Tuesday, March 10, 2015

Keeping an eye on IV intrinsic value and Margin of Safety instead of Net Asset Value

A blogpost about value investing. In Dutch waardebeleggen. Warren Buffett showed Book Value in his reports, but earnings are just as important. A combination is the Graham Number. So I would like to show my fellow investors the development of the intrinsic value (in Dutch Bedrijfseconomische waarde), tracked as Graham Number. (At the moment March 2015 I am having a problem because the IV is "increasing" quickly due to holdings in dollars being tracked in euros which is falling. A "Big Mac" total would make more sense, also seen from the perspective of changing inflation.)

A second graph shows the Margin of Safety. "Whether it's sock or stocks I like to buy when something is marked down." (Mark down in Dutch = Korting). So when the price of the stocks go up the Margin of Safety goes down. When the price of stocks goes down, like last October the Margin of Safety increases, like last October. That should make investors happy and enthusiastic to buy when stock prices go down. This is to some extent a Net Asset Value chart upside down, but it never goes above 100% or under 0% even after decades.


1. Stock overview and Graham Value calculation           Yield Possible   Calculated   Total 
        "Mr. Market"   EPS / Growth Per Share Graham Margin of Graham Number
  Stocks I own Ticker #stocks Price EPS Price per Share Book Value Nr. Value Safety Value
Oil Fugro   101 € 25,00 € 2,00 8% 10% € 17,00 € 27,66 0,10 $2.991
  Agriculture Company AGCO 33 $48,00 $3,50 7% 5% $41,00 $56,82 0,16 $1.875
  Alamo Group ALG 0 $51,11 $3,80 7% 10% $30,50 $51,07 0,00 $0
Oil Atwood Oceanics ATW 75 $29,00 $5,00 17% 5% $41,00 $67,92 0,57 $5.094
  Berkshire Hathaway BRK.B 3 $144,00 $12,00 8% 12% $100,00 $164,32 0,12 $493
OIL Chicago Bridge & Iron CBI 25 $46,00 $5,80 13% 12% $26,39 $58,68 0,22 $1.467
  City Developments CDEVY 73 $7,20 $0,62 9% 5% $8,36 $10,80 0,33 $788
  Cheung Kong CHEUY 84 $19,00 $2,50 13% 5% $22,00 $35,18 0,46 $2.955
  Amcon DIT 6 $82,00 $8,00 10% 5% $90,43 $127,58 0,36 $765
  EZCorp EZPW 671 $10,25 $1,05 10% 10% $16,18 $19,55 0,48 $13.119
  Gafisa GFA 1100 $1,15 $0,64 56% 10% $6,18 $9,43 0,88 $10.377
Oil Hollyfrontier Corp HFC 44 $38,00 $3,50 9% 3% $30,00 $48,61 0,22 $2.139
Oil Lukoil LUKOY 20 $44,00 $10,00 23% 2% $106,00 $154,43 0,72 $3.089
  Markel MKL 4 $740,00 $65,28 9% 14% $544,00 $893,88 0,17 $3.576
  Reliance Steel & Alu RS 28 $56,16 $4,70 8% 6% $53,00 $74,86 0,25 $2.096
Oil Solar City SCTY 43 $50,00 $12,00 24% 70% $25,30 $82,65 0,40 $3.554
  SouFun Holdings SFUN 54 $5,95 $0,64 11% 15% $1,54 $4,71 -0,26 $254
Oil Surgutneftegas SGTZY 100 $5,60 $2,00 36% 5% $15,75 $26,62 0,79 $2.662
Oil Sasol SSL 43 $32,75 $4,19 13% 8% $25,23 $48,77 0,33 $2.097
  Sun Hung Kai Prop. SUHJY 33 $15,00 $1,60 11% 0% $19,87 $26,75 0,44 $883
  Tech Data TECD 20 $57,00 $5,50 10% 5% $56,29 $83,46 0,32 $1.669
oil Transglobe TGA 405 $2,90 $0,30 10% 10% $7,00 $6,87 0,58 $2.784
  Universal Corp UVV 37 $46,00 $4,30 9% 3% $53,90 $72,21 0,36 $2.672
  W. R. Berkley WRB 39 $50,00 $5,00 10% 15% $37,10 $64,60 0,23 $2.520
  World Acceptance WRLD 14 $83,00 $10,00 12% 15% $33,09 $86,29 0,04 $1.208
  Test CBI 15 $47,73 $5,80 12% 10% $26,39 $58,68 0,19 $880
  Bench:   10% or more cash.            Total Graham Number value of stocks     $71.126

Comments, questions or E-mails welcome: ajbrenninkmeijer@gmail.com

Wednesday, February 25, 2015

Logic to avoid mental effort?

I am not trained in logic, but something seems screwy here at second glance.



Statement 1. You can beat market research by doing your own research.

Could this be true? Maybe.

Question 2. Every investor can beat the average (simultaneously) by reading the same information?

Answer: Yes Is false, not mathematically possible.

Question 3. Why don't more people do it?

Answer: Just lazy I guess.

The key is the word "simultaneously" , it is inferred in the second question, but not actually said. The correct answer is: many investors don't even try. They are the "dumb money" picking stocks based on emotion or buying (mutual funds that track) indexes. Pointy hair guy is making an assumption: Every investor who does do her research can beat the market averages long term, based on the assumption that the other investors will remain lazy (or believe they don't stand a chance and thus don't even try.)

My conclusion: The author Scott Adams is making a point that you shouldn't even try to beat the index, because it is impossible. In reality things might not add up as neatly as it seems at first glance. As casual reader who believes in the Efficient Market Hypothesis, will just see a confirmation of her bias and laugh at how people could be so stupid as to try beating the market.

See: https://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-and-Doddsville

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Friday, February 13, 2015

IPPC prediction from 2001 almost 15 years later

1998 was a very warm year in 2001 the UN Intergovernmental Panel on Climate Change made published a report:  http://www.ipcc.ch/ipccreports/tar/wg1/pdf/WG1_TAR-FRONT.PDF

With the following prediction for temperature on page 70. I have added the rough line until today, compared to the median prediction. We are still in the range the IPCC predicted, but just. Catastrophic anthropogenic global warming (AGW) might not be happening?

Nullius in Verba.

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Money Making Machines: How to buy a dollar for forty cents

Price is what you pay $10 stock price, value is what you get $25 intrinsic (bedrijfeconomische waarde), but you need to do some simple math.

See www.moneymakingmachines.nl 

This is what they should teach in high school.

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Thursday, February 05, 2015

Virtual Reality Retail

Just got this from Daniel Schlapkohl in the same week PurplePillVR is building their second camera.
Reminds me of my thoughts on C&A and Internet in 1996. Regarding the last question: No contest, we're gonna fight to be Nr. 1 : Providing the latest fashion at highest quality/price ratio to our customers through any channel that makes cents.

"The future of retailing
Purpose
Aim of the company is, to develop Virtual Reality (VR) solutions for retailers to
support tasks in the Value Chain as well as lifting the customer experience on a new
level to secure future business.
Status quo
-Retail business in 2015 is based on two pillar, offline and online shops. German
retail business in total increased from 2000 (428 Bill) to 2014 (459 Bill) by 7.2%,
mainly because of online business, the turnover in stationary shops decreased by
2.4 %. Shopping behavior changes drastically over the last years. 48 Bill turnover
online only in Germany has become a serious retail market that can not only be
handled besides the normal business.
-Companies like Google, Microsoft and Oculus invested millions over the last years
into new technologies that combines the real and virtual world, Virtual Reality. Via
mobile devices like glasses, the user can interact in the VR and experience the
virtual world with senses you can normally only use in the real world. The
technology reached the state of end-user ready devices that allows unimaginable
experiences.

Desired Outcome
-Prepare C&A for the challenges of future retail market
-To be THE fashion retailer, offering clothes via new technologies
-To counteract negative trends in stationary markets
-New way of collection building

Proposal
-Set up a “Future Lab” -> as a team or an independent company
-Specialists in design, programming and retail developing ideas and concepts
of new technologies in retail, specially fashion retail
-Target setting to minimum, keep the mind open and ensure the fail of
projects
“ One successful project out of ten,
instead of 2 halfhearted from beginning“
-Constant research of potentials for retail business
-First idea -> Virtual Reality, Augmented Reality
-Creating a Virtual Store -> Online Shop 2.0
-Personalized collections
-Intimate atmosphere
-Virtual Changing Room
-Helpful in Collection Building internally, setup the perfect showroom
via drag and drop in seconds

Conclusion
-We have to invest proactive in ideas to support our future business
-A Future Lab with specialists to make 1 + 1 = 3
-Stagnation is backlog -> we have to question our way of working every day,
we can adapt it to future technologies and ways of thinking
-Do we want to be a follower our a winning leader in retail? "

Name: Daniel Schlapkohl
Mail.: r07d10@retail-sc.com
Phone: +49 211 9872-3635 

Date: 04.02.2015



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Sunday, January 11, 2015

Myopic risk aversion, keeping investing clients happy

Studies have shown that over a 70-year period, stocks yield average returns that exceed government bond returns by 6-7%. Stock real returns are 10%, whereas bond real returns are 3%. However, academics believe that an equity premium of 6% is extremely large and would imply that stocks are considerably risky to hold over bonds. Conventional economic models have determined that this premium should be much lower. This lack of convergence between theoretical models and empirical results represents a stumbling block for academics to explain why the equity premium is so large. 

Behavioral finance's answer to the equity premium puzzle revolves around the tendency for people to have "myopic loss aversion", a situation in which investors - overly preoccupied by the negative effects of losses in comparison to an equivalent amount of gains - take a very short-term view on an investment. What happens is that investors are paying too much attention to the short-term volatility of their stock portfolios. While it is not uncommon for an average stock to fluctuate a few percentage points in a very short period of time, a myopic (i.e., shortsighted) investor may not react too favorably to the downside changes. Therefore, it is believed that equities must yield a high-enough premium to compensate for the investor's considerable aversion to loss. 

Seth Klarman in the most expensive investment book ever written "Margin of Safety" explained the difference between long term and short term thinking as follows: "" Loss avoidance must be the cornerstone of your investment philosophy. The avoidance of loss is the surest way to ensure a profitable outcome. This does not mean that investors should never incur the risk of any loss at all. Rather ‘Don’t lose money’ means that over several years an investment portfolio should not be exposed to appreciable loss of principal.

The goal is not to maximize returns in the short or medium term. “Outperformance” in one or more years may be irrelevant. That is because it is very difficult to recover from even one large loss, which could literally destroy all at once the beneficial effects of many years of investment success. In other words an investor is more likely to do well by achieving consistently good returns with limited downside risk than by achieving volatile and sometimes even spectacular gains but with considerable risk of principal.

An investor who earns 16 percent annual returns over a decade, for example, will, perhaps surprisingly, end up with more money than an investor who earns 20 percent a year for nine years and then loses 15 percent the tenth year.

There is an understandable, albeit uneconomic, appeal to the latter pattern of returns, however. The second investor will outperform the former nine years out of ten, gaining considerable psychic income from this apparently superior performance. If both investors are money market professionals, the latter may also have a happier clientele (90 percent of the time, they will be doing better) and thus a more successful company. This may help explain why risk avoidance is not the primary focus of most institutional investors."
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Golden eggs, geese and investing in Russia

Buffett “I have no views as to where the gold price will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, you know, Coca-Cola (KO) will be making money, and I think Wells Fargo (WFC) will be making a lot of money, and there will be a lot — and it’s a lot — it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that."

Putin 2014: A prominent businessman said that Mr. Putin had eroded the very notion of property rights in Russia, even for those who displayed fealty. He said that Mr. Putin himself had described private ownership of strategic industries with the Russian word to roost. “A chicken can exercise ownership of eggs, and it can get fed while it’s sitting on the egg,” he said, “but it’s not really their egg.”

Comments, questions or E-mails welcome: ajbrenninkmeijer@gmail.com

Saturday, November 22, 2014

Reaching Out




Photograph by Larry Burrows
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Sunday, November 09, 2014

SolarCity, an Exponential Organisation






My friend Yuri van Geest, just finished his book: Exponential Organisations . A good example in my view is SolarCity, a company founded and chaired by Elon Musk.

Numbers in millions of dollars. Market cap today €4,7 billion, share price should double well before 2020.

Comments, questions or E-mails welcome: ajbrenninkmeijer@gmail.com

Tuesday, November 04, 2014

Money Making Machines

How Buffett thinks. Cash flow per minute. Coca-Cola dividend alone to Buffett (Berkshire Hathaway) is $13 per second.

https://www.youtube.com/watch?v=qpFD609CTEs#t=35m


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Tuesday, October 21, 2014

If Warren Buffett, lived in Holland, Warren Buffett wouldn't invest like Warren Buffett ?


Update October 2014: My friend Nick Kraakman has written a good piece on this question : https://valuespreadsheet.com/value-investing-blog/capital-gains-tax-showdown-would-warren-buffett-prefer-to-live-in-holland ?

June 2014 I wrote:

Draft / Placeholder blog needs (a lot of work):

On the 26th of June 2014 Steven De Klerck might become a Dr. in Economics based on his doctorate:

                Historical reflections and empirical studies on the effectiveness of fundamental analyses”"

I skimmed throgh it and we had the following (Dutch) conversation, which "needs further research":

Me: Ik begin net met lezen, maar met "Control F" heb gezocht naar antwoorden op vragen die me bezig houden.

In Buffettology schrijft Mary Buffett aan het begin (eerste hoofdstuk als ik me goed herinner?) dat de shift in focus van past accounting measures naar (easy to predict) future earnings predictions had te maken met de Amerikaanse belastingsstelsel dat afwijkt van de Europese.

Steven: Dat ga ik zeker eens lezen. Nu blijkt het wel niet zo eenvoudig om future (long-term) earnings accuraat te voorspellen gebruikmakende van de jaarrekening en bepaalde contextuele variabelen en deze voorspellingen te gebruiken als fundament van een succesvolle aandelenstrategie. Accounting researchers hebben daarvan hun doelstelling gemaakt, zonder enig succes over de voorbije decennia. Finance studies tonen aan dat er quasi geen forecastability in long-term earnings growth rates is. Een studie die afkomstig is van de mensen achter LSV Asset Management in bijlage. De verschuiving van past naar foreward looking situeert zich aldus voornamelijk in de accounting literatuur, niet in de finance literatuur.

Me: Ook Warren E. Buffett zelf heeft het ergens met cijfers voorgerekend waarom een matig buy and hold strategie in de VS beter werkt dan een goede low PE, low PB strategie zoals Graham voorschreef in zijn laatste interview in 1976. 

Steven:  In mijn studies hou ik inderdaad geen rekening met capital gains taxes. Ik ken geen enkele studie in de literatuur die melding maakt van dit aspect. Gelden deze capital gains taxes voor alle spelers in de VS? Er zijn immers bepaalde aandelenstrategieën die een (zeer) hoge turnover hebben op maandbasis. Doch maken ook deze studies geen melding van deze capital gains taxes, wel melding van de impact van transactiekosten op overall profitability.

Comments, questions or E-mails welcome: ajbrenninkmeijer@gmail.com

Monday, September 15, 2014

Fugro for sale at a 40% discount to Graham Number value

Mr. Market is very pessimistic today...


Figures adjusted for non-cash depreciation of book value in 2014.

SECTOR: [PASS]  Fugro is neither a technology nor financial Company, and therefore this methodology is applicable. 

SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. Fugro's sales of €2,478 million, based on 2013 sales, pass this test.

CURRENT RATIO: [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. Fugro's current ratio €1,111m/€697m of 1.6 fails the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL]  For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for Fugro is €822 million, while the net current assets are €414 million. Fugro fails this test.

LONG-TERM EPS GROWTH: [PASS]   Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. Fugro's EPS growth was 334% over the past 10 years, Fugro passes this test.

Earnings Yield: [PASS] The Earnings/Price (inverse P/E) %, based on the lesser of the current Earnings Yield or the Yield using average earnings over the last 3 fiscal years, must be "acceptable", which this methodology states is greater than 6,5%. Stocks with higher earnings yields are more defensive by nature. Fugro's E/P of 14% (using the average of last 3 years earnings) passes this test.

Graham Number value: [PASS] The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. Fugro has a Graham number of (22,5 x €4,2 EPS x €20 Book Value) = €43.4 and passes this test.

Recommendation: Buy at Mr. Market price up to €26.

Last update:

Based on annual results released today March 7, 2014 and (Mr.) Market price then of €39.  






Comments, questions or E-mails welcome: ajbrenninkmeijer@gmail.com

Saturday, June 28, 2014

Buffett on inflation & why you should express your earnings in Big Macs

If you (a) forego ten hamburgers to purchase an investment; (b) receive dividends which, after tax, buy two hamburgers; and (c) receive, upon sale of your holdings, after-tax proceeds that will buy eight hamburgers, then (d) you have had no real income from your investment, no matter how much it appreciated in dollars.  You may feel richer, but you won’t eat richer.

Comments, questions or E-mails welcome: ajbrenninkmeijer@gmail.com

Friday, May 23, 2014

“What the hell is ‘percentage’ anyhow ?” – Ingvar Kamprad (IKea)

IKEA founder Ingvar Kamprad dismisses retail planning starting with an average gross margin percentage goal. The excerpt below is from his book Leading by Design.

I say to the retail "experts", “What the hell is ‘percentage’ anyhow ?” – INGVAR KAMPRAD

In 1995 the IKEA furniture store started selling hotdogs at five kronor ($ 0,50) each, as opposed to the usual price of ten to fifteen kronor. This investment was at once successful, and today it contributes to the growing restaurant and food sector by turning over 1,6 billion kronor in 1997, and alone answering for exports from Sweden amounting to 700 million kronor. That makes IKEA Sweden’s leading food exporter.

But behind this success is a special story. The “ten hot dogs strategy” says a great deal about the way the company regards price, competition, and the needs and desires of the customer.

One of IKEA’s basic principles is that of “the substantial price difference.” This is engraved in the first commandment in A Furniture Dealer’s Testament.

The reasoning is very simple. Since IKEA turns to the many people who as a rule have small resources, the company must be not just cheap, nor just cheaper-but very much cheaper. In short, the stores must sell things that, in the eyes of the public, are astonishingly cheap to buy.

So the goods must be such that ordinary people can easily and quickly identify the lowness of the price. That was how Ingvar Kamprad-for it was he-gave birth to the idea of selling hot dogs for five kronor.

He thought that IKEA needed a new kind of item at what he calls a breathtaking price. It was to be sold in the little bistro, which in a compete store is always just where customers emerge from the exit checkouts.

Everyone, including myself, who likes sausages knows what a hot dog costs at a stand. At present it is between ten and fifteen kronor. I suggested to the directors that we sell them at five kronor. They looked at me with dismay and surprise. Perhaps they thought the idea foolish, or perhaps I didn’t explain it very clearly. Talking about selling hot dogs in a multibillion furniture store was not really on the agenda.

To realize the idea, the originator had to participate himself. The target he set was that two people at the counter would be able to sell three hundred hot dogs an hour. A number of trials were carried out, and the best working position as well as the most functional fittings were tested.

It took time, but it soon became a reality. It was an almost immediate success – today hot dogs are sold all over the world on the five kronor principle. Each country has its exact price level (preferably so that only a single coin is necessary), so in Switzerland a hot dog costs one Swiss franc, in Germany one and a half Deutsche mark, in the United States fifty cents, in Austria ten schillings, and so on.

The next objection arose from my staff, who are always concerned with what they call the gross profit margin percentage. We’re selling hot dogs for almost the same amount it costs to make them. Shouldn't we raise the price and take six or seven kronor in profit?

In that case, the project ought to be abandoned, I replied, as the whole idea is based on the substantial price difference, the easily understood price. The hot dog went on costing five kronor regardless of the raw materials. We don’t lose on the deal, nor do we make much profit, but a least we make a little on each hot dog.

In the end, that is what matters.

It is common knowledge within the company that IKEA usually has a breathtakingly priced product in (each part of) its range- a “hot dog”. That has now acquired its own in-house meaning, and Ingvar Kamprad has added yet another eagerly guarded task to his many others.

A little while ago, we advertised a mug costing ten kronor. Come to IKEA and buy the mug, it said. I was upset – the price was much to high. It should have cost five kronor at the most, although it did look pretty nice and was of good quality. It was the price that was wrong.

So it came about that I wrote my philosophy about the ten (twenty nowadays) hot dogs. We have ten different products that live up to “hot dog” pricing.

Take the mug from the above example, called “Bang.”

In Switzerland it costs exactly one franc at IKEA. I haven’t found one on the ordinary market for less than three francs, and even in that case our mug was much better quality. Before, we sold at the most seven hundred thousand mugs per year, and now the “hot dog mug” sells twelve and a half million.

But Ingvar Kamprad is still in search of new hot dogs.

One day I found a wonderful English beer glass for eighteen kronor at our Swedish co-op competitor - I always go and look at what my competitors are doing. It was the kind of English glass with a level measure on it, forty centiliters, heavy and really good to hold. I thought it would be a really good “hot dog.”
I went straight to our most superb buyer and said: “Björn, can you get that glass out at one krona? You can order two million.” He replied: “Nix-I can’t, but maybe in an edition of five million.” The whole thing had the support of the product head, whom, as usual, I had bypassed. The last time I met Björn, he had a supplier who would do the glass at 1,08 kronor.
It’ll work out. So in a short time we’ve put twenty or so “hot dogs” up for sale - the whole organization is up and going.
The reader is right to ask himself or herself why, as the retired head of the firm, I go on with this sort of thing. There are three answers: one is that I find it difficult not to; it also says in my contract that I have a veto in matters of the range; and people in the company often say, “If you’re on to something, let me know.”
So I let them know.
I’m going on with my search for new “hot dogs” – lots of associates are involved. I recently saw a multi-plug we sell for under twenty kronor, while the competitors take about fifty. My belief is that this “hot dog” will sell millions.

Our pricing policy is fundamental.

The stumbling block is when we price ourselves out of the market. Our planners constantly go on that we must keep our “total gross profit margin” to a certain percentage. I say to these retail "experts", “What the hell is ‘percentage’ anyhow?”


Percentage is something mysterious. The only thing that interests us at IKEA is what is left in our pocket when the season is over.

If we had taken ten kronor for that mug, and not five, then we would, of course, have “earned” more on each mug – perhaps one and a half kronor – and had a better “gross profit margin percentage.” But we would have sold only a half million of the instead of almost twelve million, on which we now earn on krona each.

These learning experiences are easy to suppress or ignore. But after having been the subject of endless bickering for over a decade, in this respect we are beginning to wake up with a vengeance.
That pleases me enormously.
"

In March 2000 Kamprad wrote at the end of the IKEA Concept Description:

"There are however dangers lurking in the dark. Small deviations from the well-trodden path can prove to be disastrous. I can depict at least seven major threats to the continued success of the IKEA concept in the future. I would like to share these with you so that you recognize them when one or several appear in your working place, organisation or neighbouring organisation.
False steps may be insignificant in the beginning, but prove to be fatal later on.


Be aware of these trip-wires:
1. Mark-ups in pricing, resulting in an out-of-the-market situation, due to wrong pricing strategies, too high costs, and/or unsound margin-raising instead of counting money."


------------------------

Want to learn more about "Rekenen in Centen, in Plaats van Procenten"? E-mail me: ajbrenninkmeijer@gmail.com

Monday, May 05, 2014

VOPAK Graham Defensive Analysis ( intrinsic value estimate )

"the stock owner should not be too concerned with erratic fluctuations in stock prices, since in the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine (i.e. its true value will in the long run be reflected in its stock price). " : Benjamin Graham

2013 results,  5 May 2014 price
SECTOR: [PASS]  Vopak is neither a technology nor financial Company, and therefore this methodology is applicable. 

SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. Vopak's sales of €1,322 million, based on 2013 sales, pass this test.

CURRENT RATIO: [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. Vopak's current ratio €562m/€560m of 1.0 fails the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for Vopak is €2031 million, while the net
current assets are €2 millionVopak fails this test.

LONG-TERM EPS GROWTH: [PASS] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. Vopak's EPS growth over that period of 335% passes the EPS growth test.

EARNINGS YIELD: [PASS] The Earnings/Price (inverse P/E) %, based on the lesser of the current Earnings Yield or the Yield using average earnings over the last 3 fiscal years, must be "acceptable", which this methodology states is greater than 6,5%. Stocks with higher earnings yields are more defensive by nature. Vopak's E/P of 7% (using last years earnings) passes this test.

Graham Number value: [PASS] The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. Vopak has a Graham number of (22,5 x €2,8 EPS x €14,5 Book Value) = €30,3 and fails this test.

DIVIDEND 3%

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"We're right and they're wrong": Cost of Capital: WACC ? or Opportunity Cost

I'm no expert, but what Buffett says makes sense and what Buffett does makes cents. If I understand correctly, he's talking about Opportunity Costs. #BRK2014
Morningstar analyst Gregory Warren, who filled the seat left vacant by the dearth of credentialed Berkshire bears, asked for Berkshire's cost of capital and whether it plays into acquisition decisions. Buffett said the term is thrown around a lot and means different things in a lot of those contexts. This gave Munger another chance to make fun of business schools.
"Charlie and I always figure our cost of capital is what can be purchased by our second-best idea, and then we have to exceed it with our best idea," Buffett said. The real test, he said, is whether Berkshire benefits more than the cost of the acquisition. Identifying the cost of capital is often a game, he said. The CFO of a company almost always argues that a purchase exceeds the company's cost of capital.
Cost of capital does not mean what they say it means in business school, Munger said. "The answer is perfectly simple: We're right and they're wrong."
Compare that to WACC Weighted Average Cost of Capital calculation.




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