Latticework Investor

Value Investing

Echostar worth US$46 – US$55

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Another pick from Tilson is Echostar, a spin off from Dish Networks. Which is trading at a discount to liquidation value.

sats

At the beginning of 2008, satellite TV company EchoStar Communications split into two: Dish Network (DISH) and EchoStar Corp. (SATS), which is a collection of satellites, set-top box businesses and a number of investments, cash and marketable securities, all managed by legendary founder Charles Ergen. Our slides on this company are in Appendix F.

Subscribers to the Dish Network install a dish, pay a monthly fee of approximately $30 and receive lots of television channels. In 2006 there was a strong expectation that Dish Network was going to merge with one of the telcos so, in preparation for that, EchoStar Corp. was formed and received all of the assets that a telco would not want to buy, thereby making Dish Network a more attractive acquisition.

SATS has the typical spin-off dynamics: it’s smaller than the original company, had a relatively unnatural initial shareholder base that sold the stock, and management has tended to sandbag the expectations for the company so that their options are struck at a low price.

At today’s stock price, the company is being valued at its cash and investment securities, meaning an investor is paying nothing for the company’s businesses, technology and investments. This includes eight satellites (six owned and two leased, with an original cost of $1.6 billion), a high value, hard-toreplace asset.

It also includes a set-top box manufacturing business – these are the boxes that Dish Network buys – with $1.7 billion in trailing 12-month revenue. In a normal income statement environment, that revenue stream would probably be worth $2-3 billion, but the boxes are sold on a cost-plus basis to DISH, so until DISH is acquired or SATS starts selling these boxes to other customers, that business is not worth a lot today – but it has a tremendous amount of potential value.

At today’s stock price, the company is being valued at its cash and investment securities, meaning an investor is paying nothing for the company’s businesses, technology and investments. This includes eight satellites (six owned and two leased, with an original cost of $1.6 billion), a high value, hard-toreplace asset.

It also includes a set-top box manufacturing business – these are the boxes that Dish Network buys – with $1.7 billion in trailing 12-month revenue. In a normal income statement environment, that revenue stream would probably be worth $2-3 billion, but the boxes are sold on a cost-plus basis to DISH, so until DISH is acquired or SATS starts selling these boxes to other customers, that business is not worth a lot today – but it has a tremendous amount of potential value.

We think SATS will start selling to other customers because it has other technologies to make better boxes. When SATS was a wholly owned subsidiary of Dish Network, no one other than Dish would buy the boxes because Dish was as competitor. Now that SATS is an independent company, we expect it will have eventually have success selling boxes to other companies.

Finally, SATS has some other interesting technologies such as Sling Media.

In summary, we think SATS is hugely undervalued, but there are no natural buyers. As a spin-off, it was likely heavily owned by hedge funds and, given that the stock was down 54% in 2008, many were likely dumping it. There’s a big margin of safety since the company can be liquidated for more than it’s trading for.

Link to the full letter with slides about Echostar at the end.

View this document on Scribd
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Written by latticework01

June 10, 2009 at 2:37 pm

Posted in picks

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