Twenty-First Century Fox, Samsung Electronics Preferred: Complex, Family-Controlled Businesses That Are Managed for Long-Term Results

Stephen Yacktman and Jason Subotky presented their in-depth investment theses on Samsung Electronics Preferred (Korea: 005935) and Twenty-First Century Fox (Nasdaq: FOX) at Best Ideas 2017.

Samsung Electronics Preferred trades at an incredibly low valuation for a diverse, globally-powerful mega cap. Despite 30+% appreciation in 2016, the shares remain exceptionally inexpensive: 4.5x estimated 2017 earnings, net of cash and investments; less than 3.5x estimated 2017 EV/EBIT; ~2x estimated 2017 EV/EBITDA; and 1.1x price to book value. At yearend 2016, ~40% of the value of the preferred was in net cash and investments. The preferred shares traded at a 20% discount to common as of yearend 2016. The preferred is essentially equivalent to the common, except for lacking voting rights. The preferred receives an additional mandated dividend of 50 KRW per year. The discount translates into a significantly higher yield. Previous share repurchase have been more heavily weighted to preferred shares (management thought discount was too wide). Operating income could grow 30+% due to organic growth and soft comps in the second half of 2016 due to Galaxy Note7 product issues. A significant share repurchase is slated to restart this month. Political changes in Korea could weaken chaebol power and accelerate restructuring. Steve and Jason see potential for corporate restructuring and ADR listing.

Twenty-First Century Fox is a growing business at a value price. Complexity, significant investments, and the strong dollar have masked solid growth trends and made the stock appear more expensive. Star/Hulu offer huge growth potential and don’t get properly valued. The proposed acquisition of Sky, along with reduced currency headwinds, could lead to EPS growth of 50-100% over the next three years. Star is to Fox what AWS is to Amazon.com. Star is a leader with ~25% of television viewing in India (population of 1.3 billion people offers huge growth potential; Hotstar digital service has more than 110 million downloads; Zee, #2 in India, has a $6.5 billion market cap). With estimated EPS of $2.00 in CY2017, Fox trades at 14.5x earnings. However, while Star and Hulu combined do not contribute meaningfully to earnings, they are worth $4-6 per share. The Sky acquisition could be 10-15% accretive. Lower corporate taxes could add to net income.

About the instructors:

Stephen Yacktman is Chief Investment Officer, Partner, and Portfolio Manager of Yacktman Asset Management. He joined Yacktman Asset Management in 1993 as an analyst and has been co-manager for AMG Yacktman Focused Fund and AMG Yacktman Fund since 2002. In 2006 he was named Co-Chief Investment Officer and Senior Vice President of Yacktman Asset Management. Stephen was a finalist for Morningstar’s Domestic-Stock Manager of the Year award in 2011. He graduated from Brigham Young University with an economics degree and MBA. He is a member of the Management Committee of the firm. Yacktman Asset Management, founded in 1992, is a boutique investment advisory firm located in Austin, Texas.

Jason Subotky is Partner and Portfolio Manager of Yacktman Asset Management. He joined the firm in 2001, having previously worked as a General Partner at Peterschmidt Ventures and as a Vice President at Goldman Sachs. Jason received a BMusic from the University of Southern California and an MBA from Brigham Young University. Jason is a co-manager for AMG Yacktman Focused Fund and AMG Yacktman Fund and is a member of the Management Committee.