Breaking Down TiVo’s Valuation

Since last month, shares of TiVo (TIVO) have dropped from over $7 to under $5 each. This 32% selloff got my attention. Based on the company’s 3.6 million subscribers, each customer is being valued at $114 given the stock’s current price of $4.94 per share.

Since TiVo’s large distribution deal with Comcast (CMCSA) won’t take shape until mid-to-late 2006, the company has chosen to invest heavily in marketing (and show operating losses) until such deals kick in. Fortunately, the company has a large net cash position of $104 million, which can fund the company’s projected quarterly loss projection of $20-$25 million.

There is no doubt that TiVo faces extreme competitive pressures in the DVR marketplace. Nonetheless, the current value per subscriber of $114 seems low to me, given the scope of TiVo’s service and brand. Why somebody would not want to consider buying this company at this valuation escapes me. TiVo looks like an attractive speculative play at current levels.

Buffett’s Possible Successor

Probably the number one concern among Berkshire Hathaway (BRKA) followers is the successorship of Warren Buffett. Buffett is in his mid seventies and clearly will not be around forever. What will happen when the cockpit is turned over to someone else? Will someone else be as investment savvy as Buffett? Surely not. Will Berkshire stock drop as Buffett himself is most likely valued highly by current shareholders?

Many people think Lou Simpson will take over for Buffett when the time comes. Simpson is the CEO of capital operations for Geico. Basically, he manages the float for Geico’s insurance business, which amounts to several billion dollars. Interestingly, while Buffett gets the credit for portfolio additions to Berkshire’s investment portfolio, often the smaller buys are the work of Simpson, not Buffett.

Taking a look at Berkshire’s holdings as of June 30th, we can get a good idea of which investments are the work of Buffett, and which have Simpson’s fingerprints on them. Buffett’s largest holdings are the ones he has held for years. Gillette, Coca-Cola, Wells Fargo, American Express, Washington Post, to name a few. After subtracting Berkshire’s top 10 holdings (mostly those older buys) as well as its position in Proctor and Gamble (due to the pending merger) and PetroChina (which was one of BRK’s largest holdings until it was trimmed dramatically in the first half of 2005), Berkshire’s $35 billion public company portfolio is narrowed down to less than $3 billion invested in 20 companies.

Since Buffett has stated in the past that Simpson manages about $2.5 billion, it is safe to assume this small portion represents what investors should expect to see on their position sheets should Simpson be named Buffett’s successor. As a result, more often than not relatively small new additions to BRK’s portfolio are the work of Simpson, not Buffett himself.

Google Shares Moving Sideways on Low Volume

Newly released Google Desktop Search 2 and its accompanying Sidebar really gives you some idea of where the company is heading. They want to take over your PC and dethrone Microsoft as the desktop monopoly. I haven’t seen software innovations like these before. It’s hard to not get excited about it, and not even just from an investor perspective, but instead simply as a computer user.

As for Google (GOOG) stock, the chart looks very bullish. After a huge move, the shares have been moving sideways on lower volume. Growth investors probably can feel comfortable about owning it down at these levels. The next 6 to 12 months should be very exciting for industry watchers everywhere.

VeriSign Shares Becoming Attractive

Shares of Internet service firm VeriSign (VRSN) have gotten crushed recently after a lackluster Q2 earnings report resulted in a broken chart. After breaking $25 per share, technical sellers have pounced. At $21 VRSN is only about $1 away from the next support level, and trades at 20 times 2005 estimates. The company should grow 15% annually for the next few years and holds $3 per share in cash and no debt. If VRSN can hold the $20 level, it looks like an attractive entry point.

What Happened To Buffett’s Budweiser Stake?

Berkshire Hathaway (BRKA) filed with the SEC on August 15th and listed its current public stock holdings as of June 30th. Interestingly, there was a notable name absent from the list; Anheiser Busch (BUD).

Now, you may recall BUD came out in late April and said it had learned that Berkshire, Buffett’s holding company, had taken a meaningful stake in it. The stock reacted by jumping $3 to $48 on the news, and many investors bought BUD shares simply because Buffett did.

The question I have is, how come recent SEC filings show no such stake in the beer giant?

Arbitrage Monday

For those of you out there who like to play the merger arbitrage game, take a look at today’s merger announcement between OSI (OSIP) and EyeTech (EYET). OSI is paying $15 cash and 0.12275 shares for each EYET share in a deal expected to close by year-end. The current 5.6% discount on the deal represents a nearly 17% annualized return for arbitrageurs.

Big Pharma Has Tough Road Ahead

Texas Jury Finds Merck Liable in Death of Man Who Took Painkiller Vioxx, Awards Widow $253.4M

Big pharmaceutical companies like Merck (MRK) and Pfizer (PFE) are a lot riskier to own than many believe. Sure they have nice dividends and low P/E’s, but a lack of new drugs to make up for patent expirations, and extreme legal uncertainties will make it tough for these companies to grow.

Before today’s award, Merck was hoping its total Vioxx liability from the thousands of open cases would be no more than $10 billion. Well, the very first judgment against them today should raise some eyebrows.

Many people are recommending the big drug stocks for their fat yields and historically low multiples, but I have been taking the other side of the coin, and will continue to avoid these names.

Google Offering Signals Major Moves Ahead

Leave it to Google (GOOG) to get creative a year after its IPO. Today’s announcement of a $4 billion secondary will come with rampant speculation as to how the company will use the money. It’s true that Google has been hiring like crazy and expenses will likely grow faster than sales. Their cash flow can cover those expenses without selling more shares, so the more likely use for the proceeds will be larger scale acquisitions. It will be interesting to see if and who they buy, and how Wall Street reacts to the fit of such deals. The stock is down today on the news, which is expected when any company offers stock, and the P/E on 2006 estimates is about 38 times.