Author Topic: Avoiding industries ripe for disruption - local newspapers - automotive  (Read 2768 times)

Dynamic

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Around 18 years ago I took a position in a UK company that owns numerous local newspapers. Most towns have one weekly paper and perhaps a free paper light on news but concentrating on classified advertisements. Often these are owned by the same firm but have separate titles. Local monopolies. Numerous real estate agents, car dealers and tradespeople need to advertise their services to a local audience, so in addition to the news and advertisements each paper tends to have a Property section and a Motoring section with a few editorial articles and a lot of advertisements.

The high readership is a barrier to entry for new rivals. The advertising income generally supported the journalism and kept the cover price low and this made it a negligible cost purchase for its readership to buy habitually. With regional printing centres supporting colour newsprint across numerous towns' print runs, efficiency was another crocodile in the moat allowing a paper to slash its cover price, introduce competitions a giveaways and see off a new rival while barely affecting the parent company financials then return to high profitability.

The company is called Johnston Press plc and when the 2008/9 Global Financial Crisis came, I knew real estate and new car sales declines would hit it temporarily but expected it to recover and still do well across the cycle.

What actually happened is that it almost breached its debt covenants requiring an equity capital raise during a bear market. A good reason to be wary of debt load even if interest cover looks healthy. The recession turned out to be a long one and deep, but simultaneously internet advertising became more local and location-aware and online real estate aggregators diminished the value of newspaper property advertising and slashed commission rates for many agents.

I probably got back about 10% of my total investment by the time I saw the writing on the wall.

The debt lesson is valuable.

The lesson on industry disruption is more valuable.


Now we see many giants of the automotive industry making sensible platform sharing consolidations and selling cheaply.

There has certainly been good money made by Value Investors buying post-bankruptcy GM and also Fiat-Chrysler to name two examples. Certain revaluation and spin off gains have produced some nice gains fairly fast in recent years

I have not invested. I am very interested, but particularly in the advent of Electric Vehicles, much like fellow forumite Liberty. Some TED talks have championed the coming tipping point for EVs and Autonomous Vehicles.

However this very measured interview with really useful infographics on Fully Charged YouTube channel has some particularly good points.

https://youtu.be/9k7k3Mzknm8

First it lays out the barriers to EV adoption:
Range (most people need >200 miles/320 km)
Cost (to obtain that range today you need to pay more sticker price than for gasoline cars)
Performance (early small battery EVs were slow but now EVs tend to have higher performance, instant torque and low centre of mass)
Choice (not such a wide selection of vehicle types and brands available as EVs)
Charging (number of locations and charging speed on long trips)

They discuss each of these and the trends and previous projections.

EVs have about 50 moving parts compared to about 3000 for gasoline ICEV. The battery cost is key and falling faster than early projections.

They interestingly discuss with will happen as 200 mile EVs reach price parity.

Some manufacturers may try to retain parity and go no further but as EV prices continue to fall, competitors including EV only makes will lower prices (or offer more range for the same price)

They referred to an interesting statistic that cost per mile for a horse was about 1.30 in today's money. Cars brought that down to about 0.30 including fuel insurance and depreciation and only horse enthusiasts keep a horse today. EVs and Autonomous EVs should lower it substantially really soon and by 2030 internal combustion engines may well be for enthusiasts and niche use cases.

More interestingly, as most new car buyers lease, the resale value after 3-5 years makes an impact on lease cost. Before EVs reach price parity the likely resale value of an ICEV in 3-5 years will plummet so lease payments would rise for ICEVs in anticipation of price parity.

They also discuss how a number of industries are simultaneously preparing to serve the EV market including mining, industrialised battery production etc over the course of the next 5 years or so.

I recommend you watch the video with a view to industry disruption, potential investments etc.


SharperDingaan

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Re: Avoiding industries ripe for disruption - local newspapers - automotive
« Reply #1 on: January 14, 2018, 05:29:15 AM »
It's useful to take a page from the project managers playbook, where 'potential' projects are rated red, yellow, green.
Red being low probability or distant; green being the reverse. EV's would be red, tending to yellow.

There is also cyclical versus disruption. Trump canceling NAFTA is cyclical; NA integrated auto producers would take an immediate and hard hit, local unemployment levels would spiral, current leaders would be replaced in the next political cycle, leading to implementation of NAFTA2. Automating the plants and warehouses with 90% robotics is disruptive, as the jobs are never coming back. An investor would either go long the robotics immediately, or long auto producers 2 years after NAFTA withdrawal (after the bankruptcy's have already happened).

Marketers refer to 'product life cycle', industries are similar. Time on the 'X' axis is just replaced with 'innovation'. Incorporating the small innovations will improve your product and extend its life cycle; the big innovations rapidly put you out of business (motor car replacing the horse and buggy).

The take-away's here are be strategic, and be patient.
Which very few will do in today's age of instant gratification.

SD

Cigarbutt

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Re: Avoiding industries ripe for disruption - local newspapers - automotive
« Reply #2 on: January 14, 2018, 05:43:58 AM »
Interesting post Dynamic.
Have always been naturally attracted to industries being disrupted and it took 1 or 2 mistakes early on before the realization of the potential challenging impact of disrupters knocking on the barriers to entry.

Good video.
"We're on the cusp..."
Not an expert but follow the field for several reasons including an interest in the oil and gas sector and previous investments in OEMs.
You might like:
http://image-src.bcg.com/Images/BCG-The-Electric-Car-Tipping-Point-Jan-2018_tcm96-180862.pdf
https://www.slideshare.net/TheBostonConsultingGroup/the-electric-car-tipping-point-81666290

Again, another piece of work that seems to be relatively objective but that contains also a "hype" component.
Like they say, the tipping point is in sight but, at least from my limited horizon, the road won't be straight.
It is hard to see a radical change within 5 years but after, it's anybody's guess.
With innovation and technology, it all becomes so clear in hindsight.

Your comment about depreciation made me think of Carmax (KMX), a used car reseller that I'm following and triggered an inspiration for a new post that I will make later today about "reappreciation".

Uccmal

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Re: Avoiding industries ripe for disruption - local newspapers - automotive
« Reply #3 on: January 14, 2018, 09:29:38 AM »
I am holding out on replacing our vehicles for 2-4'years in favour of an plug in hybrid, or all electric. 

One way to think about this is where we get our electricty from.  The utilities that deal only in electricity and renewables should continue to grow.  I have looked at the data a bit.  Electricity demand will rise, but not dramatically but enough for utilities to have to raise capacity. 

I haven't come to an opinion on how fast this will happen.  Suffice to say it is happening, and the speed of adoption is getting contantly faster.  How fast this displaces ICE vehicles is anyones guess.  Then there is the age of the existing fleet.  Put another way, I haven't sold my oil stocks, or Enbridge stock yet.  But I am not going to overload in these areas either. 
GARP tending toward value

Viking

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Re: Avoiding industries ripe for disruption - local newspapers - automotive
« Reply #4 on: January 14, 2018, 10:56:39 AM »
I have also learned over the years to stay away from industries that are shrinking or facing disruption (newspapers being a great example). This is not to say that money cannot be made, it is just much more difficult.

One of the keys to investing success is to invest in sectors and companies that have lots of positive tailwinds. As time goes by surprises tend to be positive and this drives the share price higher. Time is your friend. In struggling industries, the surprises tend to be negative and this results in lower share prices. Time becomes the enemy of a patient investor.

rolling

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Re: Avoiding industries ripe for disruption - local newspapers - automotive
« Reply #5 on: January 14, 2018, 03:02:39 PM »
My take is that a much bugger disruptor would be autonomous car. And it is a much more certain disruptor. Why?
- it has no physics, chemestry or raw material supply problems. With batteries you can come to the conclusion that you cannot turn rock into gold.
- only limitation is informatic innovation, which is no limitation at all
- it heavily affects multiple industries, the most disrupted I can think about right now:
A) taxi companies (ride sharing services also do, but with AV it is will be much worse)
B) car dealerships: there might be a car penetration rate reduction in developed countries due to cheap autonomous ride sharing and, simultaneously, bulk car sales might become the norm (ride sharing companies will have bargaining power and deal directly with auto companies)
C) auto insurance in developed countries: less cars, less accidents and bargaining power from big clients
D) ...
My usual portfolio: Highly concentrated (up to 3 or 4 positions) in smallcaps and microcaps.

Dynamic

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Re: Avoiding industries ripe for disruption - local newspapers - automotive
« Reply #6 on: January 15, 2018, 01:23:43 AM »
I could see autonomous cars and ride sharing changing the age profile of the vehicle fleet substantially.

If cars are much better utilised there may be many fewer cars but they could clock up 200,000 - 300,000 miles maybe 500,000 miles in 3-5 years and thus the potential reduction in the number of vehicles could be offset in part by the increased replacement rate. Alternatively, they may be able to last for 1 million miles / 10 years instead of the typical 200,000 miles and 20 years of current cars.

That could mean that the auto industry new car sales don't suffer so much, but maybe second-hand dealers would have a tougher time (or just take on newer cars with higher mileage for those who want to use their own car in the traditional way).

I wouldn't be putting money on this now, but a lot of things could change and there will be a lot of second-order effects.

StubbleJumper

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Re: Avoiding industries ripe for disruption - local newspapers - automotive
« Reply #7 on: January 15, 2018, 07:49:27 AM »
So, on the subject of disruption, what do people think about outfits such as Alimentation Couche Tarde or Parkland?  Essentially, their business is to buy crappy gas stations that the majors want to dump and then operate them.  So, is the value in those companies from their operations (selling a tank of gas and a pack of smokes) or is it in the real estate?  Or will convenience stores which rely on gas station traffic go the way of the dodo bird?


SJ

TorontoRaptorsFan

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Re: Avoiding industries ripe for disruption - local newspapers - automotive
« Reply #8 on: January 15, 2018, 08:40:22 AM »
My take is that a much bugger disruptor would be autonomous car. And it is a much more certain disruptor. Why?
- it has no physics, chemestry or raw material supply problems. With batteries you can come to the conclusion that you cannot turn rock into gold.
- only limitation is informatic innovation, which is no limitation at all
- it heavily affects multiple industries, the most disrupted I can think about right now:
A) taxi companies (ride sharing services also do, but with AV it is will be much worse)
B) car dealerships: there might be a car penetration rate reduction in developed countries due to cheap autonomous ride sharing and, simultaneously, bulk car sales might become the norm (ride sharing companies will have bargaining power and deal directly with auto companies)
C) auto insurance in developed countries: less cars, less accidents and bargaining power from big clients
D) ...

D) Health care industry - reduced traffic accidents eases strain on hospital emergency rooms and gov't health care budgets
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TorontoRaptorsFan

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Re: Avoiding industries ripe for disruption - local newspapers - automotive
« Reply #9 on: January 15, 2018, 08:41:37 AM »
So, on the subject of disruption, what do people think about outfits such as Alimentation Couche Tarde or Parkland?  Essentially, their business is to buy crappy gas stations that the majors want to dump and then operate them.  So, is the value in those companies from their operations (selling a tank of gas and a pack of smokes) or is it in the real estate?  Or will convenience stores which rely on gas station traffic go the way of the dodo bird?


SJ

They'll play a role in electrical charging stations that may take 20-30 minutes to charge up a car or truck's battery.
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