Max Otte, professor of Corporate Finance at Fachhochschule Worms in Germany, gave a presentation at the Value Investing Seminar in Italy yesterday, entitled Investing Buffett Style: A Simplified Approach. Our notes from his speech follow:
- Otte likes simple and robust valuation approaches (shares Berkshire Hathaway (BRK.A) chairman Warren Buffett's aversion of calculators and spreadsheets --> answers should "scream at you").
- Some examples of simple valuations for stock markets include market cap to GDP, P/Es based on 10-year earnings, dividend yields vs. bond yields.
- Importance of organizing one's research according to 1) reliability (eg current margins are better information than estimated margins 2 years from today) and 2) underlying strategic assumption (does company have competitive advantage?
- Asset-based valuation (can be applied to 70% of companies): industry is economically viable but no incumbent competitive advantage --> asset value (replacement costs) = earnings power value.
- Earnings power valuation, without growth (can be applied to 20% of companies): industry is viable, firm enjoys sustainable competitive advantage (moat, franchise) but no/low growth.
- Earnings power valuation, with growth (can be applied to 5% of companies): industry is viable, firm enjoys sustainable competitive advantage (moat, franchise) and exhibits growth.
- Liquidation valuation (can be applied to 5% of companies): industry is NOT economically viable.
Investment Idea #1: Lufthansa (DLAKY.PK) (Asset Based):
- One of the world's leading airlines
- Will survive crisis
- Valuable Frankfurt hub
- Valuation: current market cap at 38% discount to book value of equity
Investment Idea #2: Henkel (HENKY.PK) (Sustainable Earnings, Low Growth Franchise):
- Consumer franchise
- Depressed earnings
- Stable company
- Positive family influence but not very dynamic
- Valuation: apply 14.3x multiple (assumes cost of capital 9%, growth 2%) on 10-yr average EPS of €3.42 --> €48.9 value per share --> current price of €18.6 per share represents 62% discount to fair value
Investment Idea #3: Siemens (SI) (Sustainable Earnings, Modest Growth):
- One of the world's leading infrastructure companies
- Huge pent-up demand
- Economic warfare by US interests a negative
- Valuation: apply 16.7x multiple (assumes cost of capital 10%, growth 4%) on 10-yr average EPS of €3.41 --> €56.8 value per share --> current price of €46.0 per share represents 18% discount to fair value
Investment Idea #4: Fielmann (Sustainable Earnings, Modest Growth Franchise):
- Very consistent franchise
- Huge moat
- Owner manager
- No bank debt
- Valuation: apply 33.3x multiple (assumes cost of capital 8%, growth 5%) on 10-yr average EPS of €1.71 --> €56.9 value per share --> current price of €45.0 per share represents 21% discount to fair value
About Professor Max Otte
Professor Max Otte, Ph.D., received his doctorate degree from Princeton University. He is a regular professor of Corporate Finance at the Fachhochschule Worms – University of Applied Science and founder of IFVE GmbH, an independent advisory firm that offers financial information services to its clients.
Professor Otte is also founder and director of the non-profit organization Zentrum für Value Investing e.V., an association of independent and value-oriented funds managers and investors.
Professor Otte has worked as a consultant for over 100 businesses and organizations and is author of many books on finance and economics.
His 2006 book “Der Crash kommt”, in which he predicted a financial tsunami caused by the U.S. subprime sector, has become a bestseller.
Disclosure: No positions.