Memo #7: The holding is the main thing
Plus: some earnings from companies in the Elevation Capital Global Shares Fund portfolio
Borrowing this from the often great A Wealth of Common Sense — your odds of gains on an investment increase proportionally with your holding period.
It makes me think about this YouTube interview with Chris Hohn and a PE dude (Hohn is not a fan of PE, surprise surprise). Hohn pointed out that his fund’s holding of Safran has annualised a return of 20% over 13 years. Hohn rarely gives interviews and it’s well worth the watch.
Rather a few of our companies have been reporting for the quarter — Novo Nordisk, Disney, Eli Lilly, WarnerBrothersDiscovery, etc. You will be pleased to note they all had fairly strong results (though I’m still inclined to the belief that companies should report yearly — a quarter is really nothing!)
Media first — Disney+ (and Hulu) now has 180.7 million subscribers worldwide, while Domestic Parks saw an increase of +13% YoY. The number to watch, is, of course, that streaming number — it’s still far behind Netflix’s 300 million subs but rapidly catching up. That streaming segment now makes money — real money — ~$667mn this quarter — streaming is the new cable as they say. Yet it’s WarnerBrothersDiscovery that really impressed me (let’s just call it WBD because it’s a mouthful) — added 5.3mn subscribers, bringing the total to 122.3mn this quarter. Again, not far off Disney and rapidly accelerating (at a rate double Disney’s, and more than analyst’s estimates).
Of course, WBD is a different beast. A quick history — TimeWarner merges with AOL to create AOLTimeWarner (disaster!), then AT&T buys TimeWarner for ~$85bn and doesn’t know what to do with it, and then John Malone goes OK, can we please merge Discovery Communications with Warner, and AT&T is delighted. They’re like, sure, but here’s a bunch of debt!
Here’s their debt schedule, just to show you what I mean:
That is a hell of a lot of debt! The good news is Zaz (their CEO) is paying it down like a champ — +$14.2bn in debt paid down so far. As the debt pile gets paid off, the equity portion of the company becomes increasingly more valuable. Streaming’s adjusted EBITDA (ugh, adjusted!) was $339mn this quarter (was $86mn in the comparable quarter). The point is — Zaz pays off debt, cashflow becomes a lot better, and then you’re looking at a machine far more comparable to Netflix — with all the Warner IP and HBO IP you are looking at a very valuable beast.
It’s hard to screen for stocks like WBD because so much cash goes into paying off the debt — all those ratios we typically look for aren’t there. So, you need to look at the heuristics — 1) what is the advantage (IP, and the streaming platform) and 2) how likely is it that HBO TV shows and so on will continue to be popular (very likely?) and then finally 3) how are they paying off debt? (answer: quickly, and a lot of it).
The healthcare stocks, then. We own both Eli Lilly and Novo Nordisk because weight loss drugs — currently via GLPs — represent a revolutionary technology in the healthcare space and are being rapidly adopted.
I wrote to our team a while ago about our rationale for buying Novo. The key is the “Lollapalooza effect”:
America and much of the western world have an obesity problem. There is a clear incentive for governments to underwrite the drug because obesity has a clear social + fiscal cost on society — per UoA, the fiscal cost of obesity in NZ is at least $2bn.
People have an incentive to use Ozempic, because they are vain.
This is a nice hedge against the booze stocks we like so much. Benefit from both sides of the trade — buy booze at low teens multiples; buy Novo and benefit from lower drinking rates as there’s several studies that imply ‘Zempy reduces drinking.
I don’t want Ozempic, because I like to live the good life.
This does not mean the vast majority of people won’t use Ozempic. At the moment, one in eight Americans have used a GLP. That’s +334mn people. 40% of Americans are obese.
There’s a Lollapalooza effect happening here — a bunch of incentives — vain people, governments wanting less obese people, the various side health benefits of GLPs, etc. I like when a lot of incentives are aligned because you’re relying on psychology rather than projecting numbers on an excel spreadsheet.
Novo trades cheaper than Lilly — about 16x earnings — earnings beat on analyst’s estimates though the company guided down on earnings. I want to draw your attention to this snippet from the company’s earnings call — on oral GLP — the holy grail of weight loss at this stage:
Oral semaglutide is something that we have been talking about for some time. Obviously, there's a lot of talk in the town about anything oral GLP-1 analog. Just to remind you with oral semaglutide, we see with 25 milligrams for obesity, 17% weight loss. That is a really, really strong weight loss in this space with again a safety and tolerability profile that is not only well known and acceptable to patients, but also established in a very, very large database.
That’s what we’re looking for — yes Novo makes a boatload of money and trades at a very reasonable multiple, but the holy grail is the oral GLP — both Lilly and Novo are making good progress with this.
Fantastic results from Eli Lilly — revenue increased +45% largely from their weight loss drugs, Mounjaro and Zepbound. You do pay for that ‘quality’, though — 34x earnings isn’t cheap. We think it’s best to own both sides of the GLP race, and I think there’s space for two players in the market (Novo’s GLP products are still the market leader by volume). We own more Novo than Lilly given the valuation disconnect.