Present Value of Future Cash Flows

[doctorj]

Im personally very keen to be able to find and identify any business that is trading at a value less then its cash holding. Does anyone have any quick method of scanning to identify possible culprits that can then be weedled down properly ?

The easiest way to do it is via a bloomberg terminal.... Unfortunately I'm not aware of a free/affordable way to do it.

Attached is a list of the all companies that had a market cap, as at close of trade today, less than the sum of their cash/near cash items as at the date of their last filing. I've also included the cash burn where available. The data may be a bit patchy, but you get what you pay for

 

[craft]

Im personally very keen to be able to find and identify any business that is trading at a value less then its cash holding. Does anyone have any quick method of scanning to identify possible culprits that can then be weedled down properly ?

Hi R&R

I run a cash per share(from last report) greater then price(current) per share scan and got about 225 companies – problem is they nearly all seem to either have cash burn or need the cash for operations. Scanning for ‘Idle’ cash in a profitable business (such as PMV was in the GFC) is a bit trickier.

 

[craft]

Im personally very keen to be able to find and identify any business that is trading at a value less then its cash holding. Does anyone have any quick method of scanning to identify possible culprits that can then be weedled down properly ?

Looks like I crossed with DctorJ last time.

Here’s another list to sift.

If you take only profitable companies and adjust the cash by the working capital (absolute) to try and get idle cash these companies come up. I know some have had capital returns since report date so the scan will be out because of that (as well as jujt bad data generally) but perhaps there’s a flower in the weeds there somewhere.

AGG
AYE
JRL
PSA
IRM
TYO
WEC
ATI
ESV
DSQ
MUE
GLL
RIS
LMC
EXS
DMX
EAU
TWT
MSC
MMX
ATM

 

[Ves]

Ah, "Economic Goodwill" is the term I needed. I believe Oddson once posted an article on a similar subject. Something from gurufocus that was about Walmart and Buffet's method of calculating net tangible worth. It appears there may be more to learn from that article.

 

[RandR]

Hi R&R

I run a cash per share(from last report) greater then price(current) per share scan and got about 225 companies – problem is they nearly all seem to either have cash burn or need the cash for operations. Scanning for ‘Idle’ cash in a profitable business (such as PMV was in the GFC) is a bit trickier.

Thanks, yeah, I assumed any scan directed towards finding such companies would throw up a lot of turnips. Ive got zero interest in buying a company at cash value thats operating negative cashflow. There is probably no better way for myself then to run a scan like youve described and then cross them off one by one by going through the individual companies. Perhaps filtering by some basic profit ratios could weedle a list a little further.

 

[Ves]

I feel like I've found the tip of a really big iceberg in this last week or two. There's a lot to go over, and the issue of incremental capital is not always straight forward (ie. service companies that require very, very little capital to expand). DTL is possibly the first to come to mind in this respect. It would appear on first glance that their "capital", since they have very little in the way of physical assets, revolves around expanding their skilled workforce as their market share expands, or indeed improving revenue per employee if possible. It seems hard to imagine return on invested capital in this situation. The report will be released tomorrow. Perhaps it will help me if I give it a thorough read.

Working capital expansion is another corollary of their business expansion... guess this counts as incremental capital too.

 

[odds-on]

Ah, "Economic Goodwill" is the term I needed. I believe Oddson once posted an article on a similar subject. Something from gurufocus that was about Walmart and Buffet's method of calculating net tangible worth. It appears there may be more to learn from that article.

Ves,

I personally recommend reading articles by Geoff Gannon. He has his own blog and he regularly contributes to gurufocus. He seems to have spent alot of time thinking about the WB letters and using it to analyse companies, he usually has decent examples in his posts.

Also do google "NYU Stern Prof. Aswath Damodaran", his website has lots of information. For example working capital requirements by sector.

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/wcdata.html

Hope the above helps. Apologies if you have seen it all before. Please note even though I post all of the above I am very much a back of an envelope fundamental investor!

Cheers

Oddson

 

[Ves]

Thanks very much Oddson! Looks like there is a ton of reading there - all helpful.

You should keep looking for this sort of thing, you never know when something will click and your investment analysis starts to take the next step. I do a lot of "back of the envelope" calculations, but I am beginning to expand on that more recently.

 

[Ves]

I hear EV / EBIT (DA) come up a lot - and it comes up again on the blog Oddson mentioned above. Is there any way (preferably free) that I can use to run a scan for this multiple on the Australian market? FYI - I currently use Commsec as my broker - I couldnt see any search for either of these variables.

 

[doctorj]

I hear EV / EBIT (DA) come up a lot -

See attached

 

[Ves]

See attached

Thanks - may I ask where you got the data from?

 

[doctorj]

Thanks - may I ask where you got the data from?

From my bloomberg terminal...

 

[Ves]

From my bloomberg terminal...

OK thanks!

 

[craft]

Some back of the envelope numbers for PMV to illustrate how intangibles on the balance sheet distort the economic reality and usefulness of ROE.

Market Cap: $770M
BRG Investment: $175M
Cash: $300M

Market Cap less Cash and BRG = $295M + $135M debt gives EV of $430M

Forecast guidance for Just Group = EBIT of 80M.

EV/EBIT of 5.4 times on subdued retail market profit. Average profitability suggests 95M EBIT in more normal conditions.

As I see it PMV is cheapest retail asset comparatively, but by no means the worst. Just generates a normalised EBIT margin on funds employed of 43%. Has 5 proprietary clothing brands with big online presence that will do O.K over time plus Peter Alexander and Smiggle which have bright prospects. PMV has a cashed up balance sheet and about 230M in franking credits to boot.

Mis-understood and out of fashion – produces buying opportunities. Mind you it’s not as cheap now as in the GFC where you could buy it for less than its cash holdings.

Of course I could be wrong because valuing PMV using some other popular methods which would feed in a ROE of around 5%, means it’s a dog stock – but that doesn’t make sense to me, so they sell – I buy.

The cat’s probably out of the bag to an extent with the latest report but I still get a back of the envelope EV/EBIT from the reported numbers of 6.5 @$5.60, still pretty cheap really considering the context of the retailing cycle and that Smiggle and Peter Alexander offer Premier something very rare in retail at the moment which is organic growth within a profitable franchise.

The cost control in this report is very good. Mark McInnes is worth his weight in harassment suits.

Negotiating rents with these guys is going to be even harder going forward as they have shown no reluctance to shut down where rent is not justified.

I think I had better start running the ruler over DJS in anticipation that Sol Lew and Mark Mc would be.

 

[robusta]

Must admit I took a glance at the low ROE of this one and immediately moved on, perhaps it deserves a deeper look if only to learn for next time.

 

[Ves]

Negotiating rents with these guys is going to be even harder going forward as they have shown no reluctance to shut down where rent is not justified.

This has been a common theme in a lot of annual reports this year. Retail rents are sky high against a back drop of sub-dued profits (a media euphemism for "falling") in the sector (and other sectors). It will be interesting to see what happens when the rent bubble pops (Westfield shares could get much cheaper). Something has to give. I would be interested to see a ratio of average leasing expenses as a proportion of revenue for the sector. I would say it would be near the high-end of the scale on historical terms. Not sure where if this information is easily found, however.

Following PMV over the last few weeks and waiting for the result before I made a purchase decision has taught me a lot about how the human mind (at least my poor old specimin ) has the potential to "anchor" thoughts against previous circumstances (in this case price - OMG it was $5!) and lose perspective vis a vis reality. The question should be "How much do I think it is worth?" and then "Is the price on offer reasonable when taking into account my assumptions?"

I find I often get those two questions around the wrong way or plain confused with other "emotional" questions in the heat of battle (and that is what reporting season is), and anchored thoughts such as "it was 10% cheaper on Thursday and 20% last month" come into play, when they are really irrelevant unless you are a technical trader.

I think sometimes you just need to bite your tongue and realise you cannot pick the very best bargain every time, some times settling for "cheap enough"*** is still very good in the long run, especially with companies that have the potential to re-invest incremental capital at high rates of return. Maybe others do not have this problem, but I need to remember that investing is not an exact science, it's an art-form of sorts (although I will take Beethoven or Liszt any day thanks!).

What I really need to do (and I am slowly doing), and this will come with experience, and time in the game, is thoroughly research a heap of companies (as Buffett says A to Z) and have a list ready to pounce when opportunities come along. This is probably better than looking at what is cheap at the moment because your initial research has no reference to current market prices which could get me out of the "anchoring" loop. The saying goes that an experienced investor will know exactly how to fill a portfolio during a market crash and the inexperienced investor will run around like a headless chook hoping the dart hits the right part of the dartboard.

The question of whether I needed to see the 2012 results to make a decision is another valid one, but I don't think it is as important as the first issue.


*** Please do not confuse "cheap enough", with changing your valuation criteria to make it look cheap just because the price has increased. I mean a fair or reasonable price for a great company, rather than a bargain price. The opposite is obviously true for companies that have halved in price overnight (ie. value traps).

 

[Ves]

Some back of the envelope numbers for PMV to illustrate how intangibles on the balance sheet distort the economic reality and usefulness of ROE.

Market Cap: $770M
BRG Investment: $175M
Cash: $300M

Market Cap less Cash and BRG = $295M + $135M debt gives EV of $430M

Forecast guidance for Just Group = EBIT of 80M.

EV/EBIT of 5.4 times on subdued retail market profit. Average profitability suggests 95M EBIT in more normal conditions.

As I see it PMV is cheapest retail asset comparatively, but by no means the worst. Just generates a normalised EBIT margin on funds employed of 43%. Has 5 proprietary clothing brands with big online presence that will do O.K over time plus Peter Alexander and Smiggle which have bright prospects. PMV has a cashed up balance sheet and about 230M in franking credits to boot.

Mis-understood and out of fashion – produces buying opportunities. Mind you it’s not as cheap now as in the GFC where you could buy it for less than its cash holdings.

Of course I could be wrong because valuing PMV using some other popular methods which would feed in a ROE of around 5%, means it’s a dog stock – but that doesn’t make sense to me, so they sell – I buy.

I noticed something inadvertently when doing my own analysis of PMV since we have discussed it.

I think for the last 10 years I had an average ROIC of about 41%.

I am curious if you treated the PP&E on the balance sheet the same as me. I PP&E in the denominator "net assets employed figure" at cost rather than written down value. If I did not do this the ROIC would obviously be much higher. I thought it made sense because it would be closer to the replacement cost of those assets. However, you could get technical and adjust them for inflation over the years, but that seems like pointless complexity at this stage.

I also included about $30-45 million operating cash in my calculations for each year after PMV took over JST.

I am also using EBIT as my numerator (I know some people use EBIT * (1- tax rate)). EBIT / (Total assets - excess cash - intangible assets - non-interest bearing liabilities ) = ROIC

The reason I ask is because I am interested if we get a similar end result using different methods.

 

[Ves]

Buffett's speech from Monte Carlo if anyone is interested or has not read it:

http://www.tilsonfunds.com/BuffettNotreDame.pdf

 

[Ves]

Buffett's speech from Monte Carlo if anyone is interested or has not read it:

http://www.tilsonfunds.com/BuffettNotreDame.pdf

Apologies... I meant to type Notre Dame last night. I must have been tired.

 

[Ves]

Somewhere at the start of the thread craft provided some quotes that indicated that Buffett used DCF analysis to calculate intrinsic value.

The speech transscript that I linked above has another on the topic that may be of interest:

If you can tell me what all of the cash in and cash out of a business will be, between now and
judgment day, I can tell you, assuming I know the proper interest rate, what it’s worth. It doesn’t make any difference whether you sell yo-yo’s, hula hoops, or computers. Because there would be a stream of cash between now and judgment day, and the cash spends the same, no matter where it comes from. Now my job as an investment analyst, or a business analyst, is to figure out where I may have some knowledge, what that stream of cash will be over a period of time, and also where I don’t know what the stream of cash will be. I don’t have the faintest idea of where Digital Equipment will be in next week, let alone the next 10 years. I just don’t know. I don’t even know what they do. And I never would know what they did. Even if I thought I knew what they did, I wouldn’t know what they did. Hershey bars I understand.

So, my job is to look at the universe of things I can understand – I can understand Ike Friedman’s jewelry store – and then I try to figure what that stream of cash, in and out, is going to be over a period of time, just like we did with See’s Candies, and discounting that back at an appropriate rate, which would be the long term Government rate. [Then,] I try to buy it at a price that is significantly below that. And that’s about it.

Also really liked this passage as I have been putting more thought into this side of my investing than any other in recent times:

... Incidentally, I would say that almost everybody I know in Wall Street has had as many good ideas as I have, they just had a lot of [bad] ideas too. And I’m serious about that. I mean when I bought Western Insurance Security selling at $16 and earning $20 per share, I put half my net worth into it. I checked it out first – I went down to the insurance commission and got out the convention statements, I read Best’s, and I did a lot of things first. But, I mean, my dad wasn’t in it, I’d only had one insurance class at Columbia – but it was not beyond my capabilities to do that, and it isn’t beyond your capabilities.

Now if I had some rare insight about software, or something like that – I would say that, maybe, other people couldn’t do that – or biotechnology, or something. And I’m not saying that every insight that I have is an insight that somebody else could have, but there were all kinds of people that could have understood American Express Company as well as I understood it in ‘62. They may have been...they may have had a different temperament than I did, so that they were paralyzed by fear, or that they wanted the crowd to be with them, or something like that, but I didn’t know anything about credit cards that they didn’t know, or about travelers checks. Those are not hard products to understand. But what I did have was an intense interest and I was willing, when I saw something I wanted to do, to do it. And if I couldn’t see something to do, to not do anything. By far, the most important quality is not how much IQ you’ve got. IQ is not the scarce factor. You need a reasonable amount of intelligence, but the temperament is 90% of it.

My bold.

I hope people find these quotes as enlightening as I do!