Posted on August 5thousand2022, Josh Arnold
Warren Buffett’s Berkshire Hathaway ( BRK.B ) has an equity investment portfolio of more than $360 billion as of the end of the first quarter of this year, making it one of the largest investors of any kind in the world.
Berkshire Hathaway’s portfolio is filled with quality stocks, and usually dividend-paying ones. You can learn about Warren Buffett’s stock picks to find the right ones for your individual portfolio. That’s because Buffett (and other institutional investors) are required to periodically disclose their holdings in a 13F filing.
You can see everything Warren Buffett’s stock (along with relevant financial metrics such as dividend yield and price/earnings ratio) by clicking on the link below:
note: 13F filing performance differs from fund performance. See here how we calculate the performance of the 13F feed.
As of March 31, 2022, Berkshire owned just over 7.7 million shares of Formula One Group ( FWONK ) with a market value of more than $500 million. That makes Berkshire a significant owner of F1 at around 3.8%, although the half-billion dollar position is a very small proportion of Berkshire’s overall portfolio.
In this article, we will look at the business of Formula 1, as well as its future growth prospects and expected total revenue.
Formula 1 is a series of car races held around the world. The company owns the commercial rights to the Formula One World Championship, a motor racing competition that lasts around nine months of the year where drivers compete for the drivers’ championship and teams compete at constructors’ level.
Formula 1 has existed continuously since 1950, when the first World Championship was held. Today, the Championship is 23 races in 21 countries on five continents, reaching hundreds of millions of fans around the world.
Formula One Group is a subsidiary of Liberty Media Corporation (LSXMA). The former trades using a so-called “share tracker” rather than a traditional listing, like all of Liberty’s subsidiaries. Liberty owns shares in various assets, including the Formula One Group, and lists tracker shares, which are designed to track the economic performance of the business rather than the economic performance of the company as a whole (in this case Liberty). Formula One Group has three share tracking classes, like Liberty’s other listed assets; Series A shares have 1 vote per share, Series B shares have 10 votes per share, and Series C shares have no voting rights.
Formula 1 generates about $2.5 billion in annual revenue and has a market capitalization of more than $15 billion.
The last group salary the report was for the quarter ended June 30thousand2022, which was released on August 5thousand2022 year.
The group reported strong revenue and even better adjusted operating income, but we note that in the comparable period last year, some parts of the world were still subject to COVID-19 restrictions on in-person sporting events. Therefore, the Group had simple comparative figures for the second quarter of this year.
Source: Q2 earnings release
Despite this, revenue rose sharply, adding 49% year-over-year. The profit came from a 35% increase in what the Group calls “Core” revenue, which comes from race promotion revenue, media rights fees and sponsorship fees. This has grown due to contractual fees, media rights through F1 TV subscriptions, as well as the rights of external parties broadcasting F1 events.
The second category of income, which the Group calls “Other”, grew by more than 200% in the 2nd quarter. This was driven by an increase in freight revenue from the number of events held outside of Europe in Q2, which are held outside of most teams. In addition, revenue from the hospitality business from the Paddock Club, which was closed in Q2 2021, helped boost revenue from private events.
Operating income rose from a loss of $43 million in the same period last year to a profit of $49 million in the second quarter of this year. The group also repurchased $146 million of 1% cash convertible notes due next year, effectively canceling 3.95 million ordinary shares outstanding.
Now let’s pay attention to the company’s growth prospects.
Formula 1’s growth has been quite volatile in recent years as COVID-19 has severely impacted the sport’s ability to monetize its competitions. Looking ahead, we see normalized growth of around 8% per year as a result of the recovery from COVID, which is still not complete. We believe that sponsorship and media rights revenues will contribute to these earnings, and that items that are temporarily subject to inflationary pressures, such as freight revenues, will decline.
Source: Company website
The company notes that it has significantly increased its social media reach, attracting an average of 71 million viewers per race. The audience is truly global and the Group is finding more and more ways to monetize these users over time, both in person and digitally. As the sport continues to grow in popularity, the Group’s revenue should grow over time.
Competitive advantage and recession outcomes
Formula 1’s competitive advantage is quite simply that it is the pinnacle of global ring racing and has been for seven decades. This gives it a moat that is untouched by other racing series, and as the sport grows every year, we see this advantage only growing. This is especially true as the sport becomes more mainstream with alternative outlets like Netflix Drive to survive a series that piqued the interest of those who hadn’t watched the sport before.
However, like most sports, Formula One is heavily dependent on advertising and consumer spending, which tends to suffer during recessions. We see the next recession as bad for the Group’s earnings and likely for the share price as a consequence. These are not recession-proof stocks.
Valuation and expected return
Since F1 does not generate reliable profits, we will use price to book value instead. The group reported a book value of around $27 per share and today it trades at 2.3 times that value. However, its average value over the past five years is 1.7, which means it is significantly overvalued today. This could lead to a 6% drop in total profitability in the coming years, which would almost completely offset our estimated 8% growth. Formula 1 does not pay dividends to shareholders.
We see Formula 1 as a unique and highly desirable media property. However, the company’s history of inconsistent earnings, lack of dividend and high valuation makes us stay away for now. With a total expected return of less than 2%, we rate F1 as a sell.
Other lists of dividends
Value investing is a value process in conjunction with dividend investing. The following lists contain many more high-quality dividend stocks:
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