materials. Aged.
PianoBank
VoicingProcess
(20hours)
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.
We use the concert pianist as a proving ground. They knowit. Part of this association with performing artists is the factthat we say, Look, we are trying to make a better piano foryou guys, will you try this one? And a Gary Graffman or a
Grant Johannesen or a Rudolf Serkin or one of todays fineperforming artists say, Sure. Theyll try it and come backand say, Johnny, you know that dog- I just couldnt get whatI wanted out of it, and thats what I want to know. Thats thehelp they give us. Theres no real scientific laboratory wayyou could take an experimental action, put it in a piano andtest it, and say, This is 89.27 percent better than the other orsomething. I want Gary Graffman to try the thing.
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Steinway: Passionate
Customers Steinway is the only piano on which the pianist can do everything he
wants. And everything he dreams.Vladimir Ashkenazy
When one plays a Steinway, there is a warmth and nobility in the
sound that is unequaled by any other instrument.Emanuel Ax
A Pianist without a Steinway, for me, is the same as a singer without avoice.Rudolph Buchbinder
The Steinway pianos of today are the finest I have ever played.James Levine
The more I hear its nuances of sounds, the more I realize the wealth ofcolors only a Steinway piano can produce.Murray Perahia
.
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Steinway: Relative Advantage
80K 70K 60K 50K 40K 30K 20K 10K
100
90
80
70
60
50
Cost
Voice
Rating
Steinway
Yamaha
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Steven Tyler, Aerosmith @
Boston Strong
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Steinway (LVB): Valuation
Market CapNormalized FCF
Not necessarily cheap today, but it has been in the past andwill be again in the future. Meanwhile, their advantage in
certain segments is enduring (123 years and counting).
Liquidation Value
= $359.29M~22mm
LI Factory: $150MPiano Bank: $130MBrand: $25MGerman Factory: ?
0
5
10
15
20
25
30
35
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
FCF(inmillionsof$)
Year
LVB Free Cash FlowFCF in Millions $
Th M t V l bl Thi I S hi
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Three Most Valuable Things In Searchingfor Advantaged Companies
I. Customer Segmentation and Value Analysis
Who is the core buyer? What are their purchase criteria, exactly? Does the company have leading market share? Will anyone miss them if they are gone tomorrow?
II. The Company has Unique Set of Assets and Activities (Costs and Capabilities) Unfair advantage: They are cheating!
Understand what their actual advantage is Build an ActivitySystem Evidence of Barriers to Entry (Historic Returns on Capital) Not replicable no matter what another company spends Demonstratably Lowest Cost Producer
III. Fit Between the Two
Good Value:Low multiple of normalized Cash FlowsPositive Free Cash FlowsPredictable, recurring, consistentMonetizeable AssetsDiscount to conservatively assessed value
Out of Favor Holdings that carry less risk of loss
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Pricing Anomaly:Life Sciences/ Biotech
1. Disconnect between VC and scientists timeline
2. FDA phases disproportionately affect valuation
3. When publically traded, story trumps science
4. Analysts focus only on lead candidates
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$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
$100,000
2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999
Depreciation
Value
One more Advantaged Value Investment
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Appendix
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CustomersWillingness to Pay
Cost of Creating Value(Incl. Capital Costs)
Margin- =
Winning the Value Equation
Dollars
Winning the value equation:Correctly interpreting valueUnderstanding cost dynamics
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I know it when I see
it
Identifying Advantage:
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Contango Oil & Gas Company(MCF) as a case study
The only competitive advantage in the naturalgas and oil business is to be among the LOWESTCOST producers.
Virtually all the exploration and productionindustrys VALUE CREATION occurs when drilling ofsuccessful exploration wells.
The whole point of a business is only and always
to increase shareholder wealth with conditions.
Core Beliefs from Inception
Beliefs are optional, results are mandatory and the only resultthat matters is total return to shareholders.
-Kenneth R. Peak
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Strategy, Positioning andSustainable Advantage
The highest form of generalship is to conquer the enemy by
strategy. The next highest form of generalship is to conquer
the enemy by alliance. The still next highest form of
generalship is to conquer the enemy by battle. The worst
form of generalship is to conquer the enemy by besieging
walled cities.
If you know the enemy and you know yourself, you need not
fear the result of a hundred battles. If you know yourself but
not the enemy, for every victory gained you will suffer a
defeat. If you know neither the enemy nor yourself, you will
succumb in every battle.
The general who wins a battle makes many calculations
before the battle is fought. The general who loses a battle
makes but few.
-General Tzu,The Art of War (Circa 450 B.C.)
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I yam what I yam!Popeye
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Types of Advantage:
1. High Customer Switching Costs
2. Economies of Scale/Low Cost Provider
3. Intangible Assets
4. The Network Effect
5. Threat of Entry
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Relationship Between Strategyand Activity Systems
Strategy is an integrated set of choices about where to play andhow to winThe goal is to make choices that enable the firm to createsustainable advantage relative to competitorsThe purpose of an activity system is to transform a set of choicesinto what an organization must do on a day to day basis to create
sustainable competitive advantage.The essence of great strategy is a unique activity system-choosing to perform activities differently or to performdifferent activities than rivals in order to win the valueequation
Sustainable competitive advantage arises from the way activitiesfit and reinforce each other.
The system is greater than the sum of activities: synergyThe whole system is more difficult to replicate by competitorsthan each individual activity.
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Highlighting the Main Strategic Choices
Pick the main Where to Play and How to Win strategic
choices using the following principlesWhich of these represent significant sources of:
1. Value?2. Advantage?
These main Where to Play and How to Win choices becomethe major hubs of your activity system. You will generate
activities in support of each of these major hubs
MajorHub #1
MajorHub #4
MajorHub #2
MajorHub #3
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Criteria to Evaluate the Activity System as a Set
DistinctivenessDo differences vs. competitors yield distinct advantage?Do overlaps vs. competition exist? Can we claim advantage?Does this activity show where we will not play?
Impact on Value CreationDo the activities create value for consumers? Channels?
Do the activities create value for shareholders?Sustainability
What is the longevity of our advantage? How likely is it to beimitated?
Fit
How do the activities complement and reinforce each other?Breakthrough thinkingTo what extent does this activity system enable us to change therules of the game?
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0.00% 5.00% 10.00% 15.00% 20.00% 25.00%
Steel
Airlines
Aluminum
Chemicals
Food Retailing
Tobacco
Computer Software
Food Processing
Medical Products
Beverages
Pharmaceuticals
Industry Profitability
Ten Year Weighted Average Return on CapitalFor Selected Industries