Why Did Buffett Buy Formula One Group?

The Oracle of Omaha splashed out $41.5 billion in net share purchases during the first quarter, with several brand new acquisitions added to the ever-growing portfolio at the Nebraska-based investment fund.

 

Many of the new names Buffett saw fit to include weren’t necessarily that surprising. The Wall Street legend increased his exposure to the energy sector with a big gamble on US hydrocarbon outfit Occidental Petroleum, while bets on IT firm Hewlett-Packard and investment bank Citigroup were more or less in line with his investment strategy so far.

However, one particular buy did stand out as unusual – even though he had already owned the company before.

 

That buy was the Formula One Group, which Buffett spent $500 million on to acquire another 5.6 million shares.

 

But why did Buffett include FWONA as part of his latest bonanza? And what exactly did he see in this little-known company?

 

The Formula One Group is an association of companies involved in the promotion and commercial management of the world’s most prestigious international motorsport event.

 

The business organizes its premier fixture, the FIA Formula One World Championship, and oversees various aspects of the operation, including broadcasting, advertising rights, as well as some elements of the sport’s infrastructure management.

 

For much of its history, the business was under the control of maverick British entrepreneur Bernie Ecclestone, who built the sport up into the multibillion-dollar enterprise it is today.

 

However, in 2017, Ecclestone sold his stake in the operation to the US firm Liberty Media (NASDAQ:LMACA). The company is now run on a day-to-day basis by Stefano Domenicali, with Ecclestone retaining the title of “chairman emeritus.”

 

 

The NASDAQ Composite had a pretty horrendous start to the year. The tech-heavy index saw its price fall by 21% through the last 12 months, with some of its most famous brands – such as Meta Platforms and Netflix – losing more than half their value over the period.

 

At the same time, the Formula One Group has exploded in value. The stock is up 36% since June 2021, and, although the company also had a fairly flat 2022 – it’s down just over 8% – it’s still outperforming the NASDAQ, which has dropped almost 30% so far this year.

 

To be sure, this strong price momentum will have helped persuade Buffett that the stock has legs, but there’s a lot more to the company than just its showing on the financial markets.

 

For instance, the business is widely considered a veritable cash cow, with the firm generating an annual cash from operations of $481 million as of December 2021.

 

Furthermore, Buffett likes to say you should “never bet against America.” Indeed, as you’ll see, Formula One has actually started betting big on America, making it a key part of its future plans.

 

Formula One is kind of unique. The sport is not dissimilar to a traveling circus, pitching up in one town one week, then moving straight on to another the next. It’s a global endeavor in every sense of the word, and this set-up also confers plenty of benefits for the sport as well.

 

However, this arrangement comes with one fairly serious drawback: the Formula One tour is especially vulnerable to geopolitical events – events that are inherently unpredictable and entirely out of its control.

 

The ongoing conflict between Russia and Ukraine is one situation concerning everyone in the industry right now. The war has already taken its toll on the sport this season, with the Sochi Grand Prix having been canceled for what looks like an indefinite period.

 

That decision by stakeholders was no doubt an easy one, given the horrendous humanitarian crisis the war has unleashed. However, the commercial consequences are still real, and any other cancellations of a similar kind will impact FWONA in increasingly more arduous ways.

 

Another potential problem with the Formula One Group is its complicated corporate structure. Liberty Media’s interests are attributed to a number of tracking stocks, which are securities designed to reflect the fortunes of a group of businesses rather than just the performance of one business as a whole.

 

The issue with this is that the tracking stocks are not independent legal entities in themselves, and Liberty Media can make inter-company transactions at will, ultimately hampering the ability of investors to assess the company’s health in any meaningful way.

 

Liberty Media appears to be executing its Formula One expansion plans pretty well at the moment. The company added a number of extra races to its calendar recently, and increased spectator engagement with its revamped US Grand Prix offering too.

 

Indeed, the sport has often been tagged as a Euro-centric pastime, but the success of last year’s race in Texas appears to be turning that assumption on its head. The spectacle sold out within 40 minutes of tickets going on sale, eventually attracting a total of 400,000 fans to the racetrack. Furthermore, it was estimated that around 70% of spectators were attending their first-ever Formula One Grand Prix, which bodes well if more meets in the US are scheduled for the future.

 

On the financial front, FWONA is really starting to take off. The firm’s EBITDA has grown 403% year-on-year, while its revenue is also up a massive 80% as well. However, its PE ratio is steep, coming in at a lofty non-GAAP multiple of 169x.

 

The Group doesn’t yet pay a dividend of any kind, making it an outlier when it comes to a typical Buffett stock. However, the firm is buying back its own shares, which should help salve investor worries that it’s not returning capital at a fast enough rate. In fact, Liberty Media announced it would repurchased 348 thousand FWONA shares between February 1st and April 30th.

 

By definition, Formula One has no like-for-like competitors. That makes it both attractive and risky. The brand is solid, and its roll-out into the American market can only be positive. It does have a high valuation, though – but, with no immediate peers, only time will tell how high that really is.