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TMFMmbop (35.03)

CAPS Champion Contest: Idea #1

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11

May 14, 2009 – Comments (6) | RELATED TICKERS: DIS , NYT

It's Thursday, which it means its time for the first stock idea from our Global Gains research team eligible to be rated in the CAPS Champion of the World Contest. (If you're not entered, you can do that here. Want to know the rules? They're here.)

Without further ado...

Idea #1: Short Naspers (NPSNY.PK)
Thesis:
The stock is wildly overvalued since it’s mostly a no-growth traditional media company, but the market is valuing it as though it were a hyper-growth Internet company. The reason for this discrepancy is Naspers’ 35.5% ownership stake in Chinese instant messaging provider and Internet portal Tencent. Though Naspers’ Tencent stake is worth more than $6b today at current prices and Naspers’ market cap is just $8b, Hong Kong-listed Tencent simply cannot sustain a 16x sales multiple and 32x EBITDA multiple for long. When it drops, Naspers is going down with it since the true worth of Naspers is far less.

Company Description: What are you buying when South Africa’s Naspers ? I wouldn’t be surprised if you couldn’t tell me. The company is an amalgamation of full and partial ownership shares in print, television, and Internet media assets in a seemingly random allotment of countries, including South Africa, China, Poland, Brazil, and Russia. You can take a look at the company’s motley org chart on your own, but suffice it to say it’s all over the place. Though the management team seems adept and chairman Ton Vosloo has risen through the organization all the way up from lowly journalist (I kid), they seem inexperienced in the ways of new media -- the market niche where they’re making their big bets today. Further, there is enormous currency risk in all of these environments as well as few cost-saving operating synergies since there are language and platform differences. There’s just no logical way for the business to scale without further acquisitions.

Valuation: Naspers can be broken down into two segments: Old Media (TV, newspapers, and magazines) and New Media (Internet properties). The Old Media business has $2.2b in trailing sales and $541mm in trailing EBIT. Its growth is essentially flat. The New Media business has $362mm in trailing sales and -$60mm in trailing EBIT. It’s grown 20% yoy, though the losses have widened. What are the two parts worth? Not as much as the market seems to think, but to prove that, we have to dive deeper.

Based on a peer group analysis, Naspers’ Old Media assets should sell for about 2.0x sales and 7.0x EBITDA. That yields a fair value range of $3.8b to $4.4b.

A peer analysis of popular emerging markets Internet properties, on the other hand, indicates that they sell for an average of 4.5x sales and 18.0x EBIT. That would value Naspers’ New Media business between $1.6b and, well, something less than that since Naspers New Media business is posting losses. Further, the fact is that Tencent trades well above its peer group at 16x sales and 35x EBIT. That’s the second-highest valuation for this type of property in the world, second-only to Chinese search engine Baidu.com (BIDU), lending credence to my theory that Naspers’ stock price is being driven not by fundamentals or its underlying business, but by the momentum in the stock price of Hong Kong-listed Tencent.

To see that, just add up the high ends of our two valuation ranges. $4.4b plus $1.6b equals just $6.0b. Naspers today sells for more than $8b, so I suspect at least a 25% decline in the stock price from here. But it could go further. That’s because Naspers motley assortment of Internet properties are not all best-of-breed like Tencent and are subject to intense competitive pressures, and while I expect Tencent’s multiples to contract, I expect the multiple on Naspers’ portfolio to contract even more. Its traditional media properties also don’t have the brand cache of a New York Times (NYT) or a Disney (DIS) and thus probably don’t deserve similar multiples. Further, remember that Naspers is an enormous multiplatform bet on advertising, which may not be a bet you want to make in this depressed economic environment.

All of this is to say that I think fair value here is closer to $5b.

Agree/disagree?
Now get started on the CAPS Champion of the World Contest by rating this idea. And if you want to see a few additional notes, including how you might trade on this if you were a hedge fun, get more notes on Naspers on our Global Gains discussion boards (membership required. Don’t have one? Click here to join our international investing research service where we put out many more ideas every month.)

6 Comments – Post Your Own

#1) On May 15, 2009 at 7:17 PM, TSIF (99.96) wrote:

Based on my "quick look", I would moderately disagree with shorting this company.  They do utilize mergers and acquisitions and seem to absorb them very well, even though they do cross many countries and geographics.  Yes, the traditional print/media business in the US is suffering. I do down thumb media companies in the US, but the areas where Nasper's operate are not soon to have their newspapers, television, and internet competing with each other.  They are also not markets where the recession has killed advertising.  I do agree the Hong Kong market has taken an extrodiary bounce of late, on the back of China, likely over valueing Tencent, but this is also a growth market.  I'll finish reading the annual report. The risk/reward on this company does not appear to be CAPs Champion of the world material! 

Unfortunately, with only seeing the picks weekly and needing to have one picked in the next 13 weeks from your list, it's hard to see which will have the best risk/reward. Especially considering that not opening a marginal pick can mean less reward than waiting for a higher risk/reward pick and less time for it to mature.  Why not give us the list of 13 for the quarter by name, and then do you pitch weekly? WE can get ahead of you or wait  for you to pitch them.  I know it will be a busy summer for me, and it's unlikely I will be near my computer for all 13 of this quarters choices.  Then next quarter the next 13.  You would still have our attention, which I am guessing is the point of this contest.

I seriously doubt you are going to keep everyone's attention for a year picking 2 stocks per quarter. WE are always after instant gratification!  Although quarterly prizes and checkpoints may help.

Please also consider having ONE blog post to consolidate a summary of each of the choices onto one blog for reference. 

Thanks!
TSIF

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#2) On May 15, 2009 at 8:01 PM, TMFMmbop (35.03) wrote:

Thanks for the feedback, TSIF. Note that you can pick more than 2 stocks per quarter. In fact, you can pick everything our team pitches and any international stock ideas you have on your own. The minimum is two picks: one from us and one on your own.

 

Tim 

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#3) On May 16, 2009 at 12:50 PM, TSIF (99.96) wrote:

Thanks Tim, is my limit then 200 picks for the year, and I can't close any?

P.S.  NASPERS will beat the S&P over the next year, but not by much. As such, I can pick it for the accuracy point, but I can't close it if I need room for picks with better point potential? :)

P.S.S. I'll give you a pair of Chinggis Khaan beer mugs if I can get the list of the 13 global choices at the start of each quarter, (just the names and tickers, not the pitches)....  :)

Can't blame a FOOL for trying?  :)

(PS. I need to win one quarter, I can't afford the Global subscription while I have 3 other Fool Subscriptions, but I have one I'd trade for Global gains..... :)

 

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#4) On May 16, 2009 at 12:57 PM, biggestfool88 (< 20) wrote:

It's actually P.P.S

Post-Post-Script

Sorry I am compulsive about grammar 

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#5) On May 18, 2009 at 10:55 AM, TMFMmbop (35.03) wrote:

Contest pick limit is set at 100. Let the fun begin.

Tim

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#6) On May 20, 2009 at 6:41 PM, hamburglar89 (52.44) wrote:

So, to be eligible, we have to choose to short NPSNY.PK or use one of your other Thursday ideas?

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