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 ?
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 ?
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.
Working capital expansion is another corollary of their business expansion... guess this counts as incremental capital too.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.
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.
I hear EV / EBIT (DA) come up a lot -
Thanks - may I ask where you got the data from?
OK thanks!From my bloomberg terminal...
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.
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.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 noticed something inadvertently when doing my own analysis of PMV since we have discussed it.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.
Apologies... I meant to type Notre Dame last night. I must have been tired.Buffett's speech from Monte Carlo if anyone is interested or has not read it:
http://www.tilsonfunds.com/BuffettNotreDame.pdf
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.
... 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.
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