No. of Recommendations: 16
IBM was a similar thought process? and likewise problematic.
In this case it's perhaps just a good illustration that knowing what is a good operating business is hard...the future hasn't happened yet.
At the time that IBM was doing huge buybacks and Mr Buffett was buying IBM stock, both Mr Buffett and management thought that the business future was bright and that $20 EPS and $300 shares would be hit pretty soon. With that view in mind, the buybacks that IBM was doing and Mr Buffett speaking so highly of them were sensible. But, alas, the future of the operating business did not turn out so well, and what once looked smart then looked like a mistake. These things happen. Without getting into the business evaluation process, it looks to have been a good bet that just didn't happen to work out.
This is a bit different from the situation at SIRI. I don't follow SIRI, but I gather that there is a consensus among investors and management that the underlying business is not going to grow, and probably has a best-before date, is that right? Maybe not as bad as the perennial example of Pitney Bowes whose profits have been sliding for 25 years, but in that general direction. So SIRI's buybacks are not like IBM's--in both cases the buybacks were giving each shareholder a smaller share in the cash-per-share and a larger share in the hohum-business-per-share, but in the case of IBM it was because the assessment of the business' future was wrong, whereas in SIRI's case it's perhaps a poor capital allocation decision.
For someone with a few minutes to spare, make a list of SIRI's share purchases by quarter in the last 5 or 10 years, in both dollar and share-count terms. If they hadn't done them, the current share count would be the same as the starting share count, so we can calculate what the EPS would be today, obviously lower. Imagine that each of those blocks of capital had been put into some safe solid boring investment, preferably one that hasn't really changed much in valuation level in those years. Berkshire is the obvious candidate, and P/B is currently very close to ten year average. So, offsetting the lower EPS from SIRI's operations, there would be the benefit of a value for investments per share from whatever they invested in. How much would that portfolio be worth, per share? Apply SIRI's current P/E to the lowered EPS and add the value per share of the alternative-reality portfolio. Would that be higher than the current share price? If it's a whole lot higher, as I speculate it would be, then it shows that they were investing a lot of capital in a poor business. It doesn't really speak to whether they did so in a way that was intelligent but the future surprised them (the IBM situation), or because they were just victims of the institutional imperative and didn't realize that investing more money in poor business is not a great idea.
The same fun game could be played with Davita.
Jim
