by William Smead, Smead Capital Management
Our experience tells us that Crouching Tigers, while appearing contentious and dangerous, often have hidden assets. These assets can potentially turn out-of-favor common stocks into future winners. At Smead Capital Management, we run all of our stock selection through our eight criteria. Determining the source of value among companies that meet the eight criteria, however, comes in three main forms. First, value usually comes in the form of a meritorious company, which fits our criteria, falling deeply out of favor for one reason or another. Think a JPMorgan (JPM) or an Aflac (AFL).
Second, value can come from investors treating shares of an extremely meritorious company like any average company in an index. We would put Amgen (AMGN) and Pfizer (PFE) in that category. A third category of value for us comes from a “sum-of-the-parts” analysis, which exposes valuable hidden assets. Here we find opportunity if a big spread exists between that sum and the market price of the shares.
Our discussion today zeroes in on the third category. We will review three of our holdings—Gannett (GCI), HR Block (HRB) and News Corp (NWSA)—and disclose what we consider to be their hidden assets by viewing them as Crouching Tigers.
Gannett owns 46 network-affiliated television stations along with 84 daily newspapers and has a large digital presence through owning Cars.com and Careerbuilder.com. To broadcast HDTV, Gannett owns extremely high-quality spectrum which doubles as the coveted spectrum needed by the cellular industry in the U.S. The company’s market cap on April the 23rd of 2015 was around $8.2 billion.
The federal government is on a big campaign to repurchase spectrum in order to resell it to cellular companies for the purpose of keeping a strong level of competition in the cell phone market in the U.S. Most of that spectrum is owned by network-affiliated local TV stations like the ones owned by Gannett. Here is how the New York Times reports this process on April 17 of 2015 in an article titled, “Jackpots for Local TV Stations in F.C.C. Auction of Airwaves”:
With Americans increasingly turning less to over-the-air television broadcasts and more to their mobile devices, the federal government wants to devote a bigger portion of the airwaves that carry communications signals to mobile phone data.
As it turns out, some of the most desirable airwaves — those able to travel far distances and through buildings and trees — are in the hands of America’s local television stations. The government is seeking to pay stations billions of dollars to move off those airwaves, and then it plans to sell those airwaves to wireless carriers.
The pleasant problem for Gannett is that you only want to sell your spectrum if it doesn’t interrupt your ability to broadcast. In this circumstance, spectrum is effectively “water-front property” and the auctions give us a picture of what the stations are worth to one buyer, the Federal Government of the United States. As the rights (licenses) to this airspace gets scarcer and more valuable, there comes a point at which you can both value the business or get greedy and take the offer. The President and CEO of CBS weighed in on this subject in December of 2014: