Every quarter the Mastermind Group from The Investor’s Podcast gets together to discusses their latest investment ideas. In this episode, each member of the group recommends a stock pick that might outperform the S&P 500.  After each stock pick, the remaining members of the group pick-apart the idea.  After talking about the 4 different stock picks, the group transitions into a discussion about cryptocurrencies.

In this episode, you’ll learn:

  • Which stocks the TIP mastermind group might acquire this quarter
  • Why you should go straight to the numbers before analyzing a stock pick in detail
  • Why the airline industry might be worth investing
  • What Bitcoin Cash is and if should you own it?

Tweet your comments about this episode directly to Preston, Stig, and the rest of The Investor’s Podcast Community using #TIPMoney.

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Podcast Transcript and Summary

Tobias: [00:01:55] I’ll give it a bash. I don’t mind. My pick is Gilead Sciences GILD is the ticker it’s one that I’ve picked before and it’s fun I get lots of questions about it. So I thought I’d go back to what I think when I first picked it was sort of in the high 60s ran up as high as 85. It’s run back now to around 70 71 seventy-two dollars. So people are asking me that the father asked me again and I’ll just talk about something that I still hold. I still think it’s cheap it hasn’t really moved that much from where I bought it originally that six months ago. For those who don’t know the stock, it’s one of the stocks that two years ago it was a hugely popular stock. And if you go to any of the message boards at the time it was one of the ones that everybody was kind of riding to victory. It was trading at around 120 bucks 120 bucks plus of last two years. It’s had this sort of terrible trajectory straight into the ground and it’s basically halved over two years and now it’s one of those stocks that everybody hates because it’s one of those stocks that everybody held a couple of years ago and I remember how badly they’ve all been burnt on the reason for buying two years ago was that it had this kind of stellar earnings growth that fat toad and the earnings have basically been falling since then that looks like they got to continue to fall for another 12 months two years.

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Tobias: [00:03:18] So basically it’s a buyer pharmaceutical company. Their specialty is anti-viral drugs so that means that treat to hepatitis B hepatitis C flu HIV. The problem for them has been that they’ve treated the hepatitis C which was a big moneymaker so successfully that they’ve cured everybody who they’ve treated with it rather than sort of drip feeding them this over a long period of time and building a really good business. So that’s a great thing for the people who have received the treatment not so great for the shareholders in the company right now. My sympathies are with the people who are receiving the treatment rather than the shareholders from. So they’re looking for new revenues for growth. The things that I like about the stock it’s at ninety four billion dollar market capitalization as of today and a prospect values about $95 billion a net debt of about a billion dollars. But it’s got 40 billion dollars in cash. Kind of balancing that off. So it’s very very liquid. It’s hugely cash flow positive because it they’ve got this drug that’s basically in run off they’re trying to find new sources of revenue but they are generating cash flow in the mean time so the chances of this going away as a business is very very low. If I look at any of the statistical measures of distress or any manipulation or fraud or any of those things there’s nothing there is no indication the return on invested capital which is not a measure that I think is particularly useful most of the time.
Tobias: [00:04:44] But in something like this where it’s patents it’s got various other protections. It is a kind of a useful metric. It’s incredibly high. It sits around 73 percent return on invested capital free cash flow yields around 15 percent. So when the return on invested capital is that much higher than the free cash flow yield that’s sort of an indication that the stock is probably way too cheap. And so I think favorably for the stock probably around 100 to $105 sort of at the low end and with the stock trading around $70 I think is a fairly wide margin of safety. I think potentially it could be worth more than the next few years. But the issue is going to be declining revenues for these sort of immediate future. So anybody who buys this you know next quarter are you going to see revenues a little bit lower quarter after that revenue is going to be a little bit lower. The only thing that you have going for you in this is that it’s incredibly cheap and it’s generating huge amounts of cash flow and it’s generating this incredibly high return on invested capital. So for me this is exactly the kind of stock that I’d like. It might take a few years to work its way out but by the time that the future is going to look a little bit brighter it’s going to be a much more expensive stock.
Stig: [00:05:55] I’m so happy you brought up this pick Toby I’ve been asked about this for at least a year and I want to say it’s been on my radar for yet 2 or something like what you are also saying because it has been a very light stock and then it became a cheap stock and for me I guess it always comes back to I don’t know how to value patterns. For me it’s too complicated when I read through the financial statements and also look into the business model in terms of figuring out how sustainable to do so. Toby could you talk to us about your process in terms of evaluating patents.
Stig: [00:06:30] Sometimes I’ll take a slightly different approach to these sort of stocks. The future is difficult for me to foresee I think a lot of other people have much better crystal balls than I did. I have no idea what it looks like to me I sort of have to look at the immediate past and for this stock it doesn’t look right. The revenues have been falling with her. She thinks that I should have mentioned one of them is that they’ve used some of that enormous cash pile to buy another company for about 12 billion dollars. They will start generating and things in income in some time next year I think. And then it’s not going to replace the HCV income but it’s going to come in at about a quarter of what the HCV income is which is about the closest thing I think gets to one or two over the next few years and then it continues to grow. I think that it’s one of those things the cash flows very strong. The company’s got a lot of cash on its balance sheet it has bought some stock. All of those are things that indicate to me that it’s got longevity and the potential for something good to happen and I’m just sort of at this price I think it’s cheap that I had to sort of wait and see if something good can happen when it happens.
Tobias: [00:07:36] Discussion about ratings is in danger. That when you hear from the JD portfolio business. The reason I’m asking is that the Dems or I would like to start explaining starting 17 to 20 21. What are your concerns and how can they compensate those expectations.
Tobias: [00:07:58] The earnings are falling because they’re negotiating the contracts for the sales of this into the future for me. I don’t know what’s going to happen I don’t know how to replace it but they are looking for ways to do it and they have the firepower to do it. They’re generating lots of free cash already from the existing portfolio. So I sort of think it’s one of those things that revenues continue to fall. But as a Deepali guy out I don’t really mind that so much because the balance sheet is pretty strong free cash flows they’re still running box on its existing portfolio and very very cheap.
Preston: [00:08:32] So Toby I know nothing about technical analysis so I’m just going to throw that out there. But whenever I’m looking at this and I’m looking at the top line that we’re all talking about and how it’s contracting and it’s going down and you kind of take a look at the chart and you’re seeing the price chart which I think this is the first time I’ve ever talked about a price chart on the show 165 episode. When you look at the price chart I guess the pattern of the prices just keeps going down and you’re not seeing much volume trying to stop that from happening. And so whenever I’m looking at a business like this that’s really big and has to do a lot of R&D. A billion dollars in R&D to create a new product and then they have to go through all the marketing and then they have to go through everything to try to make it a successful drug to potentially start growing that top line again. I think they’ve got a tough road ahead of themselves before you’re going to see the price of normalized and start taking off again. There could be something there could be a breakthrough in some type of R&D that they’re doing right now that could make it pop on on a whim.
Stig: [00:09:36] But for me I guess I love the price and I love the valuation on this. I’m not going to lie whenever I did the intrinsic value on this I got a very high number double digit number but my concerns are more on the technical side of their performance on their income statement and my expectation of what it’s going to look like a year from now I think it’s going to continue to contract and I don’t see anything in the volume of people buying that’s going to maybe reverse that anytime soon. So I guess for me I wouldn’t buy this even though it looks really juicy from a return standpoint from a value investing standpoint it looks really juicy. But I guess I’m going to continue to watch it and if I feel like I see a large spike in the volume I might miss out on a little bit but I think it has more to go. I think it has more to fall before you’re going to start to see the price return. That’s my personal opinion.
Tobias: [00:10:25] Drifts are definitely going to be low this time next year. Almost certainly. The thing is that by that time this sort of gets when you can see the runway for this thing the price is going to be a lot higher it’s lower than it was a few months ago but it’s higher than it was sort of six months ago. So I don’t know if that means anything to the ticket because it has it can shoot me a tweet told me.
Preston: [00:10:46] I’m pretty sure no matter what comes out of the technical side it probably won’t be. Yeah I just need to be quiet because I don’t know anything about that.
Tobias: [00:10:53] Well one of the reasons is you can have a look at the price shot from Italy this year Johnny Hopkins who writes the acquirer’s multiple blog posts. He wrote a post of Gilliat because he was excited about it and he said I want to post this up and I wanted to wait until the earnings data got populated into the spreadsheet from the data providers. And in that sort of period of time it when it bounced really quickly from 64 which Johnny had found a kind of up to 67 and then it looked like it was going to get away. And I felt really bad for Johnny because I had picked it really well and it didn’t look like it had taken off. As it happens as often happens with these stocks you do get another chance to buy them. But it’s one of those things that I think I’ve just discovered over a long time trying to buy and sell stocks if you like the process. You got to do it today because you might not get it tomorrow. They can take off really really quickly.
Preston: [00:11:45] So I agree with everything you just said. Let me ask you this then. Are you buying a small volume at this point and slowly working your way into it or are you just taking it a decent sized position right now.
Tobias: [00:11:57] I put a chunk of it and I bought some leaps when I six months ago. So it was it wasn’t the bottom it was it was in the high 60s I think at the time that I did it and it got a little bit cheaper after that and had sort of taken off since I have had a pretty full portfolio until today. So I’m going to revisit it again it’s probably something I’ll buy some more of.
Stig: [00:12:17] I guess what I’m getting from Tobias’s point of view is that the price is so low and there are a lot of upside including acquisitions which we didn’t talk about but they can be a potential target for acquisition and actually they are from that aspect as well. That’s a good point.
Preston: [00:12:35] All right. So I think that concludes Toby’s stock pick and the stock ticker is G I L D. And we’re just going to go around the horn here so why do you want to go next. Great. So Harry you’re up.
Hari: [00:12:49] Always fun to sit around and chat with you guys and I’m ready to be beaten up my pick today is Union Pacific which is a railroad company that has a lot of talk about tariff and restrictions on imports from Mexico and whatnot. And Union Pacific does a lot of business with Mexico in the sense that a lot of companies especially automobile manufacturers that transport lot of their cars through railroads and Union Pacific can be in for the two big railroads on the West and for those of you who are not familiar with railroads in the U.S. there are different classes of railroads. And back in the days that is before 1980 there were many railroads because of lot of regulations against consolidation. All things change and from then on it started as a stylus. And from then on the consolidation started happening and a lot of synergies were realized. And the number of railroads also started in music. So today there are only a handful of last one railroads on the west. We have to get big. And the NSA which is now a real Berkshire-Hathaway. And on the east it is CSX and not so different. Of course there is a Kansas City railroad as well which is a small player. And some of the interesting facts of what railroads is that about 40 percent of all the inner city. While you are transported by rail. Today and railroad employees are on one hundred and eighty five thousand jobs. It used to be 1.5 million 100 years back so they definitely work a lot on productivity and efficiency. And one trade the blazes around 250 trucks on the highway and also some of the other interesting facts about railroads in terms of their efficiency is that if freight can be moved four hundred and seventy nine miles on one gallon of fuel.
Hari: [00:15:05] So that’s much more efficient and also a safer way to transport freight than trucks in those of what they carry around 19 percent this school so coal is a major contributor to the revenue and chemicals grains and food and then assembly parts water weight. And then finish goods and miscellaneous. So that’s kind of the we’re all contributors to revenue. Union Pacific specifically operates mostly in the western region. As I said most of their Walham comes under course also for entry. We got it on Los Angeles Long Beach on the west coast and then BNSF pretty much are neck to neck. If you look at their revenue number of miles of tracks BNSF and you won’t be having to actually on the West Coast. One of the interesting facts about railroads is obviously there are more. It’s really hard to create another rail road because of all the regulations in terms of land acquisitions and building up their infrastructure is concerned you and B has been expanding quite a bit in the last couple of years. And also it has increased its overall efficiency. And the reason I think that is there are some uncertainties going ahead in the next couple of months. And based on how the policies on imports are shaped it might impact railroads and specifically Union Pacific and BNSF. So this will be a stock to watch. It will be good for us as I understand a lot of the different sources of revenue for this railroad. And if there is a I think about this particular stock and if people are ready to throw the baby with the board it might be investing back for some of us.
Preston: [00:16:57] So sorry for me when I’m looking through this I go straight to the numbers and although I think that the competitive advantage piece of it I completely agree with everything you said. I don’t see the revenues really contracting at all. I think they’re going to continue to be able to produce decent cash flow but the premium that people are paying to own it today for me is not a buy. I’m kind of curious what you think the intrinsic value through like an IRR is. For me I’m coming up with I think I’m being very liberal in my assessment as to what I think they’re able to do in the future. Basically saying I am giving them much more a benefit of the doubt than being conservative with my numbers and I’m still coming up with like about a three and a half percent return at the current price. So basically saying what they’ve got today they can continue to sustain into the future. That’s my worst case my best case is saying that they’re going to grow at 7 percent. And those are the numbers that I’m using as my projections into the future and I’m still coming up with three and a half percent. And so I guess my question back to you is if that’s a true statement let’s just assume that that’s a true three and a half percent. Why not just buy an S&P 500. Because I think you’re going to get the same return and you’re going to have less risk.
Hari: [00:18:07] That’s a good point. I’m not recommending a buy at these levels as I’m sure also that this is not a stock that I would buy hoping that they will get all that revenue at a faster pace from here. In fact I’m not even assuming any growth in revenue. I’m looking at them as a place to borrow my cash I some do it and it’s more like a gun generating opportunity but not at this price. I would be interested in the stock when it is in the lower 70s. That’s when it becomes much more compelling and interesting. But however it’s it’s good to study this now because I’m expecting that there will be a lot of rumors and news around banning Mexican imports or some Mexican reports that can drastically impact the revenue of Union Pacific because they’re already low on their revenues from coal which is slowly. And that is being compensated by the revenue from imports from Mexico. So there is definitely some headaches.
Preston: [00:19:14] So it’s your number that you that you quoted there. You’re looking for something in the $70 price range. And whenever I put that number into my intrinsic value assessment I get around an 8 percent return if you can buy it for like 70 bucks. But the problem is it’s it’s not 70 bucks it’s $115 right now so I’m with you. As far as wait until around that price range. But you know by the time it gets to $70 there might be some other deals in the market that are way better than a 8 or 9 percent return. I also want the audience to know that right now the dividend on this has given you a 2 percent yield at the current price so that’s not a bad dividend. And I think all the money that you’re going to make on this. Now moving forward at that price is really going to be that difficult.
Hari: [00:19:57] I was just going through some thoughts at you on this one. If I look at it on the trustee Altman finish rich Remine statistical measures to determine if it’s in any financial distress if it’s financially strong if there’s any sort of manipulation. So there’s none of that which is always a good sign. Market caps around 91 billion enterprise value was at a hundred and six billion which means that it’s carrying sort of 15 billion dollars in net debt net obligations which aren’t typically love. If I look at on an acquirer’s multiple basis it’s trading a little bit of 10 times which for a good business or really good business that could be about fair value. I think for this business I think it’s either just at face value or it’s just a little bit below to say that the way that I would calculate it turning on invested capital around nonperson and the return that’s available is about 3 percent. So it’s a little bit of value for me but there are some things that are nice. One of them is got a very stable earnings trajectory. So it is one of those things that if you could get it at the right price which $70 is probably the limit of the right price but that’s well within the possibility of something that you would do. It’s probably something that you can buy there and then let it sit for a long time and you can’t just sort of accumulate and grow. So I think it’s a really nice fundamental stock a little bit worried about the level of debt that’s carrying just not something I think. I’m not certain I should say I’m worried about it’s just not something that I like to see. Otherwise I think it’s a good fundamental business just a little bit expensive.
Stig: [00:21:26] Yes. So for me I don’t have too many things to add. I also read through our intrinsic value calculator and when I look at it we probably around called 3 or 4 percent so there are similar results as Preston in terms of debt that Toby just mentioned. I don’t think I’m as concerned so you get have different types of obligations that might be more burdensome for the company and others and if you look at the interest bearing debt. It’s not too bad you still have a coverage ratio above 10 was basically just means that you can pay the interest expenses but the operating income of these 10 times and even though that debt has slightly increased I don’t think it’s it it’s a huge issue. So I think that that feedback is really just summed up is. Great business. Not a lot to say about that. You bring up a lot of great points about local monopolies and perhaps pricing power to some extent even though it’s regulated. But really the valuation is really the big red flag here.
Hari: [00:22:25] Yeah I think I definitely agree with you. And one piece of information for the audience is that the previous month in October us last on railroads together or more intermodal containers were than during any previous month in the history of returns. So obviously the valuations are basically letting the recent trends and the recent numbers come in go to all the railroads all the railroads are really valuable. They are really as Toby was alluding to are a little bit higher than their value.
Hari: [00:23:02] So it’s definitely not something that I would buy right now but I will definitely watch the well never look at the revenue and I guess you can say that but a lot of the utility companies see that it’s more last less. And you also said before that you don’t expect perhaps growth at all. Is it even possible in this business to grow your top line being as a local monopoly as a Union Pacific operation.
Tobias: [00:23:31] Yes if you look at the revenue growth it pretty much tracks the GDP and also tracks the important explore dynamics between US and Mexico. If I were charged in my analysis which essentially tracks the dollar amount of U.S. and Mexico import export and the U.N. peace Holligan their revenue from that particular well. And another interesting aspect of you and B is they own a significant percentage in Mexico’s biggest rating. So they have some growth coming in from Mexico. But again right now everybody recognizes these facts. So everything is big into the stock price.
Preston: [00:24:21] Ok. So Stig go ahead and talk about your pick because I didn’t know what your pick was until just a couple minutes before when I was doing a little bit of research on your pick and I had to smile because we almost have identical picks with. This was not planned in any way. But go ahead. Let’s let’s hear yours first. So my pick is Southwest Airlines and the stock ticker is LUV. So what’s not to like about that. It’s a major airline and together with Delta United and American they control 70 percent of the U.S. market. They’re the biggest at least measured in originated passengers audit and they provide schedule extra potations throughout US and also in the international markets. One thing to mention just before we talk about the industry is that they have 44 consecutive years off of his ability. And that’s almost unheard off especially if you talk about the industry like the airline industry. Some of the key industry ratio ratios so look at that. First of all the load factor. That’s basically how they fill their seats per mile. And if you look across the board we are looking at something slightly above 80 percent in North America Japan 7 to be exact. LTV was one of the best airlines out there with eighty three point six.
Stig: [00:25:47]. That’s the class where Southwest Airlines really makes his mark is on customer satisfaction and if you look at the airlines that’s its top ranked all the major airlines. Number two and three JetBlue and Alaska and then for my at Delta US number four. But very interesting. And people are probably not surprised when I say that United Airlines they’re not doing that great in their customer satisfaction survey here. The oil price is very important and it’s a high percentage of the operating expenses. So it fluctuates a lot if you look at the past 15 years for Southwest It has been everything from sixteen point five. Back in 2003 up almost thirty eight percent of the operating expenses in 2011. Today it’s hovering around the low 20s because of the relative oil price that you see. That’s another interesting factor to consider. So if you think the oil price will stay on for a long time it might be more appealing. And if you have a different opinion. You might come up with a different expected yield rotation for the industry is really not good. I don’t know if people remember Warren Buffett buying into the airlines a few decades ago and he has continuously said almost ever since I did say almost because he actually just popped into airlines.
Stig: [00:27:20] But he used to say that he has an 800 number that he used to call and say hey my name is Warren and I’m an air-aholic because he just loves buying an airline at least at that time and it didn’t pan out for him as well in the 80s as yet. Typically it’s also a hated industry because the labor is unionized so it’s a it’s a tricky business to be and definitely need to put that out there. They’ve been caught a few changes in the airline industry over the few decades though which is probably also one of the reasons why you see investors like Warren Buffett and other investors too going into the industry. Why. It’s still a very competitive business. There are fewer airlines today than they used to be. Provides more monopoly and they’re also pricing power in different regions like if you are in Dallas area you might primarily be flying American or if you’re in New Jersey you might be flying United. So you do have some pricing power but even more importantly the last batch or the past 15 years has gone from 70 above 80 percent. That’s been very important that you see in this consolidation in the industry.
Preston: [00:28:35] If I look specifically at LUV I see almost no death almost no dividend either. But that’s really not that important a thing that they the way they are looking at the capital this is really good. You see a share buyback around 5 percent. But perhaps the thing I’d really like to highlight is the moat. If you look at the Competitive advantage of LUV I think it is the culture and even though it’s very hard to quantify the importance of culture I think that is one of the very reasons why you see this customer satisfaction being so high for this company. This is probably an anecdote more than anything but the company does not allow any type of art on the walls of the headquarters. Instead they only allow pictures of employees friends and family. We spoke to just pop right months ago about this pig and he talked about how the annual meeting people would give each others Hock’s which is typically something you don’t see unless you team up with our crew in Omaha I guess. But I’m curious to hear what the group has to say before we talk about the potential growth and the catalyst for the stock.
Tobias: [00:29:52] I’m a big fan of the airlines. They’ve all come into the acquirer’s multiple screener Delta and LGV Levy is just sitting slightly outside of the screen. I’ll tell you a few things are the reasons that are that are like in market cap said it’s a billion enterprise value that it’s a billion almost no debt on the core is multiple of non-points six times so that the most expensive stock in the screener at the moment is Nonpoint to time so that tells you how close it is to appearing in the screener of all the airlines is probably the best run airline and that’s reflected in a few things. It’s got excellent returns in the capital. It’s among the best companies out there. On that basis I think the price is excellent to where it is the only two concerns that I have. Free cash flow yield is very low. So it’s generating a little bit under 5 percent. Our free cash flow basis. And if I look at my statistical measures my Petroski Altmann Benish witcha financial distress financial strength and it’s really palatial fraud et cetera. It’s fine on financial distress it’s fun it’s not manipulative but Petroski it scores fall out of a possible nine so that’s sort of towards the low end I’d have to dig into that and find out exactly why that is but it’s just just an observation. Otherwise I think it’s a good pick.
Preston: [00:31:13] So stig this one also I agree I think it’s a decent pick but I’m curious what you got for the intrinsic value as far as what you think the yield is based off ramp rates. Yeah. So whenever I did that and I think it was conservative. Now we haven’t talked too much about the growth opportunities a put 7 percent as my rubber band or with a 25 percent probability of 3 percent as my most likely growth rate 60 percent. The reason Mike came up with 3 percent is that the expectations offer until I think it’s 2013 or that’s around 3.3 which is it is hard to predict and yet it’s not this has to do with immigration has to do with GDP growth. And it would not be unreasonable to expect 3 percent whether or not Southwest could capture that. That’s always of discussion. And then I have a minus two in my little band because it’s just we’re pessimistic I guess and I come up with an internal rate of return or expected rate of return of 7.2 percent which is not great. It’s not something I’m super excited about but I think a 7.2 percent in times like this I think that might be if you have some sort of certainty for that might not be too bad. Luckily you have the chance to speak with my good friend Toby about this just last week we talked about whether or not actually 7 percent was the upper limit given how the market is right now.
Stig: [00:32:45] I don’t know. It is very modest but it seems to me to be good if you’re paying the opportunity cost of the market. I’m curious to hear your thoughts about your intrinsic value escalation price. I had very similar numbers to you as far as the bands and adjustment that I made. I think that their free cash flow that they had this past year coming in at 2 billion what I had for this past year seemed like it was a little uncharacteristic of the previous period of time and so I felt like that was a little high. So I just sat down and whenever I did that I ended up getting around a five to six percent return for the IRR on the company so I mean if we split the difference we just say it’s somewhere in between you know five and seven percent we’re at 6 percent. So you know if the markets priced that three and we think we can get six with this double the return of this five hundred that becomes a hard decision to go into an individual stock because especially something that I highly regulated highly unionized very susceptible to commodity prices as they fluctuate. Jean I don’t I would probably buy a little bit of it but I would not be a big position.
Tobias: [00:33:56] I guess Preston is the abominable no man.
Preston: [00:33:58] No I’m not. I’m not. I’m just a little hesitant because the returns aren’t really like extremely fat and it is a great business I’m not going to lie this is probably the best airline company out there. But yeah it all comes down to the valuation. That’s basically what you’re saying. Just to provide you comments to the discussion about free cash flow. I actually think I was conservative when I used the current number as a benchmark. I don’t think it’s necessarily a low number. When I see of the possibilities moving ahead and we could talk about that later. But I also want to say that is if you look at the age of the Leitz or southwest on massive capital investments and the average age is eleven point eight years west for let’s say Delta this is all the four major They have the oldest fleet of seventeen point two. Now it is actually part of Delta strength. He offered to have an older fleet and then pay more maintenance costs. And not as much in terms of the cost of some of the acquisitions. But it’s something that I guess is my way of saying that if I look at numbers I don’t think at the current level we’re seeing now is high.
Hari: [00:35:08] I just wanted to bring get to the point what’s the downside from here. I was just looking at it during the 2007 2008 recession. I don’t see any revenue during that time. Yeah. It’s really hard to believe that the airline is going to do during the data that this is going to be good.
Preston: [00:35:26] When you look at the numbers I know at least for the Delta numbers when you go back and you look at 2008 2009 the revenues were not impacted at all in fact the revenues went up from 2007 2008. They went up again from 2008 to 2009 which I was blown away by that. But their bottom line suffered tremendously. And most of that was because of the oil prices went up to $150 a barrel during the 2008 period of time. So I’m with you I thought the exact same thing here. But the numbers were telling me a different story so I guess the expectation moving forward is that if you have another credit contraction that the revenues probably wouldn’t be impacted too much with the airlines which is surprising but who knows. We’ll see what happens. Yeah and the thing is I’m very excited to see what’s going to happen next. So Southwest only just started to grow outside of of us a few years ago and it still only accounts for 4 percent of top line. And that’s really the focus now. Typically the margins are not as good also because the load factor is not as high. French international flights but there is much more room to roll for Southwest and for the other airlines so even though I always like to be conservative in terms of my estimates that’s something I do put the emphasis on. Now keep in mind that I did say that my Auber band was just 7 percent and I want to get that 25 percent probability. Analysts and Wall Street they expect consensus around 10 percent growth this company growth rate is pretty strong last 10 years.
Stig: [00:36:56] It’s done. The data here I think it looks like it’s more than 20 percent which is another thing that often it’s often difficult to believe on a single point on an annual basis.
Preston: [00:37:08] Wasn’t it when he said it was it. I guess for me when I’m just looking because on our total here we plot the free cash flow so we can like see graphically what they look like and then we kind of interpret that line into the future with another line that we can graphically see. And I mean if I put in 10 percent if you put in 20 percent it be it would not look right. I can tell you that much. No. So if you look at it like the 10 year average here the revenue just last year would be around 8 and a half percent. But then the operating income we around like 15 percent I mean. So it might not be 20 percent but it’s definitely I guess a lot more than most people give you credit or so you know. Again yes it does come down to the valuation. Is this a great airline company. It is. And we should probably have bought whenever Warren Buffet did and he acquired his things 7 8 percent stake in both Delta and Southwest. If I might add. But the price isn’t too much different from whatever he got it. I mean it’s a little bit. It’s definitely higher than whenever he got it. It’s not a lot higher. You know in the summer both of these picks went way higher and they’ve come back quite a bit. I know for mine for Delta it was as high as $55. Now it’s back down to 48. So I mean it’s contracted quite a bit and I think opportunities there.
Preston: [00:38:26] I’m curious let’s transition over to my airline but I promise you I had no idea Stig was coming to the table with an airline tonight. I was I really laughed whenever I saw that and I was actually coming with an airline as well. So Stig I’m curious what did you get for your intrinsic value. Delta before I even start my pitch I want to hear what you got. Yes so I didn’t know that you would take Delta if I pick LV I could came in a little higher for Delta and I did with the Lovi. I think I came around eight eight and a half. Stuff like that. I don’t think the airline is as good. But the valuation is definitely more interesting yeah. So I’m getting a higher valuation than you and I think I’m looking at it with the same conservative guy as you know whenever I was looking at the last one and I’m getting 10 percent on that. So when you go from 6 to 10 percent you know I mean I think that’s a significant jump in the return. And you know when I’m thinking about a person that’s booking their airline I don’t think that a person if they can save a hundred bucks by going on Delta opposed to going on Southwest I think they’re going to go on Delta every day of the week for the most part especially when you get into some of the more expensive tickets. I think people are looking to save money way over the brand of the airline.
Preston: [00:39:50] I might be wrong. So for me when I’m thinking through that the competitive advantage of the brand and all the quality that we talk about with Southwest I don’t know that I’m necessarily willing to take a cut in the yield that I expect to get that to happen simply because I don’t think that it’s a competitive advantage. I mean it’s definitely a competitive advantage. Let me go to the extreme here but I don’t think it’s a strong of a competitive advantage as some people might give to some other type of industry. So that’s why I think this is probably a better pick than yours a lot better. But I do think that the returns a little bit fatter I could get into some of the numbers something that I think has caused the airlines to maybe pull back a little bit from where they were at in the summer is when you start looking at the revenue. When you look at the revenue for Delta from 2001 up until the year 2016 the revenues had increased every single year during that period of time which I find just amazing. 2016 was the first year that you had the revenues actually contract. Just a touch looking at the trend for this year in 2017 it looks like the revenues are going to go higher than they were last year which I think is good but I think that maybe that’s why you’ve been seeing the price maybe not pop as much as what we probably expected a year ago.
Preston: [00:41:13] Just to kind of put some context on this for people so the price of Delta right now is forty nine dollars a share. The earnings are the profit you get for each one of those shares is $5 and 79 cents. So good luck finding anything like that on the U.S. stock market as far as I’m concerned. I think you’re going to have a very challenging time trying to find a company that’s giving you that much profit for the price that you’re paying especially for something that’s this large and this stable that debt to equity on Delta is a point five when the rest of the industry is a 1.3. So their competitors are more than double the leverage in Delta. So in general I think that those are all positive. This is something that I’m definitely taking a position in. That’s not a very sizable position but it’s a position and I think that the negatives here the free cash flow seems to be building pretty strong. It’s growing but it’s not growing at a rapid clip and I think already mentioned whenever Steve was talking I’m not a real big fan of how regulated this industry is but I am a fan of how much it’s been consolidating recently. And I think that that’s one of the reasons why you’re seeing it as a decent place to be based on the prices and in the profits that you’re seeing. So that’s my pitch. I’m curious what everyone else thinks.
Tobias: [00:42:27] I was just going to run through the numbers very quickly. So the market cap fifty five billion enterprise value forty one and a half so it’s carrying a little bit of net debt. But as Preston points out still very low equity I calculated to point six acquirers multiple on the seven tell him so it’s slightly cheaper and Southwest patristic. So I think on valuation I smoked a little bit weaker. I still think it’s too cheap so it’s I think the DCF around 60 65 dollars. The growth rates haven’t been a strong southwest. I think that that makes it a sli