As value investors we still have to look at what the company is capable of. To decide whether VVTV will remain as it is for an indefinite time OR whether markers have been placed to promote future growth.

As the company stands today, everyone is right that it is fair or overpriced but what if there is a possibility that we are being too short sighted?

All the good news from VVTV haven’t even trickled down to the results yet. In the end VVTV may not be able to execute which could lead it to skidding down again but I am taking the chance that things may improve slightly.

Compare VVTV now to the past recessions. VVTV was no where near the doom and gloom it has been subjected to and they are still here to this day.

As The General stated in point 3 above and what I described in my very first VVTV Asset Value Play article, they are in more than 80m homes. If each household is worth a measly $5 each, that distribution alone is worth $400m. That is a lot of money to duplicate.

Don’t forget that although they have off balance sheet debt, they have backing from GE and NBCU who is unlikely to let VVTV go down when they have so much money riding on it.

At face value VVTV is overpriced but once you consider all the other details, VVTV still has more to go.

The #1 challenge that VV has faced since 1998 is: generating enough sales to pay for the distribution (and other costs) with the balance for EBITDA and FCF. The problem was they signed up (thanks to their NBC buds) to long term ( and it turned out very expensive) distribution. That said, the company generated ‘fcf’ of almost $1B during these years to self-fund the carriage. During that same time frame the company generated sales of $5.9B. Distribution costs were 17% vs 8-10% for HSN and 5% or less for QVC. For every 1% decline in that cost the company would have earned FCF/EBITDA of $51M over that timeframe.

Those distribution cost challenges resulted in various strategies all designed to hit revenue targets that would allow those distribution fees to be paid. VV’s CAGR sales growth during those years was 10% but CAGR for homes was 17.38%.

History is history. 65% of those distribution agreements have been renegotiated with a 30% reduction and extended for 3 years. The DTV distribution agreement (expensive) expires in 2 years and will most likely be reduced by 30%. In 3 years it is likely there will be a further reduction in carriage costs reflecting the reality that there are far more channels in a digital TV world than in an analog world + the increasing use of the internet to deliver video (no carriage charge for that today)…think of distribution as real estate except in a digital world they can make more. (if you dig into the early years of Q and H you will see that they benefitted from sweetheart deals with the cableco’s in exchange for carriage…something that has not happened to date with VV)

They also extended the GE pf by 5 years (not 3).

Bringing us back to the present:
1) Carriage costs have been and will continue to be reduced
2) The current management team/consultant(s) have successful experience in the industry; that experience primarily comes from Q. Q is the KING of FCF in the retail/e-commerce world generating 10%+ FCF rates at their peak.
3) Q almost went belly up in the early 90’s due to a merger….10 years later it was valued at $14B+(about 20x FCF at the time); it has seen its mcap evaporate to as low as $1.3B in the current market YET it will generate FCF of $600M+

Other factors to consider:
a) VV is currently distributed to 72M homes….and zero international. There are 25M additional homes they could grow into domestically which will equate to new sales growth at some point; they have suggested they will enter international markets in the future which will drive additional growth. Q and H are both mature in the US and have mature operations in a number of countries.
b) If current managment were able to grow VV to 30% of Q’s growth leading to its 2003 valuation….VV would be valued at $4.5B on sales of $1.4B in 10 years……considering mgmt has stated they will double sales in 3-5 yrs…then double again over the next 5 yrs…and considering their track record/experience…it does not seem far fetched.
c) Nobody ever talks about the strategic value of being in 72M homes via Cable/Satellite & Broadband…..to duplicate that is a VERY EXPENSIVE endeavor. It is the wild card that could turn up an Ace or a 2. We shall see….

What I found was a company beaten down due to high uncertainty but with assets to produce income and at the same time protect the downside.

The tangible assets alone make the current valuation floating around fair value. Im really not being that optimistic. We have still yet to see what the improvements to the margins will be and how the new products will affect sales.

But as the price continues up towards my fair value, I’ll be getting ready to sell and lock profits.

You say VVTV is “a business that is being sold for 1/2 book value, 0.12% of its sales, plenty of cash, exposure to 80+ million households and growing and good insider ownership.”

I like to keep it simple–FCF, FCF, FCF. Book value is nice, but what cash does it return? Sales are nice, but how profitable? Room for growth great, but how have the managed growth for returns in the past? Insider ownership aligns incentives, but have those incentives produced profitable results?

I would be happy for you if things turned out as you expect. It sounds like your estimate of VVTV’s intrinsic value really hinges on future results being far better than anything yet achieved.
.-= Wide Moat´s last blog ..Buffett’s Berkshire Letter for 1992 =-.