Portfolio Review: Westwood Wobbles; Disney's Magical Profits

WESTWOOD WOBBLES

Westwood Holdings Group (WHG) reported disappointing first quarter revenues which fell 29% to $23.9 million with net earnings and EPS dropping 95% to $392,000 and $0.05, respectively. The drop in net income was due to lower total revenues and a $0.6 million net foreign currency loss, partially offset by lower incentive compensation expense.  
 
During the quarter, net outflows totaled $1.3 billion. The company ended the quarter with $16.8 billion of assets under management, down nearly 26% from last year. To curtail the outflows due to industry disruption,the company implemented a new pricing structure while continuing to make significant investments in its portfolio management, sales, distribution and infrastructure teams to support business development while further investing in its digital platform transformation.
 
During the quarter, Westwood Holdings generated $10.5 million in operating cash flow, up from $1.4 million last year. The sale of investments buoyed operating cash flow by $16.6 million.  
 
During the quarter, Westwood paid $7.7 million in dividends at $0.72 per share. From 2002 to 2018, the company paid over $190 million in shareholder dividends with the firm increasing the annual dividend declared every year since 2002. Westwood ended the quarter with about $108 million in cash and investments, no long-term debt and shareholders’ equity topping $156 million. While Westwood’s dividend yield appears attractive, the deteriorating business fundamentals may lead to a dividend cut in the future due to a now wobbly business model. As a result of the sharp decline in assets under management and the significant drop in sales and earnings, we have decided to cut our losses and sell our position in Westwood Holdings.

DISNEY MAGICAL PROFITS

During a very busy quarter, Walt Disney (DIS) completed its $71 billion acquisition of Twenty-First Century Fox, Inc. (FOX) for stock and cash. The acquisition is expected to be accretive to Disney’s EPS before the impact of purchase accounting for the second fiscal year after the close of the transaction, and to yield at least $2 billion in cost synergies by 2021 from operating efficiencies realized through the combination of businesses.  
 
Disney also entered into an agreement with Sinclair Broadcast Group (SBGI) under which Sinclair will acquire the equity interests in 21 Regional Sports Networks (RSN’s) and Fox College Sports, which were acquired by Disney in its acquisition of Fox. The transaction ascribes a total enterprise value to the RSNs equal to $10.6 billion, reflecting a purchase price of $9.6 billion.
 
Disney also unveiled its direct-to-consumer streaming strategy, including Hulu, Hotstar, ESPN+ and the upcoming Disney+ service, which will launch in the U.S. market on 11/12/19, at $6.99 a month. The service will offer a new way to experience content from the company’s many brands, including Disney, Pixar, Marvel, Star Wars and National Geographic. Following its U.S debut, Disney+ will rapidly expand globally, with plans to be in nearly all major regions of the world within the next two years.  
 
Disney and Comcast announced that Disney will assume full operational control of Hulu, effective immediately, in return for Disney and Comcast entering into a “put/call” agreement regarding NBCUniversal’s 33% ownership interest in Hulu. Under the agreement, as early as January 2024, Comcast can require Disney to buy NBCUniversal’s interest in Hulu and Disney can require NBCUniversal to sell that interest to Disney for its fair market value at that future time. Disney has guaranteed a sale price to Comcast that represents a minimum total equity value of Hulu at that time of $27.5 billion.
 
Disney reported fiscal second quarter revenue rose 2.6% to $14.9 billion with EPS up 81% to $3.53. Excluding certain items including a noncash $4.9 billion gain on the acquisition of controlling interest in Hulu, EPS decreased 13% during the quarter. Free cash flow declined 23% during the first half of fiscal 2019 to $3.6 billion given the company’s increased investments in parks, resorts and other property. During the first half, Disney paid dividends of $1.3 billion and suspended its share buyback program as the company focuses on using excess cash to reduce the debt taken on for the Fox acquisition. Disney’s stock has provided a 46% total return over the last 30 months and now appears fully valued, prompting us to pocket some magical profits.

With the proceeds from Westwood Holdings and the profits from Walt Disney, we plan to buy TD Ameritrade (AMTD). Why? To find out, read our last article here. Personal and employee purchases will be made during the week following distribution of this newsletter. (See disclosure below.)