We all know a picture is worth a thousand words. At Getty Images
I won't bore you here with the details of Getty's report, which came out after the market closed yesterday. Instead, I'm going to jump in and take a look at why Getty is a great business that, unfortunately, is not quite cheap enough for a value investor like me.
Getty is in the business of licensing images, still or moving, to anyone who wants to use them. If an advertising agency needs a nighttime cityscape picture to make a point about a product, it goes to Getty. If a company needs some images depicting productivity for its annual report or website; it goes to Getty. If you want pictures of naughty nuns in negligees... well, Getty can't help you there, and neither can I.
Anyway, for the year, Getty's revenues grew 19%. Back out the effect of currency conversions, and revenue grew 12.7%. At the same time, Getty cut 0.7% from its cost of sales and reduced its sales, general, and administrative expenses by 3.9%. Revenue growth and cost control are good for the bottom line. But we're going to skip the bottom line and learn how Getty generates so much cash.
Unlike a retailer like Costco
Nonetheless, Getty, whose shares currently trade for just under $70 each, has over $4 per share in net cash (cash plus short-term investments minus debt). It also generated $166 million in annual free cash flow off $622 million in revenue. One could make the argument that free cash flow should deduct acquisition spending; doing so brings the figure down to $140 million.
But despite the impressive operations of the business and its strong balance sheet, an enterprise value-to-free cash flow ratio of 23 to 27 (depending on which free cash flow you use) is too rich for my blood. As Warren Buffett says, "You pay a high price for a cheery consensus."