Interview With a Short-Seller
Editor's Note: The following is an excerpt available exclusively at TheStreet.com from an interview originally published by Value Investor Insight.
Jim Chanos, founder of Kynikos Associates, is famous for his early bearish calls on such legendary busts as Baldwin-United, Integrated Resources, Sunbeam, Conseco (CNO) and Enron. With more than $2 billion in assets under management, Chanos excels in identifying company-specific ticking time bombs as well as big-picture trends that will roil companies and industries.
Why are you so negative on the cable-TV business?
What amazes me about the cable business is that investors seem to be acting like there's no physical and technological obsolescence at work here. I keep pointing out that at some point you have to get your money out before a competing technology comes along. I wrote a piece a couple years ago acknowledging that in 2004 and 2005 the industry would reach for the first time the promised land of free cash flow, but who knew after that? And sure enough, Comcast (CMCSA) and others are upping their capex spending for 2006 and 2007 to compete with the Bells and everybody else, so we're going right back into periods of declining free cash flow. That's the history of this business. Even if you assume 30-year depreciation on the plant, which is way too generous, the returns on capital have been below the cost of capital for this industry since inception.So why does it seem every value investor has a cable company in their portfolio? Because they believe management when they say that gross cash flow is going way up and required capital is going way down over time. The reality is the cable executives are not blessed with any great crystal ball themselves, and we believe they always underestimate the competition. Satellite came out of the blue. Now the Bells are going to compete with them. On top of that you've got wireless broadband coming on.
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