Brian Gaudet

Diageo: The Coca-Cola of the Alcoholic Beverage Industry?

No Moss,
I had included a couple of links to the derivation of intrinsic value, but the editors removed them. The basic approach is in this article: seekingalpha.com/artic...


On Sep 28 10:56 PM No Moss wrote:

> Good comments on Diageo. You capture the essence of Diageo, that
> is, unmatched stable of brands and unmatched scale of marketing and
> distribution. The marketing leverage comes from the fact that their
> marketing and distribution infrastructure is scalable, that is, it
> doesn't add a lot of expense to take on another brand. You can see
> the benefit to Diageo and the mannufacturing company in their recent
> agreement with Grand Marnier.
>
> You can see a direct relationship between Diageo and the British
> Pound. Intuitively, the stock should benefit from the fall of the
> British pound in the last year (and vice versa for its recent rise).
> However, the stock is widely held internationally, so in fact it
> seems to fall on the Pound's weakness and rise on its strength.<br/>
>
> Try comparing a chart of the British Pound to the price of the stock
> over the last year.
>
> You don't mention how you arrived at the value of $64. I'd be surprised
> if the stock remained in the sixties once the growth in volume resumes,
> and I expect that to be the case this year (fiscal year ending June
> 30th, 2010). You have to remember that fiscal year 2009 coincided
> with the worst recession in modern memory.
>
> You might want to check the spelling of Ketel One.

Using Dynamic Withdrawal Policies with Retirement Portfolios

Thanks for your feedback. I am not sure what your are referring to with the "piling problem"? If you could be more specific, I would like to look into fixing it.


On Sep 02 04:29 PM whidbey wrote:

> I looked at your site and read over your literature. I think it
> meets my concerns for flexibility and the RMD problems. I currently
> use Financial Engines Monte Carlo which is OK but nothing to shout
> about, and some of the Mathematica 7 modeling tools for case studies
> for clients. Most of my clients have very large estates and we model
> of the whole thing for them, if we can. Both of the sets we are
> using are more powerful than yours, but I hope that interested people
> will given yours a shot ;the are certainly priced right. BTW the
> piling problem is solved relative easily and it should be fixed since
> the size limits on models appear to be unattractive. Good going
> and nice work.

Q4 Results: The Long Term Case for Procter & Gamble

Stephen,
I think with some of the beauty products, they saw an opportunity to provide products of similar quality to that found in department stores at a fraction of the cost. Over the last few years, the operating margin and return on tangible assets for this segment have been impressive. I guess it is to be expected that the segment would be slowing down now, but long-term I think their decision will prove to be a good one. As for Folgers, it does appear that P&G's snacks division is their least profitable (looking at operating margin), and it also appears that many food brands are not holding up as well to private label competition. Really my only complaint with management would be that I wish they would replace some of their short-term debt with longer term debt.


On Aug 09 12:39 PM Stephen Rosenman wrote:

> Fair enough.
> How do you view PG's foray into beauty products? Not so sure that
> is the right move. I'm also wondering whether selling Folger's
> to SJM was such a good move. Look at the strong profits that brought
> to SJM. I think it turned out that they sold their best not worst
> division. Thoughts?

S&P 500 vs. Treasuries: Which Will Outperform Over the Next Ten Years?

pslater,
The 5.5% discount rate is a real (inflation-adjusted) discount rate. An AAA bond yielding 5.5% might give give you a 3.5% real rate of return, if inflation stays low. If I were use my model to value an AAA bond, I might use something like a 2.5% real discount rate (close to the historical average since 1926). So if my model indicates that a company (or stock index) has a market price equal to its estimated intrinsic value, the expected REAL return would be 5.5%. But if my model indicates that an investment grade bond has a market price equal to its estimated intrinsic value, the expected REAL return would be 2.5%.


On Jun 12 01:55 PM pslater wrote:

> Brian, I admire your valuation work. However, I do take exception
> with your discount rate. Your 5.5% is representative of the current
> AAA corporate bond yield. The problem is that there are only a handful
> of AAA compaies anymore and the average non financial company in
> the S&amp;P has a credit rating of BAA (or BBB in S&amp;P speak).
> For confirmation, check out the average credit quality of the iShares
> investment grade corportate bond fund - ticker LQD. It's BBB. <br/>
>
> If you use the current BAA bond rate of around 8% you will get radically
> different valuations than you arrived at above. I would argue that
> the 10 year Treasury and AAA bond rates do not come anywhere near
> approximating an adequate discount rate.

S&P 500 vs. Treasuries: Which Will Outperform Over the Next Ten Years?

Paco,
I agree that a collapse (or at least sharp fall) in the dollar is likely, which would increase the cost of imports and fuel inflation. However, since a significant fraction of SP500 earnings originate from overseas, SP500 earnings - which are measured in dollars - will get a boost from this. If we see an extreme scenario, such as hyperinflation or a devaluation of the dollar, history tells us that when the dust settles, equities (at least the ones that survive), which give you a claim to earnings generated from goods and services, have ended up being a good way to maintain a portfolio's purchasing power; i.e., if in 20 years a dollar only purchases 1/5 of what it does today, surviving companies should, in aggregate, be able to sell a unit of their product or service for 5X what they did to day.


On Jun 12 09:26 AM Paco Ahlgren wrote:

> Brian, this is an interesting post. I'm afraid, however, that with
> the obligations the U.S. government has committed itself to -- along
> with other major economic powers -- we're going to be facing unprecedented
> inflationary price pressure in the near future. Treasuries are in
> a lot of trouble. I've written a number of articles on Seeking Alpha
> establishing just how dangerous these waters are.
>
> The S&amp;P is likely to trade sideways or higher -- perhaps even
> much higher -- but it won't outpace the collapse of the dollar, once
> the effects of these profligate policies take hold.

How Will a Single Payer Health Care System Affect Pharmaceutical Prices?

John,
Although the point of the article had nothing to do with the merits of single payer or other universal health care schemes, I feel the need to comment on your article. First, the paper I referenced refutes what you say: that increased bargaining power in Europe is driving up U.S. prices. Measured at purchasing power parity and adjusting for income levels, there is no difference.

Second, the problem with leaving government completely out of health care is that you end up with individual business owners not having the bargaining power of IBM, with the result they end up paying much higher rates. What is known is that the United States pays almost twice the percentage of GDP on health care as most other developed nations, with no resultant increase in the quality of health. If there was actually an example of a completely private health care system that provides equivalent or better care than Europe and Canada, I would suggest we copy it. I have quite a few friends in France that have no complaints about the health care there. If you want expedited care, or some new treatment that is not covered by the universal coverage system, you can pay for it out of your own pocket at a private hospital. And if you are a part time worker with limited means, you can still get timely and satisfactory treatment. The best solution for health care is a single risk pool with everybody paying the same rate, which means the health subsidize the sick, and the young subsidize the old (we already do the last through medicare).


On Jun 09 09:40 AM John Hunt, MD wrote:

> All this is Statlinistic mumbo jumbo. The only certain thing, and
> it is unequivocal, is that the current government control of the
> medical systems of all countries has lead to inefficient supply/demand
> balance. Indirect and direct subsidization of pharma companies (for
> example by subsidizing purchase of their drugs) leads to higher prices
> in the US (duh!), for which attempts to compensate by centralized
> price controls will lead without doubt to less innovation and poor
> economic function.
>
> The solution is so clear and brilliant. Get the government OUT OF
> HEALTH CARE. ALtogether, completely. By the way, in the United
> States, the people of America NEVER delegated their powers to the
> the federal government, for that government to force them to buy
> financial instruments such as health insurance. The US government's
> involvement in health care so far and in the future has been, and
> will be, illegal usurpation of power.
>
> NONE of the above article matters at all. What matters is getting
> the government to obey the law that we wrote (that being the US CONSTITUTION),
> for doing so will fix the whole busted health care system.

How Will a Single Payer Health Care System Affect Pharmaceutical Prices?

User 428271,
You are right in that some of these countries do not have single payer system in the strict sense; some have hybrids. But my goal was to look at what might happen if we move to a health care system where the purchasers of pharmaceuticals gained bargaining power similar to countries in Europe.


On Jun 09 09:16 AM User 428271 wrote:

> This is interesting but it is misleading to say that Germany, Japan,
> or even France have single payer systems. Universal coverage, yes
> but not single payer.

Johnson & Johnson: Strong Pipeline, Compelling Valuation

TLassen,
I am not sure about maintaining 14% dividend growth (the latest increase was 6.5%), but I do think a long-term inflation-adjusted growth rate for earnings and dividends of 4% to 6% is doable; this assumes long-term global real GDP growth in excess of 4%, TAM for pharmaceuticals, medical devices, and consumer health products growing a bit faster than global GDP, and constant market share.


On May 26 05:46 PM TLassen wrote:

> very good analysis of JNJ. I am long on the company as well, do you
> think they can maintain the 14% dividend growth in the current business
> environment?
> I took the time to visit your website, must say I am very impressed.
> I am always interested in learning from fellow investors, will read
> the pdf file in great detail.

Considering a Position in ADP

1

How GE Compares to Other Banks

User 358157,
Did you even understand my post? My analysis refuted the assertion by the author that GE had a low ratio of tangible equity to assets, and showed that GECS has a strong position compared to banks! And yet you ask if I have a short position? (the answer is no, I am long). How can you possibly consider my post negative?


On Feb 17 11:32 AM User 358187 wrote:

> I would say a very poor analysis on the part of the writer. IF you
> are going to compare apples and oranges, the first thing you might
> want to do is see how the tangible equity in the banks are minus
> their TARP money? My off the cuff guess is all are showing negative
> equity positions. GE has not taken any of that money and yet still
> shows a cash/short term investments balance in the range of $50B.
>
>
> Why do these so called analysts constantly promote negativism against
> companies? My guess is this guy shorted GE?
>
>
> On Feb 17 11:16 AM ge_shareholder wrote:

How GE Compares to Other Banks

I disagree with this analysis. If you want to compare apples to apples, compare the ratio of GECS tangible equity to tangible assets; the rest of the company (GE industrial) is not in the financial services business, and unless you are concerned about GE industrial's liquidation value, the ratio is meaningless. Now for GECS at Q4:

Shareholders Equity: $53.3B
goodwill & intangibles: -$29.0B
Cash held be GE (1): $12.3B

Tangible Equity: $36.6B

Total Assets: $660.9 B
goodwill & intangibles: -$29.0 B
Cash held by GE: $12.3 B

Tangible Assets: $644.2

Ratio of tangible equity to tangible assets: 5.68%

(1) According to GE, the $15B in cash raised from equity offering is intended for GECS. As of Q4 earnings, $5B was injected into GECS, and I believe since then $9B more.

However, this analysis neglects the fact that of the $78B in GECS cash and marketable securities, $36B is cash, and the bulk of the marketable securities are investment grade bonds used for the run-off annuity and insurance businesses. Consequently, I would give the $78B a risk weighting of zero. This improves the ratio to 6.78%.

Given the fact that financing receivables are much better matched to maturing debt than any bank I know of, and that in a pinch GE industrial can temporarily cut its dividend and inject up to $10B a year into GECS (or more likely $5B a year w/ a 50% cut), I think GECS's position looks pretty good.

Choosing Your Portfolio Risk Tolerance

Geoff,
I agree that the accuracy implied by an MVO is misleading, since any inputs are rough estimates at best (the same can be said for the inputs to a Monte Carlo simulator). I also agree that using limited historical data is dangerous, as asset class returns tend to mean revert (although using 50 years or more of data gets around this problem). That said, there are a couple of ways around the problem with MVOs. One is to use the Black-Litterman model. I use a model similar to the Black-Litterman model, but with less emphasis on the assumption of efficient markets. Either way, the MVO becomes well-behaved, and more importantly, gives you a better starting point for Monte Carlo simulations.

I disagree that estimating forward looking returns is the hard part of Monte Carlo simulation, it is instead the hard part of asset class valuation; A Monte Carlo simulator takes whatever assumptions you give it, just like an MVO. And just as important as the expected returns are the expected rate of return volatility and correlation matrix.

Also, I am glad you made the point about the difference between portfolio volatility and the risk of not meeting your financial goal; this point is often missed in discussions on financial planning.

Choosing Your Portfolio Risk Tolerance

How did you determine that the model portfolios were efficient (this is implied when you refer to one of your charts as illustrating the efficient frontier)? Did you first run a mean variance optimizer on the ten asset classes using your forward looking estimates for average and standard deviation of annual returns? If not, then there could very well be another portfolio using these ten asset classes that could provide a higher expected return without increased volatility (or decreased volatility w/o a decrease in expected return) as compared to one of your model portfolios. Personally, I prefer to first run an MVO (that optimizes using the geometric rather than average annual return of each asset class) on a given feasible set, and then sample the resulting efficient frontier using a Monte Carlo simulator. That way you know you are only simulating efficient portfolios.