Weekend Reading

7 October 2016 | by Paul Perrino, CFA

A summary of this week’s best articles. Follow us on Twitter (@INTRINSICINV) for similar ongoing posts and shares.

The Auto Industry’s Real Challenge (Evan Hirsh, John Jullens, and Ganesh Kalpundi, Strategy + Business)

Since Tesla unveiled the auto-pilot feature, other car manufacturers have been investing hundreds of millions of dollars into developing fully autonomous vehicles. Some estimate this will take 5 to 10 years before the technology is available for purchase. This isn’t the only challenge car manufacturers face. Consumers are demanding a better digital experience in their cars, which requires a different skill set than traditional auto manufacturers. There continues to be increasing regulations for lower emission vehicles across all product lines, which can be difficult on SUVs and light trucks. And, “automakers must scale up geographically, because virtually all the industry’s growth is, and will be, in emerging markets.” One solution to overcoming these issues is to segregate and specialize. “The second step is for companies to clearly decide what their strength is — for example, building large trucks and SUVs, powertrains, or some other technology integration — so that they put their resources into the scale and capabilities needed to thrive in their chosen area.”

How will Twitter’s suitors reap its value? (Richard Water and Tim Bradshaw, @RichardWaters and @tim, Financial Times)

Fifteen months after Jack Dorsey returned to Twitter, there has been little change. Last week, take over rumors by Google and Saleforce started to swirl. But on October 5th, Recode reported that Google, Disney and Apple would all pass on making an offer. After Salesforce lost the bid for LinkedIn to Microsoft, they could be on the search for another social network to integrate into their software. Twitter could provide “real-time information it can supply to corporate marketers about millions of their consumers.”

Understanding Deutsche Bank’s $47 Trillion Derivatives Book (Mike Bird, @Birdyword, WSJ)

Reminiscent of before the financial crisis, hard to value assets on Deutsche’s balance sheet is causing some investors to pause. The share price of the bank fell more than 48% this year. These risky assets are called Level 3 assets. Investors compare Level 3 assets to their Tier 1 (safe) assets to help determine the risk of the bank. JPM analyst determined Deutsche’s ratio is 72%, compared to an average of 38% for 12 global banks. But that isn’t the only thing concerning analysts. “For Deutsche Bank, there is a list of greater concerns.”

Liberty Media: Better Than Berkshire (Andrew Bary, Barron’s)

John Malone has a stellar record investing in cable-TV, so much so that he’s been outperforming the Oracle from Omaha for the past decade. Similar to Buffet, Malone takes the approach of serving as the capital allocator and leaving day-to-day operations to be run by management. “But unlike Buffett, who famously has said the holding period for Berkshire businesses is ‘forever,’ Malone and Maffei will sell if the price is right.” One skill Malone has developed is his willingness to sell businesses and shed assets in the mostax-efficientnt manner, thereby maximizing the value he creates for his shareholders.

Ensemble Capital’s clients own shares of Apple (AAPL) and Google (GOOGL).

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