GuruFocus had the pleasure of hosting a presentation with Keith Smith, portfolio manager at Bonhoeffer Capital Management.
Smith brings over 20 years of valuation experience to the Bonhoeffer Fund. In addition to managing the fund's portfolio, he serves as a director for Enterprise Diversified Inc. and as an advisor to Willow Oak Asset Management, the fund's general partner. He is a CFA charter holder and received his MBA from UCLA. He has held positions with Empire Valuation Consultants, PwC, Management Consulting & Research, and served as a captain in the U.S. Air Force.
Watch the full stream here:
Smith kicked off his presentation with a detailed discussion of markets in transition, which are fragmented markets that can create organic and consolidation growth opportunities.
In these markets, innovation can create new or modify existing value chains and ecosystems. Examples of this include a legacy or mature business that can adopt the innovation and value chains will be modified. In cases where they cannot, a new value chain will be developed.
He also noted fragmented markets can also provide opportunities for growth.
The investor touched on valuations in transitioning markets and covered the corporate options companies have to generate growth.
He then went on to highlight different consolidation models as well as the categorization, characteristics and benchmarking of consolidators.
Smith then transitioned into a case study of two good potential consolidators.
The first was E.W. Scripps Co. (SSP, Financial), a Cincinnati-based broadcasting company that is currently focusing its efforts on the creation and distribution of local TV content as well as nationwide network development.
The second company discussed was Consolidated Communications Holdings Inc. (CNSL, Financial), a telecommunications company headquartered in Illinois. It is in the process of rolling out a fiber network.
While both have good business models, Smith said the challenge for legacy media companies like these is creating content for a reasonable price. He pointed out that one difference between Warner Bros. Discovery and Scripps is the latter has access to the local markets, which provides a bit more cash flow stability. Overall, though, he thinks it is an “interesting combination that makes a lot of sense.”
As for Consolidated Communications, one audience member wanted to know how it compares to cable company Altice USA Inc. (ATUS, Financial). He replied that while Altice has an existing cable infrastructure that they are replacing with fiber, it is under pressure. Smith said his biggest concern with the company is its management team. Given what they have done in France over the past several years, he is afraid it will be repeated in the U.S. Outside of management concerns, he feels Consolidated also has greater upside potential.