What's interesting here though is I started looking at one company which led my thoughts onto another company which led me onto another one... And I ended up indecisive....
Let's start with Lamar Advertising.
- Company: Lamar Advertising (NASDAQ:LAMR)
- Market Cap: $2.55B
- TTM FCF yield: 9%
- Business: The 3rd largest billboard advertising provider in US
- Moats: Nothing can replace billboards for brand-awareness advertising. Highway Beautification Act (1965) limits the number of billboards that can be built. This is pretty close to Buffett's "toll booth" type of business.
- Positives: A gradual recovering US economy will improve both occupany and rates. LAMR will also be able to refinance some of its debts in the coming years with lower interest rates.
- Negatives: Cyclical business. Very high debt. FCF interest cover is only 2.2x. But the mgmt has been prudently using all of the FCF to pay down its debts in the last 3 years. Yet, there is no gaurantee the mgmt won't do another debt-fueled acquisition in the future.
While I was thinking about LAMR's advertising business, I remembered another advertising related company.
- Company: Omnicom Group (NASDAQ:OMC)
- Market Cap: $13.2B
- TTM FCF yield: 10%
- Business: Advertising agent
- Moats: Ad agent is a service business.When marketing campaigns get more and more complicated, the value of an Ad agent increases. Its moat resides in its sticky customer relationship. (e.g. Apple has been staying with one agent since Jobs returned. You can't say that for its semi suppliers. Btw, Apple's ad agent belongs to OMC.)
- Positives: Although debt/equity is ~1.0, interest cover is a comfortable 10x.
- Negatives: This is cyclical business and profit moves in tandem with the economy. OMC has significant exposure in Europe. This is both a plus and minus. When Europe's problems fade, we shall see growth. But it may take years.
Dun & Bradstreet Corp
- Company: Dun & Bradstreet (NYSE:DNB)
- Market Cap: $3.22B
- TTM FCF yield: 8.75%
- Business: Data provider of business records and credit history
- Moats: When the database you provide is essential to other people to conduct their businesses and when its size gets to a certain critical mass, its economics benefits from a form of network effect and becomes self-sustainable. This is the kind of business an idiot can run.
- Positives: But DNB's mgmt are not idiots. They don't chase unattractive growth for the sake of it. They return cash back to investors in the form of share buybacks.
- Negatives: Business isn't growing in the recent years. Can it really grow in line with the economy?
- Company: Microsoft Corp (NASDAQ:MSFT)
- Market Cap: $252B
- TTM FCF yield: 11%
- Business: software
- Moats: MSFT has 2 undeniable franchises: Windows and Office. Both are essentially annuity kind of business.
- Positives: Truck load of cash. ROE in the range of 40% without using debt. Growing steadily 8-12% p.a. over many years. On the corporate front, Windows 7 upgrade cycle will accelerate in these 2 years. On the consumer front, Windows 8 sales will provide additional revenues.
- Negatives: Given its size, growing will become harder and harder. Cloud-based computing and mobile computing both threaten MSFT's franchises. There is also the risk the mgmt will destroy value on poor acquisitions.
No matter how I cut it, MSFT looks like a superior investment to the rest. My conviction is high.
Charlie Munger always says diversification is diworsification. My dilemma here is whether I should diversify in order to reduce my exposure to one single company. No matter how high my conviction is, there are always "unknown unknowns". There is also this unhelpful thought urging me to divest: "Earning outstanding returns requires hardwork. If I keep on adding to just the same old position and not spending time to dig deep into other companies, I'm not working hard enough." (I haven't yet done in depth analyses of some of these other companies. If I end up staying with MSFT, this won't be the best use of my brain power and time.)
I'm really interested in your thoughts!
(Disclosure: Long MSFT)