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Christopher Bloomstran Profile picture
@ChrisBloomstran
Dec 5, 2020 • 25 tweets • 7 min read • Read on X
The water is chummed. @elonmusk already hooked a whale, an endless supply of dumb money in the S&P committee that compelled its passive followers to buy $TSLA shares at any price, providing it the ongoing capital it needs to grow (because it doesn’t produce it internally)... 1/
Elon is now hunting the greatest great white of them all. Suggesting this week in the media that he’d be open to a “friendly” merger with an established auto manufacturer, Elon is zeroing in on pulling off perhaps the greatest casino heist of all time, his coup de grâce. 2/
Warren Buffett knows, and Henry Singleton knew, if your stock is an expensive currency, spend it. Elon has fire in the bottle with his shares at a $650B cap and needs his own Jerry Levin. To wit: 3/
20 years ago, Steve Case pulled off arguably the single greatest feat of capital allocation. In the same deal, Case’s contemporary on the other side, Jerry Levin, cemented one of the worst deals ever made. 4/
For the uninitiated, Case, a marketing guy by background, had become CEO of America Online. Like Elon, Case was a “visionary.” AOL had made a number of incredible pivots. It began as Control Video which sold a video game download for Atari. 5/
It moved on as Quantum Computer Services, developing the first IM service (“You’ve Got Mail”). It IPO’d as America Online in 1992, w/ a 28% gain over its offer price. Case developed a home page, then chat (“Buddy List”), bought CompuServe and then Netscape for $4.2B in 1999. 6/
With the browser, IM, chat, news and email, because it was the late 1990’s the stock price was insane, straight up from the IPO, and Case knew competition was coming fast. The business was literally going to die, so Case sought a bride. 7/
Over three months of heavy, secret courtship (and lots of first growth Bordeaux), AOL announced they would tie the knot with Time Warner, headed by Jerry Levin, in a “friendly, merger of equals” in January 2000, two months before the tech bubble began its implosion. 8/
What did each side bring to the party? AOL brought its soon to be dead dial-up internet business, $4.7B, in revenues, aggressive accounting and 12,000 employees. Time Warner brought its movie and studio assets, $14.7B, or 3 times the revenues and 68,000, 5.7x the employees. 9/
Each side had a $168B market cap and Time Warner also bore $17B in debt. AOL shareholders got 55% of the “deal” and its shares rose over 30% on the news! Jerry Levin would be CEO and Steve Case the big picture Chairman. 10/
The company had a combined market cap of $336B and enterprise value of $354B, on $19.5B in combined revenues. In today’s goofy market the valuation would seem reasonable. The deal would close, the stock would decline by 90% and Levin would be out by the end of 2001. 11/
Case had pulled off the sale of the century, using AOL’s high-priced currency @ 35x revenues to buy a durable, not dying business for 11x revenues. Down from a combined $354B market cap, $T ultimately bought Time Warner last year for $85B plus assumed debt. But back to $TSLA: 12/
With 48k employees and plants in Fremont, Shanghai and 2 under construction in Germany & Austin, $TSLA, with $30B in revenues will sell ~500k, cars this year and only make a profit thanks to temporary emissions credits from $GM & $FCAU, drawing on reserves and cutting R&D. 13/
The new factories should allow for 1.5-2M vehicle capacity. Fully diluted, the market cap is now not small, at $650B, 22 times revenues! Elon has already been given an obscene number of option shares, 100M shares in the most recent grant, though with not all tranches vested. 14/
Musk hooked $SPX inclusion. To “grow into” a $650B market value, $TSLA will need to make more cars. A LOT OF THEM. To make more cars, they will need more people and plants, A LOT OF THEM. To build or to buy, that is the question. $TSLA can’t internally finance its growth so…15/
Suppose Elon is courting Mary Barra at $GM. Envisioning a full conversion to EV, GM’s stock has been on a tear, up from $14 in March and hitting a new, post-restructuring IPO high of $46.46 last week, a $66B market cap, approximately 2/3 of revenues. 16/
GM shareholders would probably be ecstatic if Mary could sell GM at twice the highest price this decade, post its bankruptcy, yes? Elon could offer her a price at twice the current high. 17/
At a $132B takeout, GM's share of the combined entity on a pro-rata $782B market cap (plus GM’s more than $100B in net debt), $GM would own 17% of the combined entity. To the party, Elon brings his 4 plants and 48k people. 18/
Mary Barra brings 165k people, 11 assembly plants, 25 stamping, propulsion, component and battery plants, 19 parts distribution centers and 2 engineering campuses. GM produced 7.5M vehicles last year and has capacity to make 10M, which would be ~10% global market share. 19/
Total capacity w/ Tesla would be 12M vehicles. At $20K per, sales capacity is $240B. Doubling GM’s net margin to Toyota’s envious 6% yields $14.4B in theoretical profit. But Tesla sells software too! Add in $5K per at a 30% net software margin, profits balloon to almost $16B. 20/
What’s the P/E? What’s your market cap? At 20x, market cap is $320B, half of Tesla’s alone today and 40% of the hypothetical combo. Remember, Mary Barra doubles GM’s current price for her shareholders and gets 17% of the combined entity, $40B against the current $66B. What? 21/
For perspective, GM’s P/E multiple has averaged 7 for the last decade…

Elon becomes Steve Case. His option fully vest and he walks away with $140B. 22/
When @elonmusk approaches @mtbarra @GM, Akio Toyoda @Toyota, Mark Manley and @JohnElkann @fiat, @Herbert_Diess @VW or @jimfarley98 and Bill Ford @Ford, ask, over steak and first growth Bordeaux (or, ahem, weed in the case of Elon), “What am I giving up and what am I getting?” 23/
If you are the great white, don’t negotiate like the minnow. Highly recommended not to listen to the counsel of investment bankers. Guaranteed Elon won’t propose a cash deal because he can’t. Elon has managed to engineer one of the most overvalued currencies of all time. 24/
Outside of the $TSLA cult of drivers & shareholders, there’s only one man hoping for an all-stock merger of equals among Tesla and an auto major. That guy sold Time Warner to AOL and is hoping for a successor to his title. Who will be the Jerry Levin of the auto industry? 25/25

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More from @ChrisBloomstran

Christopher Bloomstran Profile picture
Aug 2
Berkshire Hathaway released its 2nd quarter 10-Q and operating earnings this morning. Despite little activity on the capital allocation front, Berkshire’s key businesses produced generally solid profitability, and FAR BETTER than is being generally reported. A brief summary: 1/5
Most observers reported operating earnings declined by 3.8% from $11.6 billion in 2024’s second quarter to $11.16 billion. When properly assessed, operating earnings in fact increased 7.9% from $11.2 billion to $12.0 billion when excluding a mark-to-market currency translation to U.S. dollars on Berkshire’s $22 billion foreign-denominated borrowings.

Berkshire releases a supplemental non-GAAP presentation of its operating earnings which logically excludes realized and unrealized investment gains and losses. Prior to 2018, unrealized gains and losses were not included in the income statement. The operating earnings presentation does include foreign currency gains and losses in each reporting period relating to translating the face value of debt borrowed in three foreign currencies for the period’s change in the exchange rate. Berkshire includes the loss or gain in operating earnings because as its balance sheet carrying value for the debt liability fluctuates, the unrealized, non-cash gain or loss is also included in SG&A on the income statement.

But think about what investments the internationally-denominated debt finances. In the case of Berkshire’s $14 billion of Japanese yen borrowed (long-term at an average 1.1% interest rate) the proceeds were used to purchase shares in five publicly-traded Japanese trading companies. The five companies had a combined market value of $23.6 billion at March 31. They have gained in price above Berkshire’s evolving cost basis and it has also increased position sizes in each. The dollar declined 4% against the yen during the second quarter. Berkshire includes any market value changes on the stocks trading on Japanese exchanges for each quarterly and yearly reporting period. It also includes any currency change in the translation to U.S. dollars in the market value of each stock position. In a period such at 2025’s second quarter, the declining dollar will add value to reported market value of the stocks, but will create a loss on the carrying value of the debt Berkshire borrowed in yen. Because Berkshire excludes the gains and losses on the stocks in each period (both from price change in yen but also from currency change), the analyst should also exclude the losses and gains on the debt translation. Berkshire’s debt footnote 16 in the 10-Q quantifies the underlying face value of borrowings in euros, British pounds and Japanese yen, the period U.S. translated carrying value, and the pre-tax gain or loss flowing through SG&A. The operating earnings supplement found in each quarter’s press release quantifies the after-tax quarterly gain or loss from currency on the debt in an italicized footnote, making the needed adjustment straightforward.

Long story short, properly excluding currency changes on foreign-denominated debt, operating earnings rose 7.9% in the second quarter and 3.1% for the first half, where most are reporting a 3.8% decline in the quarter and 8.9% decline in the first half.

It’s also being reported that Berkshire’s substantial cash holdings declined $3.6 billion in the quarter, from ~$348 billion to ~$344 billion. NO! Berkshire occasionally purchases a T-bill position on the final trading day of a quarter. When doing so, cash and the T-bill BOTH appear as assets on the first page (asset side) of the balance sheet and an offsetting liability for the purchase amount appears on the second page of liabilities and equity. On the next business day, cash and the liability disappear. Berkshire’s balance sheet had no liability for T-bills purchase at June 30 but did have liabilities of $12.8 billion at year-end 2024 and $14.4 billion at March 31. 2/5
Most observers don’t know to subtract the liability from cash and overstate Berkshire’s cash balance in reporting periods where a liability for T-bill purchase exists. I wrote in the last annual letter that my fantasy is that Berkshire will spend ALL of its cash on a T-bill position on the final trading day of a quarter or year. Heads will explode.

Enough on accounting. The capital allocation front was remarkably quiet during the second quarter. As expected Berkshire repurchased no shares. The stock actually traded above my appraisal of intrinsic value earlier in the quarter for the first time since our owning the stock in February 2000. The shares peaked the Friday before this year’s annual meeting at its highest fundamental valuation since 1998. Ongoing growth in intrinsic value and a ~12% price decline from the peak has the share now at about 85% of my appraisal and back down to valuation levels where Berkshire last bought back shares.

The common stock portfolio (largely held in the insurance operation) again saw net quarterly sales for nearly three years in a row. $6.9 billion of sales were less than offset by $3.9 billion of purchases in the quarter. That’s $3 billion of net sales for the quarter and $4.5 billion for the year.

Berkshire’s operating companies are earning good and progressively improving earnings. BNSF is solidly turning the corner. Cost misalignment and operational issues hampered profitability for several years, as did weak car loadings/volumes. The business is improving on all fronts with second quarter net income up 19.5% over last year and up 13.1% for the first half. Improvement came via overhead improvement, lower fuel costs, and car loadings up nearly 2%, with particular strength in ag and huge growth in coal. Yep. Coal. BNSF was underearning by perhaps $2 billion annually recently and has closed to gap to ~$1 billion. More work to to do but the progress is undeniable. Unmentioned was the recent offer by Union Pacific to buy Norfolk Southern, a transcontinental merger I never would have imagined passing antitrust review, but with the current administration, all bets are off. The combination would impart huge competitive pressure on the remaining Class I North American rails. Expect rail customers, and perhaps the other rails, to lobby hard against the merger.

BHEs earnings were up 7.1% for the quarter and 31.1% in the first half. Margins were modestly better, expenses higher, but most of the improvement was due to no additional reserving at PacifiCorp for 2020s Oregon and Northern California wildfires. Berkshire and BHE did mention the “One Big Beautiful Bill Act” and its potential impact, yet unknowable, on the ability to deploy capex using production tax credits in wind, solar and portions of new grid capacity beginning in 2026. I’ve read the legislation related to energy and my guess is much of what was enacted will be subject to change and reinterpretation. Like the regulatory climate in socialist-leaning states, what happens with tax policy related to renewables will dictate Berkshire’s ability to earn decent returns on capital and to deploy new capital. The value of BHE is in harm’s way for sure. 3/5
Read 5 tweets
Christopher Bloomstran Profile picture
Dec 11, 2023
A $5.8 billion offer is at hand to take Macy's private at ~$21 a share, a 32% premium over Friday's $17.39 close. Bidders call the stock “undervalued,”down from $74 in 2015. The retail graveyard is full of turnarounds. Good luck. How bad is this one? Some stunning statistics: 1/
At the proposed buyout price the $5.8 billion offer values Macy’s at roughly 7x FY 24 profit. The retailer earns an apparent 20% return on $4.1 billion in equity (much less on capital given $5.8 billion in net debt). But how profitable is M really and where have profits gone? 2/
Over the last 25 years Macy’s reported $21 billion in profits. A quarter of those were distributed as dividends. Fully the remaining 75% of profit was spent repurchasing shares. At the $21 buyout offer the stock is no higher than 25 years ago!That’s $15 billion in bad buys. 3/ Image
Read 10 tweets
Christopher Bloomstran Profile picture
Aug 5, 2023
Berkshire reported 2Q results this morning. As always, there's more under the hood than the reported results. A few thoughts on what is a very mixed bag. BRK is a good proxy for the US economy. The industrial economy is weak, consistent with what other companies are reporting. 1/
For starters, operating income was $10.0 billion for the quarter, up 6.7% over 2Q 22 and up 9.2% for six months. However, properly excluding forex gains on non-US denominated debt, profit rose from $8.3 billion to $9.6 billion in the quarter, up 15.2% and 17.9% for six months. 2/
However, much of the increase came from income on Allegheny's acquired assets in October and from BRK's now 80% investment in Pilot, up from 38.6% (5 months consolidated and 1 month equity method). Higher interest income on a larger cash balance further drove much of the gain. 3/
Read 23 tweets
Christopher Bloomstran Profile picture
Apr 22, 2023
Ark Invest, the bucket shop EFT promotional “investor,” the one whose founder CEO told a CNBC audience a year ago that ARKK would earn 50% a year (correct if she said minus), is back with its 3rd annual Tesla “research report” with a fresh $2,000 price forecast by 2027. Amen. 1/
That’s a $7 trillion market cap, or a mere 21% of the S&P 500's current cap. MSFT, AAPL, GOOGL, AMZN and META have a combined $7.7 trillion market cap today, up from $6.2 trillion at yearend. From today’s $165 share price, $2,000 in 4.75 years is 69% per year. Makes sense. 2/
Zero mention of expected hyperinflation in the report. Cue the class action lawyers. Cue @SECEnfDirector. The bull case is $2,500 per share, 25% higher than the base case and a market cap of nearly $9 trillion, or 26% of the current S&P and up from 1.5% of the index now. 3/
Read 25 tweets
Christopher Bloomstran Profile picture
Jan 21, 2023
35 FACTS NOT LIKELY FOUND ON ARKK YET UNRELEASED 12/31/2022 FACTSHEET

1. Loss from 2/12/2021 Peak: -80.1%
2. CNBC Appearances Since 2/12/2021 Peak: 23
3. Cumulative NET Assets Raised Since 10/31/2014 Launch: $17.1 Billion ($14.5B in 2020 and 2021)
4. Assets at 12/31/2022: $6.0B
5. Cumulative Management Fees Earned: $300 Million
6. Market Value at 2/12/2021 Peak: $29 Billion
7. Dollar Loss Since Peak: $23 Billion
8. Annual Return vs S&P 500 Since 10/31/2014 Launch: 5.4% vs 10.3%
9. $ARKK Price 12/31/22: $31.24
10. Date Last $31.24: 08/22/2017
11. AUM at 8/22/17: $450 million ($15m @ 1/1/17)
12. Net Inflows Since 8/22/17: $16.9B (Out of $17.1 Since Inception)
13. Percent of ALL DOLLARS Invested in ARKK Since 10/31/2014 Inception Losing Money: 98%
13a. Yep
Read 8 tweets
Christopher Bloomstran Profile picture
Dec 25, 2022
Who could forget the C-Suite high jinks when Elon and CFO Zach Kirkhorn invested $1.5 billion in Bitcoin and added the titles "Technoking of Tesla" and "Master of Coin?" Since the March 15, 2021 rebranding, Tesla and Bitcoin are down 48% and 70%, respectively. Great fun.🎄 1/
While the Bitcoin position and the Tesla outside shareholders have suffered mightily, how have the INSIDERS fared? If you guessed considerably better you are correct. Collectively the brass at Tesla appear to have unloaded 126 million Tesla shares for more than $41 billion. 2/
While Elon's sales are the preponderance of that, selling at an average share price of $325 is pretty good when measured against the present $123.15 price. That's a current bid 62% below the average sale. Nearly all shares were gifts from the board, not bought out of pocket. 3/
Read 15 tweets

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