Oil price discussion and analysis

[YOUNG_TRADER]

Re: OIL AGAIN!

Hmmm I've got a value for that company Michael, but I'll wait as the question was not directed at me,

 

[michael_selway]

Re: OIL AGAIN!

Hmmm I've got a value for that company Michael, but I'll wait as the question was not directed at me,

Hehe yep, wait for "Realist's" response first

thx

MS

 

[Realist]

Re: OIL AGAIN!

Lets say an Aussie listed company with 100mil shares (fully diluted) can earn 100mil in NPAT per annum with near 100% certainty but no growth (so dividends are possible). Also assuming no disaster world events such as Terrorism, SARS, etc, whats the most you are willing to pay for each share roughly?

First I will assume they do not have significant debt because that changes any valuation. Next I will assume they will make $100M NPAT per year for many years and have done so before with some slow growth (to cover inflation at least).

The way I work the market cap out quickly for a company that continuosly makes $100M per year NPAT is 4 times 5 years NPAT so $2,000M is my quick estimate.

$2 Bill Market cap so I'd pay roughly $20 a share.

 

[michael_selway]

Re: OIL AGAIN!

First I will assume they do not have significant debt because that changes any valuation. Next I will assume they will make $100M NPAT per year for many years and have done so before with some slow growth (to cover inflation at least).

The way I work the market cap out quickly for a company that continuosly makes $100M per year NPAT is 4 times 5 years NPAT so $2,000M is my quick estimate.

$2 Bill Market cap so I'd pay roughly $20 a share.

Hi thx for that, yep assuming what you mentioned as well

But when you say "4 times 5 years NPAT" what do u mean exactly? like how did u coem up with those numbers?

thx again

MS

 

[Realist]

Re: OIL AGAIN!

Right, I am back and 3/4 p*ssed after watching the rugby bloodbath at the pub.

First of all was I correct?

What is your answer?

 

[Realist]

Re: OIL AGAIN!

when you say "4 times 5 years NPAT" what do u mean exactly? like how did u coem up with those numbers?

I mean what I say. Find a company that has made profits the last 5 years. I wont buy anything else.

Add up those last 5 years profits. Then multiply by 4.

That is the approximate market cap.

If they are growing fast and a truly great prospect add a little to the market cap.... If they aint growing much subtract a little.

 

[michael_selway]

Re: OIL AGAIN!

I mean what I say. Find a company that has made profits the last 5 years. I wont buy anything else.

Add up those last 5 years profits. Then multiply by 4.

That is the approximate market cap.

If they are growing fast and a truly great prospect add a little to the market cap.... If they aint growing much subtract a little.

oh ok, its just a very different thought, esp multiply by 4, seems out of nowhere that number

anyway mine conincidently same asnwers as your about $20 per share

Bascially the hidden assumption is the current risk free interest, about 5% return p.a. For example if u put $1 in the bank u will get 5c interest, if u put $20 in the bank you will get $1 interest per annum

So thats why for this example since each share can earn $1 per share in NPAT every year (assumption was "near certainty" or "risk free"), thus peopel will be willing to pay up to about $20 for each share (PE of 20 = 5% return)

If the the market was only $10, people will quickly buy it up to around $20, beacuse at $10 they are getting 10% return pa, more than 5% in the bank

Obiviously in the real ASX, there are risks (external and company specific) and peopel have to factor that in and so most likely pay under 20, maybe 18 or so, depending on the risks of course. But essentially depends on the current risk free interest rate, thats the key

also yeah if its EPS grows (or downgrades) people might be willing to pay more/less than $20 per share, depending how much its forecast growth next yr or 2 is, and the risks to those growth in EPS forecast etc

thx

MS

 

[michael_selway]

Re: OIL AGAIN!

If the current interest rate was 10% pa, the max ill pay for that stock will be about $10

However you will still be paying $20? which will earn u $1 pa, but if u put that $20 in the bank it can earn u $2 pa?

Since they have no growth and can sustian earnings, they will likely pay most of their EPS out as dividends

thx

MS

 

[Realist]

Re: OIL AGAIN!

oh ok, its just a very different thought, esp multiply by 4, seems out of nowhere that number

anyway mine conincidently same asnwers as your about $20 per share

What I do is find a company that has made a profit the past 5 years with regular growth. I don't use foward or projected earnings, I use facts not speculation.

Say the last 5 years NPAT are roughly: 900K 950K 1000K 1050K 1100K

Then I add up the previous 5 years NPAT - and multpily by 4. That gives you a market cap based on an average PER of 20 on the last 5 years earnings.

You see a PER should never be judged on 1 years worth of earnings. One great year can make an average company look cheaper than it really is, and one great year may have been for some unknown and possibly sinister reason (some weird sale, cooking the books who knows). If a company has 5 great years in a row well it would have been no fluke.

Now a PER of 20 is higher than the market average of around 15. But your company is growing and solid - you pay a slight premium for that. And 20 is an indication of the most you'd pay not an average price.

Where did I get this from? - Graham initially, who else, he always says look at 5 years earnings, 10 years if possible. Never just 1.

And PER's are hugely important of course in valuing a company.



And that brings me back to the original question. How much importance do you place on NTA or debt?

PER's can be misleading in valuing a company, a company with huge assets and no debt is obviously worth alot more than one with huge debts and little assets - regardless of their PER's or earnings power.

 

[rederob]

Re: OIL AGAIN!

And that brings me back to the original question. How much importance do you place on NTA or debt?

PER's can be misleading in valuing a company, a company with huge assets and no debt is obviously worth alot more than one with huge debts and little assets - regardless of their PER's or earnings power.

And I suggest those are just the tip of the iceberg of fundamental analysis.
If it was that easy for every stock we would all be quite rich and not looking here for inspiration!

 

[michael_selway]

Re: OIL AGAIN!

And that brings me back to the original question. How much importance do you place on NTA or debt?

PER's can be misleading in valuing a company, a company with huge assets and no debt is obviously worth alot more than one with huge debts and little assets - regardless of their PER's or earnings power.

Hi Realist

Thanks for your thoughts

ok imo, EPS and forecast EPS(DPS) the most important, the NTA and Debt are "risks" to the earnings amoung other risks ofcourse, so i have to adjust the PER (up or down) to reflect that

Btw what do u think of the below

If the current interest rate was 10% pa, the max ill pay for that stock will be about $10

However you will still be paying $20? which will earn u $1 pa, but if u put that $20 in the bank it can earn u $2 pa?

Since they have no growth and can sustian earnings, they will likely pay most of their EPS out as dividends

thx

MS

ALso another scenario about future EPS forecast

Lets say last 5 yrs it earns 100mil NPAT, but next yr forecast is 200mil NPAT(with near 100% certianty), , and after that 300mil NPAT (with near 100% certianty), then after that steadies at 300mil NPAT indefinetly (with near 100% certianty).

Assuming same facts apply from ealier. whats the max would u be willing to pay for it now?

thx

MS

 

[Realist]

Re: OIL AGAIN!

If it was that easy for every stock we would all be quite rich and not looking here for inspiration!

It is easy. Fundamental analysis is a get rich slow scheme.

It takes decades before you can retire filthy rich, not days unfortunately.

So I've got plenty of time to wait and post tripe here.

 

[Realist]

Re: OIL AGAIN!

Originally Posted by michael_selway
If the current interest rate was 10% pa, the max ill pay for that stock will be about $10

However you will still be paying $20? which will earn u $1 pa, but if u put that $20 in the bank it can earn u $2 pa?

Since they have no growth and can sustian earnings, they will likely pay most of their EPS out as dividends

thx

MS

Yeah, the way I look at it houses are a good investment when interest rates are higher because houses become cheaper - people can only afford so much in mortgage payments, and by definition if someone can afford $1000 a week in mortgage payments they can borrow less when interest rates are higher.

Why buy a house though when you're paying high interest rates? Because you are paying off your mortgage over 30 years and interest rates will in all likelihood come down, making your payments easier. You get a cheap house and the likelihood of easy payments in a few years.

So how do interest rates affect shares? Hmm negatively I would think, Graham would move more money into bonds and have less in shares - because bonds are safer.

If you can get the same return from a term deposit as you can on shares then I'd take the term deposit any day - no risk!

So I agree with you I'd pay less for a company when interest rates are high.

How much less - well I'd adjust the 5 years times 4 to maybe 5 years times 3.5 even 3.

I have never invested when interest rates are high, I may find out soon though...

When interest rates rise I'd have less in shares, more in the bank - simple as that. So because I own less shares I'd be more discerning about what shares I bought, your company where we agreed the most we'd pay is $20 I'd be tempted to pay say $15 at the most.

There are no foolproof sharemarket calculations that work in all cases - common sense always comes first over any ratio.

 

[Realist]

Re: OIL AGAIN!

Also another scenario about future EPS forecast

Lets say last 5 yrs it earns 100mil NPAT, but next yr forecast is 200mil NPAT(with near 100% certianty), , and after that 300mil NPAT (with near 100% certianty), then after that steadies at 300mil NPAT indefinetly (with near 100% certianty).

Assuming same facts apply from ealier. whats the max would u be willing to pay for it now?

$20 is what I would pay at the most!!

I may miss out on a good deal of course.

But there is no such thing as a 100% certainty of a company tripling their NPAT in 2 years.

Projected earnings are as likely to be wrong as they are to be right.

Analysts can only predit so much, they can not predict that war breaks out between China and Taiwan and there is a trade freeze on China and your company (that relies on China) goes under. The shares die, you paid too much, I didn't. You lose more than me.

But lets say they were right and your company does triple its NPAT, people that buy that company make big profits amd I miss out, those people are highly likely to buy a similar company where the projections did not work out and they make a loss. Over time I will do better being safe, than people who punt on projections of stellar growth.

 

[michael_selway]

Re: OIL AGAIN!

$20 is what I would pay at the most!!

I may miss out on a good deal of course.

But there is no such thing as a 100% certainty of a company tripling their NPAT in 2 years.

Projected earnings are as likely to be wrong as they are to be right.

Analysts can only predit so much, they can not predict that war breaks out between China and Taiwan and there is a trade freeze on China and your company (that relies on China) goes under. The shares die, you paid too much, I didn't. You lose more than me.

But lets say they were right and your company does triple its NPAT, people that buy that company make big profits amd I miss out, those people are highly likely to buy a similar company where the projections did not work out and they make a loss. Over time I will do better being safe, than people who punt on projections of stellar growth.

Whats you say is true

But thats also how we differ i think, and yes in alot of cases u will miss a great growth company, like above if those EPS did in fact occur 300 mil indefinitely would mean 60 max eventually (we both agree on this). But what i would be willing to pay now maybe 40 (which is 1 yr in advance only)

Its true that its not 100% certaintly, but close to it, and one shodul give it some credit atleast, u woudl think?

Basically, looking at past earnings isnt everything, current and future EPS is much more important

For example, a merger or takover or acquistion is announced, why does price go up? Why are people willing to pay more now after the news? According to what you said above u will still pay the same based on the last 5 yrs NPAT*4 etc?

The reason is because the new M&A actiavity has changed to future, i.e. its should be now more EPS accreditive than before, ie forecast EPS increases due to synergies etc

What do u think about this M&A point, are u willling to pay more after the news?

thx again

MS

 

[Realist]

Re: OIL AGAIN!

What do u think about this M&A point, are u willling to pay more after the news?

Hi Michael, the answer is No.

It does not matter to me what the reason is. My reason was just an example.

I pretty much ignore future earnings forecasts. Much like I ignore anyone's tips on the Melbourne Cup.

I look at facts, not forecasts.

For every great opportunity I will miss I can show you just as many sour opportunities I'd avoid.

My first aim when investing : don't lose!!

If you are paying $40 a share for a company that has made $100M NPAT in our example you are paying up to $25 too much = maybe 62% too much.

Not wise.

 

[michael_selway]

Re: OIL AGAIN!

Hi Michael, the answer is No.

It does not matter to me what the reason is. My reason was just an example.

I pretty much ignore future earnings forecasts. Much like I ignore anyone's tips on the Melbourne Cup.

I look at facts, not forecasts.

For every great opportunity I will miss I can show you just as many sour opportunities I'd avoid.

My first aim when investing : don't lose!!

If you are paying $40 a share for a company that has made $100M NPAT in our example you are paying up to $25 too much = maybe 62% too much.

Not wise.

Return (1/pe) is one thing, Risk is the other (Time or future is the 3rd), so as long as risk is low in the above example, i would be willing to pay up to $60 if it was 100% certain. if 90% certainn 55 maybe, 80% certain 50 maybe etc, see where im getting at? Depends on what you (or the market) think the Risks (upside or downside) to the Return is in the future.

One shoudl look at more than just 1 yr forecast but atleast 3 imo, 5-10 is optimal. I think most brokers use 10.

Also your point about not looking at forecasts, fine. Thats a fair opiion in that regard

But all i know that the general market looks at forecats for sure, and thsu M&A news will usualy mean a jump in prices to reflect the change in the future (forecast EPS). Imo its important to understand how and why the market reacts to news and annoucements.

anyway thanks for sharing your ideas! its been great knowing

thx

MS

 

[Smurf1976]

Re: OIL AGAIN!

Yeah, the way I look at it houses are a good investment when interest rates are higher because houses become cheaper - people can only afford so much in mortgage payments, and by definition if someone can afford $1000 a week in mortgage payments they can borrow less when interest rates are higher.

Why buy a house though when you're paying high interest rates? Because you are paying off your mortgage over 30 years and interest rates will in all likelihood come down, making your payments easier. You get a cheap house and the likelihood of easy payments in a few years.

So how do interest rates affect shares? Hmm negatively I would think...

Exactly. You want low interest rates AFTER you take out the mortgage, not before.

 

[michael_selway]

Re: OIL AGAIN!

Return (1/pe) is one thing, Risk is the other (Time or future is the 3rd), so as long as risk is low in the above example, i would be willing to pay up to $60 if it was 100% certain. if 90% certainn 55 maybe, 80% certain 50 maybe etc, see where im getting at? Depends on what you (or the market) think the Risks (upside or downside) to the Return is in the future.

One shoudl look at more than just 1 yr forecast but atleast 3 imo, 5-10 is optimal. I think most brokers use 10.

Also your point about not looking at forecasts, fine. Thats a fair opiion in that regard

But all i know that the general market looks at forecats for sure, and thsu M&A news will usualy mean a jump in prices to reflect the change in the future (forecast EPS). Imo its important to understand how much and why the market reacts to news and annoucements.

anyway thanks for sharing your ideas! its been great knowing

thx

MS

Hi Realist

Actually forgot one thing, instead of using M&A (positive news) shoudl have used a negative news example

E.g. in the question where it can earn 100mil NPAT indefiently at near 100% certainty and the other assumptions etc

whats happens if all of a sudden the company issues a profit downgrade?

"Due to a sudden downturn in sales we now expect the next FY NPAT to be
around 50mil NPAT, but expect 50mil NPAT to be maintained from then on indefiently"

Woudl u still be willign to pay max $20 per share now?

My answer is no, because the future has changed ie forecast EPS has decreased significanlty, so need to revalue once again etc, price downwards of course

thx

MS

 

[Realist]

Re: OIL AGAIN!

Hi Realist

Actually forgot one thing, instead of using M&A (positive news) shoudl have used a negative news example

E.g. in the question where it can earn 100mil NPAT indefiently at near 100% certainty and the other assumptions etc

whats happens if all of a sudden the company issues a profit downgrade?

"Due to a sudden downturn in sales we now expect the next FY NPAT to be
around 50mil NPAT, but expect 50mil NPAT to be maintained from then on indefiently"

Woudl u still be willign to pay max $20 per share now?

My answer is no, because the future has changed ie forecast EPS has decreased significanlty, so need to revalue once again etc, price downwards of course

thx

MS

Ahh to easy.

Before I had even read the newspaper that morning the downgrade was announced the share price would have dropped. Many others hear news before I do. Market efficiency means the share price will dive - probably more than it needed to.

The share price may be $12 now (depending on the severity of the downgrade).

So would I now buy the company?

Hell yes, it makes $100M NPAT consistently year after year, and I get it at a discount. I'm planning to own it for the next 20 years so now is a great time to buy.

(the exception is if the NPAT becomes a loss) - if $100M becomes $40M so be it. But as I said before I do not like losses.