w w w . t i c o n l i n e . c o m

EVENTS IN 1998

According to my journal I read the annual reports of The Gap, McDonalds, Coca Cola, Jacobs Engineering, The Washington Post, Medtronic, King World Productions, Cracker Barrel, Nike, Wrigleys, Tootsie Roll and Pepsi.

In June 1998 I added King World Productions to my portfolio at an average price of $27 per share or an equivalent market capitalization of $2.0 billion. This was not really a bargain - discounted free cash flow calculations indicated as much. However, I was intrigued by the management and the economics of the business.

One advantage I've found that I have is that my net worth is considerably smaller than the institutions and investments in small billion-dollar or multi-million dollar businesses can affect my net worth in a significant way.

King World Production is the number 1 distributor of first-run syndicated television programming in the U.S. run by Roger and Michael King. The King family owned about 20% of the business. Everything I read about the King brothers told me that they were phenomenal salesmen with tremendous knowledge about their product. Sales per employee at King World ran at $1.17 billion per employee.

King World's primary sources of revenue are the Oprah Winfrey Show (40%), Jeopardy (20%), The Wheel of Fortune (20%), and Inside Edition (7%). King World Productions' direct marketing division added a few more percentage points to the mix and as of late, Hollywood Squares has as well.

King World Productions had an excellent earnings record, increasing at a good clip over the last 10-15 years. It's net profit margins and return on equity floated around 20% for the last decade and the business generated a lot of free cash flow with capital expenditures running at $0.01 to $0.03 per share.

I called Steve LoCascio, the CFO of King World Productions on a few occasions. Steve was extremely helpful in educating me about the business and I owe him a debt of gratitude for putting up with questions that probably sounded pretty stupid.

Mr. LoCascio informed me that television shows could last 10-20 years. This, as Peter Lynch has said in the past, was a very stable business. The King brothers also had the wherewithal to lock stations into multi-year deals that essentially translated to a few years of guaranteed cash flow. Oprah was a lock into the early part of the next century and I felt that that was enough time for the King brothers to work some more of their magic.

King World's balance sheet carried no long-term debt, had a current ratio above 6.0 and held $800-$900 million in cash on the books. Management was extremely cost conscious, refused to pay a dividend (they paid a special $2 per share special dividend, but that was an anomaly) and had instituted a share-buyback program.

Fear of losing the Oprah Winfrey Show kept the stock price down and many investors told me that it was too risky. I was pretty concerned about this at first, but the more I read the more I became convinced that the power of King World Productions didn't rest on the fortunes of the Oprah Winfrey Show as much as it did on the management abilities of the King brothers. Although the show was important, I felt the King bothers were the real gems of the business. It was comforting to know that some CBS executives felt the same way, according to the New York Post:

"CBS can call off the deal if either Roger or Michael King "died, became incapacitated or otherwise not in a position to perform his obligations," the filing said.

'Roger and Michael King are an important part of what we're buying,' explained a CBS exec."

Fairly soon after I bought my shares, it plummeted to $21 per share. This is the test of a value investor and I failed miserably. My hesitation prevented me from getting money into my brokerage account and I was unable to capitalize on the great opportunity to reduce my average cost. This mistake cost me quite a lot.

On April 1, 1999 CBS announced that it would be buying King World Productions for $2.5 billion in stock - giving me a 30% annualized return for my troubles. Although I was willing to hold King World Productions for the next decade I was not unhappy with this outcome. Needless to say, over the last few days I have been reading everything and anything I could find about CBS - particularly Mel Karmazin and Infinity.

Another investment I made in 1998 was Berkshire Hathaway. My investment in Berkshire was far less than it could have been simply because I didn't understand the entire business. In general my feeling was this - my entire investing rational has been developed from reading (and oftentimes rereading) about Warren Buffett. I felt that any business that Mr. Buffett engaged in would have characteristics that I would also look for since these characteristics were learned from him in the first place! With that terriffically well-calculated and researched thought I purchased a few Berkshire B shares (ending early in September) for $2150 - a 25% annualized gain to date.

It is important to remember that these returns, against the backdrop of the S&P were not as great as they sound. As they say "a rising tide raises all boats".

The beginning of 1999 has started the same as 1998. Markets are at record highs and I can find nothing better to do with my time aside from reading SEC 10-K filings.

Best Regards,
JimC