Live Nation- Everybody Wants to Rule the World

Date: May 2, 2013 Price: $12.50 Mkt. Cap.: $2.4 billion

An investment in Live Nation (LYV) provides investors with an opportunity to buy into a unique set of assets that provides an ecosystem to maximize that amount of revenue and profits available in the live entertainment industry. Unlike most of our typical investment reports which focus on free cash flow utilization, net asset value investing, mean reversion of margins or special situations, this report will look at the investment merits of a company that generates little free cash flow at the moment and is somewhat of a growth investment if company management is successful in achieving its objectives. Their dominant size is a competitive advantage and the presence of a significant, value creating long-term investor (Liberty Media)  provides additional margin of safety from a liquidity standpoint. The strategy is not without risks and we will discuss those as well.. What follows is our analysis of the merits of Live Nation’s three year plan to grow its Adjusted Operating Income (AOI) by 30-35%.

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Book Review: Security Analysis – Principle and Technique by Graham, Dodd, and Cottle, 1962

I am very partial to the 1962 edition of this classic.  Even though only the first 97 pages are relevant to security analysis today, what a great 97 pages they are.  The editions published since Graham’s death in 1976, can best be characterized as garbage.  In many cases the new authors have so badly mischaracterized Graham’s work that it is unrecognizable.  Graham’s own writing in the editions before 1962, are a reasonable substitute, but the 1962 edition is by far the best.

Since this book has been reviewed in so many places, I am going to attempt to tell you 4 things that you might not already know from the first 97 pages.

  1. Graham is often thought of as the champion of intrinsic value, or in today’s terms the absolute value of the security.  However, way back in 1962 Graham relalized that the relative valuation method was also valid. Very few realize he said of relative valuation, “This approach is valid when employed in connection with capital committed to permanent full investment in common stocks, a commitment which now appears to be accepted for many investment funds. p. 27”  Of course, today the asset allocation decision is even more likely to be separated from the stock selection decision. Graham saw merits in both absolute and relative methods of valuation.
  2. Graham has several paragraphs about what he calls, “The Critical Function of Security Analysis” p. 34 Do you really know what that critical function of security analysis is? Are you sure? The critical role that Graham explains is the analyst’s responsibility as a financial statesman.  He discusses the important role of the analyst in the capital allocation process.  If Ben Graham were alive today watching Jim Cramer jump around trading stocks and making cow noises, do you suppose that is what he had in mind when he called for all analysts to be financial statesmen. I doubt it.
  3. How often have I seen just about any quantitative approach to investing characterized as a “Graham and Dodd” approach? Way too often.  Nothing could be further from the truth.  Graham has an entire chapter entitled, “Quantitative and Qualitative Factors In Security Analysis.” p. 85 Even in 1962 Graham realized that qualitative factors were very important.  He says, “Figures alone are not sufficient, they may be completely vitiated by qualitative considerations of an opposite import.” This chapter is so critical that it should be reread every few years. Modern financial texts have nothing that comes close to the insights Graham had in this chapter.
  4. Graham studied the classics of literature extensively. He had countless verves to use as his book’s dedication.  He chose the Greek poet Horace, “Many shall be restored that are now fallen and many shall fall that are now held in honor”.  Let these words ring in your ears even time you pick a stock.

Of course, there are many other important concepts discussed in these first 97 pages.  Graham’s discussion of the “margin of safety” approach is a central focus of this website. Many of us in the investment business read this text early in our career and then put it on shelf. This is a mistake. Please take a moment to read it again.