ValueXVail 2013 - Ethan Berg

7/28/2019 ValueXVail 2013 - Ethan Berg

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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

Documents

ValueXVail 2013 - Ethan Berg