There’s nobody better than Warren Buffett in the investing world. He’s a huge public figure that gets a lot of attention, and since he’s had such a great performance from 1965 through 2012, it’s no wonder that so many people pay attention to what he has to say. During those years mentioned above, he’s even outperformed the S&P 500 index by over 10 percentage points each year. This is based on his favorite proxy – book value per share. To put it into perspective, the S&P 500 only managed to average 9.4% annually during that time period, yet Buffett beat the market’s performance by double.
With such a high outperformance, you would think that Buffett was mainly dealing with futures and forwards, credit default swaps and other forms of credit derivatives – and you’d be absolutely wrong. Although Berkshire Hathaway certainly engages in those types of investments every once in a while, their success is ultimately rooted in a very simple strategy… Buy high quality, undervalued stocks and hold them for the long haul.
When Berkshire Hathaway makes moves that are different than the common consensus, you should always pay attention. At this time, it looks like Buffett is making bets on cable and pay-TV providers and believing that they aren’t going anywhere. During the third quarter, Berkshire made additional purchases of DirecTV and Charter Communications, and Buffett certainly believes that they are going to succeed moving forward.
Charter Communications Is Purchasing Subscribers
During a time when pay-TV and other video services are struggling, and most of these providers are even currently losing customers instead of the other way around, Charter is purchasing video subscribers from Time Warner Cable, and they are also swapping some with Comcast in order to centralize and build up their subscriber base. After losing the bidding war with Comcast in an effort to purchase Time Warner, the company made a different move and chose to purchase 1.4 million customers from Time Warner instead once the deal was over. If this merger is approved, Charter will become the second biggest provider of cable TV in the United States of America. They will have a total of 6 million subscribers, but they will still be very far away from the significant amount of subscribers that Comcast currently has, which is more than 33 million.
With this stock purchase, Berkshire Hathaway could be betting on the growth of the Internet and monetization more than video. During the third quarter, Charter actually added 94,000 residential Internet customers, and they even increased their Internet revenue by 13.4% year-over-year. Even though video revenue managed to go up 6% during that time, going to be difficult to sustain this without additional organic subscribers. The eventuality is that subscribers are going to be less willing to live with increases in pricing.
An Explanation for the DirecTV Purchase
The Internet theory doesn’t explain why Berkshire Hathaway would’ve purchased additional shares of DirecTV. Why? Because the satellite TV provider doesn’t actually offer direct Internet service, although they do partner with some ISPs in order to provide a bundle service. Purchasing DirecTV is not the best way to play the growth of subscribers on the Internet, although one should note that Berkshire Hathaway owns Verizon, which is also an Internet provider. The stock purchase of DirecTV is most likely less focused on the US operations of the company and more geared toward the fortune that is ready to be made in Latin America.
AT&T is currently working on the deal to purchase DirecTV, and it’s currently pending regulatory approval in the United States. But in the meantime, DirecTV Latin America is experiencing fantastic performance, and since 2010, company revenue in this area has gone up 24% annually, and subscriber growth has risen 26% per year. As the middle class in Latin America continues to grow, you could expect this trend to continue. The United States market, however, is relatively mature and certainly developed.
Telecom Baron Warren Buffett?
Lastly, by purchasing more shares of DirecTV, this enables Berkshire Hathaway to expand its telecom holdings. If the deal between AT&T and DirecTV is approved, the shareholders at DirecTV are going to receive $28.50 in cash and $66.50 worth of AT&T stock for each DirecTV share. Essentially, this deal is going to make Buffett and Berkshire Hathaway a very large holder of shares in two of the largest telecoms of the United States.
Looking at this from a long-term basis, both AT&T and Verizon are potentially undervalued, and this is even more so true if net neutrality loses and the ISPs have a greater ability to effectively monetize their bandwidth. If this doesn’t happen, these companies are still going to have huge demands for wireless data and in order to capture this value; they are going to continue to raise their prices.
All in all, it does not appear that Buffett and Berkshire Hathaway think cable is dead and buried. On the other hand, the company is certainly targeting their bets rather than making indiscriminate purchases. Will the AT& T/DirecTV and Charter stocks continue to outperform as time goes by? Nobody knows for certain, but it’s kind of hard to bet against Berkshire Hathaway. People have done so in the past but they usually end up with the short end of the stick.