Value Investor Daily #17

Presented by

Fund manager and renowned Buffett and Munger disciple Mohnish Pabrai recently gave an insightful and fun session at The 2024 SumZero Virtual Investor Summit.

It's well worth the one-hour watch time, but if you only have a few minutes, here’s a full breakdown of everything he covered:

The State of Big Tech - Meta, Alphabet, Microsoft, and Apple

• The last time Mohnish talked to SumZero, he predicted Meta would be an "easy double" at $200. But it wasn't easy to hold through.

• CEO Mark Zuckerberg righted the ship by cutting costs, implementing layoffs, and controlling R&D spending at their Reality Labs division. The stock fell to $88 before coming full circle to over $500.

• In Pabrai’s opinion, Alphabet has a lot of fat to cut in terms of expenses.

• Microsoft is much leaner, with 36% net margins vs. Alphabet’s 24%.  Furthermore, Microsoft is a “very critical” vendor to enterprises. Its strong subscription revenue isn’t going anywhere and is, therefore, of higher quality than Meta or Alphabet. Earnings stability demands a premium. 

• Meta and Alphabet are still incredible businesses and continue to eliminate ad spend waste for businesses.

• The metaverse narrative is over; now, it’s all about AI. Microsoft is an exceptional cloner but not a great innovator. Ironically, they are now the leader in AI, especially with their partnership with OpenAI.

• Microsoft has exceptional execution once it decides to clone or pursue an opportunity. It’s approaching 50 years old and can move effectively from paradigm to paradigm. It is extremely capable of adapting to change. 

• Google has long been strong in AI but lacks Microsoft's execution. Bill Gates said that Microsoft does real research in the academic “ivory tower” and practical R&D lab styles.

• Google has had a leg up on pure academic research for a long time, but it’s fallen behind on business execution.

• Apple has little to no pure research; it’s all practical R&D.

• Pabrai expects all four big tech giants to continue performing on the business front, but none of their stocks are cheap now.

TAV’s Almaty International Terminal Opening Soon

• One of Pabrai’s Turkish bets, airport operator TAV Holding, is opening a new international terminal in Kazakstan, and it’s expected to boost profits significantly.

• TAV will capture duty-free rev share and airline and passenger fee increases that will go straight to the bottom line

• Background - TAV bought the airport at the peak of the pandemic when there were no flights, for an amazing deal

• Most airport purchase deals are basically long-term leases from governments. This one was an outright purchase. The government never gets it back.

• Currently, there is no duty-free profit share with the store operators, but all the duty-free business will be moved to the new terminal, and a new profit-sharing deal will go into effect. 

• Economics of duty-free stores: the airport operator charges something like 40% of the top line. TAV also has its own subsidiary that runs duty-free stores; it owns 50% of that subsidiary. 

• The average duty-free store revenue per flight is $1500, which comes to $600 to the airport operator after their 40% cut. If you assume 100 passengers on average per flight, this comes to around $6 per passenger. 

• Terminal fees are typically $8-9 per passenger. They’re only charging $3-4 in the Almaty terminal. They will be raising those fees by 20% per year going forward.

• So, per passenger, rev share and fees are set to increase from $3 to $10-$11 very soon and eventually to $15. The overall passenger count is now 30-40% higher than in 2019. 

• TAV also does the fueling at the airport, which has 40% margins. It all adds up to a wonderful business.

• They may choose to sell the Almaty airport in the near future. It will likely go for $3-5 billion alone, and TAV owns 15 other airports.

• The entire company has a market cap of just under $2 billion. 

• When Pabrai first invested in the company, its market cap was only $600-$800 million in USD. This is the essence of finding unloved, misunderstood opportunities. The company was trading at ultra-low valuations due to the twin effects of the pandemic and sky-high inflation in Turkey. 

• Turkish tourism is booming because the Turkish government recently removed all visa requirements for US citizens. 

• 2024 passenger numbers are shaping up to be 30% higher than 2023

• More than half of Pabrai’s total portfolio is concentrated in Turkey at this point

Why are all your favorite newsletters switching to beehiiv?

It’s because the founding beehiiv team were all early Morning Brew employees who helped scale that newsletter to over 4 million daily subscribers.

Years of trial and error went into building the precise tools, dashboards, and analytics needed to accomplish that. And now every newsletter on beehiiv has access to the same winning formula.

So what exactly does beehiiv offer?

• World-class growth tools like the referral program and recommendation network

• Monetization via the beehiiv Ad Network and premium subscriptions (i.e. beehiiv helps you get paid)

• Seamless content creation with a sleek collaborative editor

• Best-in-class inbox deliverability of 99%

• Oh and it’s the most affordable by a mile…

Take your newsletter to the next level — get started for free.

US Bets

• All of Pabrai’s current bets are focused on metallurgical coal right now

• Metallurgical coal is used to make iron and steel

• We’ll be using it 50+ years from now to make iron and steel because there is no substitute.

• The stocks in the sector, like Alpha Metallurgical (AMR), were trading at just 2x earnings and doing massive buybacks when he got in.

• ESG mandates had likely pushed down the valuation of the stock to unreasonably low levels by stopping fund managers from owning them

Auto Dealers Are a Great Business (For Now), Manufacturers Not So Much 

• Everyone expects all cars to go electric and to be bought directly from auto manufacturers. 

• That’s why auto dealer stocks are trading at single-digit P/E’s right now. 

• People assume electric cars need no service, but they eventually need parts (and service). 

• About 40% of net profit cash flows at auto dealers come from their parts business. 

• After ten years, the battery packs on EVs will need to be replaced, which is very expensive.

• The OEMs are still selling through dealer networks; they found going direct wasn’t worth it.

• EVs are not growing as fast as they were. Tesla sales have slowed in the US.

• Dealerships are not going anywhere yet; it’s still a good business

• But OEM car manufacturers are eventually going to be in trouble

  • Dealers are a good business, but OEMs are a really bad business

  • The competition from EV makers Tesla and BYD will eventually drive their margins into negative territory 

  • It will be very hard for them to survive at that point

Reysas

• Management at Turkish warehouse operator Reysas has made no major mistakes or dumb moves in the last five years.

• Pabrai continues to hold.

US real estate

• Office vacancies are at 20%+, extremely high

  • More than three decades since vacancies were that high

  • Stay away from office real estate stocks. It won’t rebound, most likely, any time soon. Secular change in how people work. They work from home now. They don’t want to go back.

  • US growth rates are really low, which is also bad for office real estate

• Home builders have started buying back lots of shares

  • The other builders are starting to copy NVR’s use of buybacks

  • NVR stock went from under $10 to over $8,000

  • Pulte and others are starting to copy that model

  • Once interest rates drop, home building will do even better

  • Pabrai has no bets on any of the homebuilders yet, though.

Indian Bets

• India is a great economy with lots of growth, but it’s not cheap anymore

• Pabrai is finding more to do in the US and Turkey, and he’s been a net seller of Indian equities recently 

What to Look for in a Great Investment

• Strong cash flow

• Depressed pricing caused by external circumstances, to the point where the valuation is so cheap it makes no sense

• Examples

  • The pandemic crushing airport traffic

  • The inflation in Turkey creating extreme fear in rational investors, even in hard asset businesses.

  • ESG depressing coal sponsorship by institutions to the point where the companies could buy back stock at extremely low valuations

  • EV growth depressing auto dealer valuations

US Debt

• The US will never default because we own the printing press, but we’re testing the limits now.

• There is a risk of runaway inflation at this point.

• But Washington is still too dysfunctional to fix it right now. 

A Tribute to Charlie Munger

• Charlie Munger bought out a chemical additives company by buying the debt for 30-40 cents on the dollar. The story is hilarious; you’ll love it!

• Berkshire wouldn’t be even 10% of what it is today without the influence of Charlie.

• You can read more about Charlie’s impact in Buffett’s annual letter this year—Charlie Munger, The Architect of Berkshire Hathaway. He will be missed at this year’s (and all future) annual meeting.

Thanks for reading, and we hope you learned something today.

Happy investing!

Why are all your favorite newsletters switching to beehiiv?

It’s because the founding beehiiv team were all early Morning Brew employees who helped scale that newsletter to over 4 million daily subscribers.

Years of trial and error went into building the precise tools, dashboards, and analytics needed to accomplish that. And now every newsletter on beehiiv has access to the same winning formula.

So what exactly does beehiiv offer?

• World-class growth tools like the referral program and recommendation network

• Monetization via the beehiiv Ad Network and premium subscriptions (i.e. beehiiv helps you get paid)

• Seamless content creation with a sleek collaborative editor

• Best-in-class inbox deliverability of 99%

• Oh and it’s the most affordable by a mile…

Take your newsletter to the next level — get started for free.