There's no larger figure in investing than Berkshire Hathaway's Warren Buffett. That attention is warranted, considering his decades of stellar performance: from 1965-2012 he outperformed the S&P 500 with Berkshire's book value per share returning 693,518% versus 9,841% for the S&P 500 index itself.
With all this outperformance, you'd think Buffett was primarily dealing with credit default swaps, futures and forwards, and other types of credit derivatives -- and you'd be wrong. Although the company does engage in esoteric investments from time to time, Berkshire Hathaway's success is rooted in a simple strategy: buy undervalued, high-quality businesses and hold them for the long term.
So when Berkshire takes a stance somewhat contrary to the common consensus, it makes sense to pay attention. Right now, it appears Berkshire is betting that pay-TV and cable providers aren't going away. In fact, if the third-quarter additional purchases of stock in Charter Communications (NASDAQ: CHTR) and DirecTV (NASDAQ: DTV) are any indication, Berkshire is betting on them to thrive going forward.
Charter is buying subscribers
In a time in which video services (pay TV) are universally struggling, with most providers losing customers rather than gaining them, Charter is actually buying video subscribers from Time Warner Cable and swapping others with Comcast to build and centralize their subscriber base. After losing the bidding war with Comcast to buy Time Warner, the company decided to buy 1.4 million customers from Time Warner after the deal ends. If the merger is approved, Charter would become the second-largest cable provider in the United States with 6 million subscribers, but will significantly trail Comcast's 33 million-plus subscribers.
With this purchase, Buffett and Co. could be betting on Internet growth and monetization more than video. That makes sense, as Charter in the third quarter added 94,000 residential Internet customers and increased its Internet revenue 13.4% year over year. Although video revenue was up 6% during that period, that will be difficult to sustain without organic subscriber additions. Eventually, subscribers will be less willing to stomach price increases.
Internet doesn't explain the DIRECTV purchase, but this does
Still, the Internet theory doesn't explain Berkshire's purchase of additional DIRECTV stock. This satellite pay-TV provider doesn't directly provide Internet service, instead partnering with ISPs to offer its bundled service. Buying DIRECTV is an inefficient way to play the growth of Internet subscribers (although it should be noted that Berkshire owns ISP Verizon as well). But this stock purchase is probably less focused on DIRECTV's U.S. operations and more concerned about its Latin American fortunes.
AT&T (T +0.42%), is working to buy DIRECTV, pending U.S. regulatory approval (more on that later). Meanwhile, DIRECTV Latin America is performing well: Since 2010, revenue is up 24% annually and subscriber growth up 26% per year. As Latin America's middle class continues to grow, look for that trend to continue. Meanwhile, the U.S. market is mostly mature and developed.
Buffett, the telecom baron?
Finally, buying additional shares of DIRECTV enables Berkshire to expand his telecom holdings. If the DIRECTV-AT&T deal is approved, DIRECTV shareholders will receive $28.50 in cash and $66.50 in AT&T stock for each share of DIRECTV. Essentially, Buffett would become a large shareholder in the two largest U.S. telecoms.
On a long-term basis, both Verizon and AT&T could be undervalued; even more so if net neutrality is defeated and their ISP businesses are able to more effectively monetize bandwidth. If not, the companies still face huge demands from wireless data and will continue to raise prices in order to capture that value.
In the end, it appears Berkshire doesn't think cable is dead just yet. However, the company is taking seemingly targeted bets rather than indiscriminate ones. Will Charter and DIRECTV/AT&T outperform going forward? Who knows, but I wouldn't bet against Berkshire Hathaway -- too many people have been on the losing end of that proposition.
