4 Key Trends Pressuring Zynga's Business--And The Numbers To Back It Up [View article]
Here are a couple positive trends Steven: 1. Mobile & International gaming are both growing rapidly 2. The firm's early-mover advantage provides them with a richer dataset than peers when trying to figure out how to monetize gamers 3. $2/share of value from cash & HQ. So if you shut down the company today, fired everyone, and paid down all existing debts, existing owners would get $1.80/share from cash and ~$0.20/share of value from selling the HQ building they own (at a fire sale price). This provides at least a soft floor from a valuation perspective. 4. The CEO has started a bunch of companies before and has sold them, if he's able to sell the firm to a competitor, he might be able to extract a premium over today's price.
As for an ulterior motive, I definitely have one, but it's not to make money on the stock. I like to be able to share my thoughts with potential employers on different names and if I can just send them a link, it's an easy way to do that. Doing these write-ups keeps me in the game and hopefully sharp. Thanks for your comments.
That's fair raproducer, but I think OMGPOP is a perfect example of a new game developer coming out of nowhere. The firm was virtually unknown pre-Draw Something, only has ~40 people, and was only started a few years ago. They had one really big hit game, Draw Something, and they rocketed to the top of the app charts. I believe there are thousands of other OMGPOPs out there. Yes, most of them will fail, but a few of them will have a game that hits it big and those games will take share from Zynga games. The cost to develop these social games is only a couple of million. While that's not cheap, it's certainly a lower barrier to entry than console games which costs tens of millions of dollars.
I agree with you that at $2.80, there isn't a whole lot of downside left in the stock given that the firm has significant cash on balance sheet, but my point is just that the business the firm competes in is highly competitive and that type of business is notoriously hard for investors to correctly project the winners (if any) in the long-term.
Hey Paulo, I certainly agree that FB is the MOST likely threat to LNKD given that its network is already significantly deeper and broader than LNKD, but I think there are other threats that are underestimated. The two that come to mind are:
1. Micro-Career Networks - Basically mini-LinkedIns around a very specific career. Since my background is in finance, I'm most familiar with finance based sites (e.g. SeekingAlpha, SumZero, CFA Institute, NYSSA, etc), but I'm sure similar types of networking exists for other careers. It seems to me that if you're a recruiter trying to hire a finance professional, the fact that LinkedIn has a very broad network does very little to help your search. As a recruiter you may be just as likely to focus your search on a more targeted micro-career networking site. I don't expect these micro-career networking sites to unseat LinkedIn, but they certainly could add to pricing pressure in the professional services divisions. Thinking about how most recruiting firms are organized, they tend to be industry specific, that to me means that career networking sites which are industry specific could eventually pose a threat (or at least eat into LinkedIn mkt share).
International Career Sites - Similar to your professional network being concentrated in a single industry, many people find that their network is also concentrated in a single geography. I live in NYC and went to college in California so much of my network is from that area. My understanding is that sites like Xing & Viadeo have a substantial portion of their markets in Europe (France & Germany). Yes, plenty of people in Germany who do business in the US have both a LinkedIn account and a Xing account, but my point is just that penetrating those regions will be more difficult and may result in LNKD needing to acquire these firms. If they use stock that's not a terrible thing, but if they use cash (and I'm sure these firms want at least a portion of any deal to be done in cash), it could be a real negative for shareholders if they pay too much.
LinkedIn is still growing very fast and I don't expect that to change, right away, but I think the ease at which competitors can come into the fray and affect pricing is underestimated.
Just some food for thought on the competitive position.
Buy LinkedIn, Short Monster As Online Giants Wage War [View article]
Hi Qineqt, while I agree with you that LinkedIn is taking share and that Monster is losing share and that this trend is likely to continue for the foreseeable future, I don't think that's sufficient to recommend a long position in LinkedIn or a short position in Monster as the valuations of each firm seems to already reflect these trends. If we look at these firms on a EV/Revenue basis, LinkedIn's valuation is 22x richer than Monster's (see below):
EV / TTM Revenue MWW = 0.9x LNKD = 20.3x
Basically for every $1 of revenue that LinkedIn generates the street gives them credit for an equivalent of $22 of revenue generated by Monster. Said another way, LNKD's stock price seems to already reflect significant growth, so simply noting that they are taking share seems insufficient. Instead, you'd need to show the amount of market share they are going to take will be greater than the very optimistic assumptions already built into the stock. They may very well beat those assumptions, driving the stock higher, but they need to beat expectations, not just take share on an absolute basis. Just by way of example, LNKD has guided to revenue this quarter of $210-215mm, this represents YoY growth of 73-78%. I'd hypothesize that if LinkedIn only delivers 70% YoY growth, still pretty phenomenal, the stock would crash even though 70% YoY growth would clearly indicate that the firm was taking significant share. Hope this helps.
Full Disclosure: I am currently short LNKD and have written about my short thesis here on Seeking Alpha, most recently here - http://seekingalpha.co...
LIBOR Related Lawsuits: How Do They Affect The Banks? [View article]
Hey guys, just want to make a quick comment on how low LIBOR rates could hurt. If you are an owner of a floating rate corporate bond, like many pension funds are, and those rates are held artificially low during times of stress, you don't get the benefit that would have come with higher rates as credit spreads widened. Now admittedly because central banks were driving short-term rates down to near zero, any widening that would have come from credit spreads blowing out would have been at least largely offset by lower "risk-free" rates. So any screwing around with LIBOR only probably had a marginal impact, but if you were robbed of a couple of million bucks, you'd still be willing to fight it in court.
JPMorgan Loss Estimates Reach $9 Billion; The Real Risk Remains In Play [View article]
cwr83, I agree with you that some of JPM's valuation is related to the perception that it is a better/safer/smarter bank than some of its peers. And I agree that this CIO-debacle certainly calls at least some of that into question. But let's look at the numbers. Here's where peers are trading on 2013 earnings (estimates are CapIQ sourced; prices are the current mkt price when I wrote the comment):
C 5.7x....($25.75/$4.53) BAC 7.7x...($7.57/$0.98) WFC 8.8x...($32.05/$3.66) USB 10.3x...($31.07/$3.01)
The average among this group is 8.1x.
JPM is currently trading at 6.6x ($35.19/$5.32) or at a 19% discount to the group. To me that seems to indicate that much of the loss of luster is already built in.
If we also include GS & MS because JPM has a substantial investment banking component to their earnings, the peer table looks like this:
C 5.7x....($25.75/$4.53) BAC 7.7x...($7.57/$0.98) WFC 8.8x...($32.05/$3.66) USB 10.3x...($31.07/$3.01) GS 7.1x...($92.22/$13.01) MS 6.0x...($13.64/$2.26)
The average of this peer group is 7.6x. This means that JPM is still trading at a 13% discount to this broader group. Sure, estimates are certainly subject to revision and analysts may be bringing them down, but at least right now, it doesn't appear that JPM is trading like an expensive bank. So I'm not sure how much of a Dimon premium is really baked in.
Mega Banks Must Shrink: Great For The Country, Better For Shareholders [View article]
Hi Ranjan, thanks for the article. There is certainly a pretty sizable disconnect btwn the valuation of the largest banks and the smallest banks. Much of this can be attributable to a few factors: 1) many of the biggest are still working through legacy issues related to the financial crisis, 2) shareholders have attached a haircut to bank balance sheets that are still fairly opaque, and 3) larger banks will be required to hold more capital than smaller banks once Basel III comes into affect. Two of those issues are unlikely to go away (2 & 3), but the large-cap banks should be able to work through their legacy issues as time passes. As they work through these issues they should be able to return significant capital to shareholders in the form of dividends and buybacks. In my view as more capital is returned to shareholders the valuation gap btwn large & small banks can begin to shrink (I don't expect it to ever close because issue 2&3 are permanent). I think the current gap however is big enough that current shareholders should benefit as these stocks begin to climb back to fair value. I've written about the five largest banks in a series of articles, but the big take-away is just that even making reasonably conservative assumptions investors should be able to generate a mid-to-high teens IRR on these stocks (particularly JPM & C, which I believe offer the best risk reward).
Things I Wish Jamie Dimon Could Have Asked Congress [View article]
Excellent article. Sound bites sell and a thoughtful understanding of the nuances of a very complicated business are often ignored for the sake of political gains. Thanks for presenting the more nuanced picture of reality. The world is much more grey than any of the major media outlets seem inclined to portray it as; you do your citizens a service by walking through some of these complicated issues in an easily digestible manner.
Having said that, these over-simplifications of reality I think present a trading opportunity for long-term investors willing to deal with a little volatility. I think a couple of these large-cap banks, Citi and JP Morgan, in particular are trading well below intrinsic value, and offer a reasonable amount of downside protection even in a low rate, low growth environment given their current discount to tangible book value. I've written a few articles about the large cap banks and I think there's pretty substantial value there and generally investors should be able to generate IRRs in the mid-to-high teens over the next several years.
Bank Of America's $67 Trillion In Derivative Positions Explained [View article]
Nice detailed article Andrew. I actually really liked your final closing statement:
"In all, I think that the derivatives market is not as nefarious and evil as most believe. The economic benefits are real, but the risks are exacerbated by lax regulation and no formal derivatives exchange. In order to restore trust in our banking system, these contracts should be sold on an organized exchange and the parties that buy and sell these products should be heavily regulated. Without a derivatives exchange to accurately value these products with current market data, we can never truly know what these products are worth. Without more regulation of selling and buying of derivatives, especially Credit Default Swaps, we could be in for a financial fallout that would make the AIG debacle and financial crisis in 2008 look like a walk in the park."
I think you're spot on. There is a bit of a tendency to demonize the derivatives markets without considering the legitimate benefit it does serve. Yes, it needs to be better regulated and more closely scrutinized, but it does add some value.
Why Amazon's Worth North Of $200 Per Share [View article]
Super thoughtful reply Brian. Really appreciate it.
So just a couple points of clarification. If you're discounting free cash flows (and not net income), FCF adds back the stock-based comp charge that is included in net income. Thus the FCF number doesn't have a stock-based comp charge. If you've adjusted for this by discounting FCF with a stock-based comp charge included, then you're exactly right that you don't need to adjust the share count. However if you're forecasting a FCF number that does not include a charge for stock-based comp, you do need to augment the share count. I can't quite see which one you're doing from your article, but you're correct in that either approach works.
Also while you're correct that the firm will receive cash when stock options are exercised I believe most of the firm's stock-based comp is in restricted shares. When these shares vest the firm will receive no cash. So in this case, I think the cash the firm could potentially receive is much smaller given their bias to restricted stock vs option grants.
And then finally, re: including the cost of acquisitions as part of capex. You are certainly right, you can include it as a "CapEx" expense but then you need to give them credit for future growth. Or you can exclude it and not give them credit for future growth. Like you said it's one or the other, but not both. I agree with that entirely. Here's the thing though, I think their past growth benefited from acquisitions they've done in the past and since some analyst (me included) use the past as a guide to estimating the future, I think part of AMZN's growth rate is at least partially attributable to these acquisitions. So if you assume they stop acquiring, you need to assume the growth rate slows. And that it slows beyond what it was going to slow anyway given their increased size.
Hope that helps clarify my view and again thanks for the very thoughtful reply above.
Why Amazon's Worth North Of $200 Per Share [View article]
Hey Paulo, interesting point. When I look at AMZN's CapEx I include not just purchases of PP&E but cash used for acquisitions. Given that many investors are holding the stock looking for revenue growth not bottom line growth, management is essentially incentivized to purchase growth by buying other firms with steep revenue growth curves regardless of their potential to add to the bottom-line.
Another interesting thing about AMZN (and many tech companies) is that given that they pay many of their employees with stock-based comp this non-cash expense is added back when calculating free cash flow. The true effect of stock comp is to increase the share count down the road. However, since most analyst use a single share count in their DCF (the latest period), the future growth in share count from employee stock comp gets entirely lost. The way to compensate for this is to use a different share count for each future period, essentially discounting back FCF/share for each period (not several periods of FCF and then dividing by the current share count). Very few analysts do this and thus often overstate the value of firms that are heavy share comp users. Hope that makes sense.
Valuentum, interesting thorough approach. Thanks for writing.
Own JPMorgan For The Second Best Risk/Reward Profile In The Banking Sector [View article]
Thanks for your reply E.D. Hart.
I think reasonable people can disagree whether the past 10yrs in this case (again, making some adjustments for leverage) is a good predictor of the future. I certainly agree with you that as a country we are likely to see a reasonably protracted period of global de-leveraging and that will no doubt affect the ability of these banks to grow. Having said that even if they are unable to re-invest in their business, they should still be able to return capital to investors & repurchase their stocks at a discount to book value which can continue to increase their earnings (and dividends) on a per share basis at a double-digit rate.
Also while there are some similarities btwn the Japanese period of de-leveraging over the last two decades and the US's next decade, I think one big difference is that the US injected huge amounts of capital into the banks essentially preventing them from becoming zombie banks like we had in Japan. The banking system in the US is pretty well capitalized (with a few exceptions) and likely to become more so over the next few years. Part of what I like about these investments is that I don't need to make heroic growth assumptions or predict outrageous multiples to get a pretty decent return on my money. In fact my forecasted multiples and returns on capital are well below what the banks have generated in the past. In Citi's case for example, I'm just predicting a return on tier 1 common equity of 10.25% and a price-to-tier 1 common of only 1.1x, those are far from a very aggressive assumption and well below their historical numbers. And even if you think my assumptions are too aggressive, in my sensitivity analysis, I ran a scenario where I assume the firm can only earn an 8% ROT1C and adjusted my P/T1C lower accordingly and I could still generate an IRR in the mid-teens with relatively limited downside. So even if you do believe that I've over-estimated the firm's long-term returns in a global de-leveraging cycle, I think the returns you can get on the stocks from this level, still look compelling assuming you are willing to wait.
At least in my view, the current price bakes in a pretty good margin of safety. Hope that's helpful.
Own JPMorgan For The Second Best Risk/Reward Profile In The Banking Sector [View article]
Hey Andrew, glad you enjoyed the piece. The probability distributions are purely my own estimates. Said another way, there isn't a whole lot of science behind them, but I tried to incorporate the following general premises when creating them:
1. Assumed the left tail was generally fatter than the right. This basically implies that as levered & regulated companies, there is a greater likelihood that they trade at a lower multiple to T1C than a high one. It also just makes my estimate a little more conservative.
2. Overtime, I have the weighted average P/T1C gravitate towards my calculated long-term sustainable P/T1C. In JPM's case that's 1.4x. This is much lower than what it's been historically, but it should be lower because capital requirements are going way higher.
Hope that helps. Also since these are entirely my own estimates and maybe not consistent with how other people view the probability distributions, anyone who wants can download my model here and tweak the probability distributions as they see fit. You can download my model here - http://bit.ly/LasdMV
Thanks for your question Andrew and thanks for making it all the way through a VERY long and dense piece!
Revisiting The Intrinsic Value Of Berkshire Hathaway [View article]
Excellent and very thorough analysis Ashwin. You built in reasonably conservative assumptions and still found a modest disconnect btwn the price and the intrinsic value of the stock. Additionally, should the stock trade much lower, you have a known (and exceedingly large) buyer willing to step in, which I think helps place a soft floor under the stock in a market sell-off. Full disclosure, I'm also long BRK.
4 Key Trends Pressuring Zynga's Business--And The Numbers To Back It Up [View article]
1. Mobile & International gaming are both growing rapidly
2. The firm's early-mover advantage provides them with a richer dataset than peers when trying to figure out how to monetize gamers
3. $2/share of value from cash & HQ. So if you shut down the company today, fired everyone, and paid down all existing debts, existing owners would get $1.80/share from cash and ~$0.20/share of value from selling the HQ building they own (at a fire sale price). This provides at least a soft floor from a valuation perspective.
4. The CEO has started a bunch of companies before and has sold them, if he's able to sell the firm to a competitor, he might be able to extract a premium over today's price.
As for an ulterior motive, I definitely have one, but it's not to make money on the stock. I like to be able to share my thoughts with potential employers on different names and if I can just send them a link, it's an easy way to do that. Doing these write-ups keeps me in the game and hopefully sharp.
Thanks for your comments.
Zynga: No Games, Just The Facts [View article]
I agree with you that at $2.80, there isn't a whole lot of downside left in the stock given that the firm has significant cash on balance sheet, but my point is just that the business the firm competes in is highly competitive and that type of business is notoriously hard for investors to correctly project the winners (if any) in the long-term.
LinkedIn's Sword Of Damocles [View article]
1. Micro-Career Networks - Basically mini-LinkedIns around a very specific career. Since my background is in finance, I'm most familiar with finance based sites (e.g. SeekingAlpha, SumZero, CFA Institute, NYSSA, etc), but I'm sure similar types of networking exists for other careers. It seems to me that if you're a recruiter trying to hire a finance professional, the fact that LinkedIn has a very broad network does very little to help your search. As a recruiter you may be just as likely to focus your search on a more targeted micro-career networking site. I don't expect these micro-career networking sites to unseat LinkedIn, but they certainly could add to pricing pressure in the professional services divisions. Thinking about how most recruiting firms are organized, they tend to be industry specific, that to me means that career networking sites which are industry specific could eventually pose a threat (or at least eat into LinkedIn mkt share).
International Career Sites - Similar to your professional network being concentrated in a single industry, many people find that their network is also concentrated in a single geography. I live in NYC and went to college in California so much of my network is from that area. My understanding is that sites like Xing & Viadeo have a substantial portion of their markets in Europe (France & Germany). Yes, plenty of people in Germany who do business in the US have both a LinkedIn account and a Xing account, but my point is just that penetrating those regions will be more difficult and may result in LNKD needing to acquire these firms. If they use stock that's not a terrible thing, but if they use cash (and I'm sure these firms want at least a portion of any deal to be done in cash), it could be a real negative for shareholders if they pay too much.
LinkedIn is still growing very fast and I don't expect that to change, right away, but I think the ease at which competitors can come into the fray and affect pricing is underestimated.
Just some food for thought on the competitive position.
Buy LinkedIn, Short Monster As Online Giants Wage War [View article]
EV / TTM Revenue
MWW = 0.9x
LNKD = 20.3x
Basically for every $1 of revenue that LinkedIn generates the street gives them credit for an equivalent of $22 of revenue generated by Monster. Said another way, LNKD's stock price seems to already reflect significant growth, so simply noting that they are taking share seems insufficient. Instead, you'd need to show the amount of market share they are going to take will be greater than the very optimistic assumptions already built into the stock. They may very well beat those assumptions, driving the stock higher, but they need to beat expectations, not just take share on an absolute basis. Just by way of example, LNKD has guided to revenue this quarter of $210-215mm, this represents YoY growth of 73-78%. I'd hypothesize that if LinkedIn only delivers 70% YoY growth, still pretty phenomenal, the stock would crash even though 70% YoY growth would clearly indicate that the firm was taking significant share. Hope this helps.
Full Disclosure: I am currently short LNKD and have written about my short thesis here on Seeking Alpha, most recently here - http://seekingalpha.co...
LIBOR Related Lawsuits: How Do They Affect The Banks? [View article]
JPMorgan Loss Estimates Reach $9 Billion; The Real Risk Remains In Play [View article]
C 5.7x....($25.75/$4.53)
BAC 7.7x...($7.57/$0.98)
WFC 8.8x...($32.05/$3.66)
USB 10.3x...($31.07/$3.01)
The average among this group is 8.1x.
JPM is currently trading at 6.6x ($35.19/$5.32) or at a 19% discount to the group. To me that seems to indicate that much of the loss of luster is already built in.
If we also include GS & MS because JPM has a substantial investment banking component to their earnings, the peer table looks like this:
C 5.7x....($25.75/$4.53)
BAC 7.7x...($7.57/$0.98)
WFC 8.8x...($32.05/$3.66)
USB 10.3x...($31.07/$3.01)
GS 7.1x...($92.22/$13.01)
MS 6.0x...($13.64/$2.26)
The average of this peer group is 7.6x. This means that JPM is still trading at a 13% discount to this broader group. Sure, estimates are certainly subject to revision and analysts may be bringing them down, but at least right now, it doesn't appear that JPM is trading like an expensive bank. So I'm not sure how much of a Dimon premium is really baked in.
Hope that helps contextualize my answer.
Mega Banks Must Shrink: Great For The Country, Better For Shareholders [View article]
Thanks again for your article.
Things I Wish Jamie Dimon Could Have Asked Congress [View article]
Having said that, these over-simplifications of reality I think present a trading opportunity for long-term investors willing to deal with a little volatility. I think a couple of these large-cap banks, Citi and JP Morgan, in particular are trading well below intrinsic value, and offer a reasonable amount of downside protection even in a low rate, low growth environment given their current discount to tangible book value. I've written a few articles about the large cap banks and I think there's pretty substantial value there and generally investors should be able to generate IRRs in the mid-to-high teens over the next several years.
Bank Of America's $67 Trillion In Derivative Positions Explained [View article]
"In all, I think that the derivatives market is not as nefarious and evil as most believe. The economic benefits are real, but the risks are exacerbated by lax regulation and no formal derivatives exchange. In order to restore trust in our banking system, these contracts should be sold on an organized exchange and the parties that buy and sell these products should be heavily regulated. Without a derivatives exchange to accurately value these products with current market data, we can never truly know what these products are worth. Without more regulation of selling and buying of derivatives, especially Credit Default Swaps, we could be in for a financial fallout that would make the AIG debacle and financial crisis in 2008 look like a walk in the park."
I think you're spot on. There is a bit of a tendency to demonize the derivatives markets without considering the legitimate benefit it does serve. Yes, it needs to be better regulated and more closely scrutinized, but it does add some value.
Why Amazon's Worth North Of $200 Per Share [View article]
So just a couple points of clarification. If you're discounting free cash flows (and not net income), FCF adds back the stock-based comp charge that is included in net income. Thus the FCF number doesn't have a stock-based comp charge. If you've adjusted for this by discounting FCF with a stock-based comp charge included, then you're exactly right that you don't need to adjust the share count. However if you're forecasting a FCF number that does not include a charge for stock-based comp, you do need to augment the share count. I can't quite see which one you're doing from your article, but you're correct in that either approach works.
Also while you're correct that the firm will receive cash when stock options are exercised I believe most of the firm's stock-based comp is in restricted shares. When these shares vest the firm will receive no cash. So in this case, I think the cash the firm could potentially receive is much smaller given their bias to restricted stock vs option grants.
And then finally, re: including the cost of acquisitions as part of capex. You are certainly right, you can include it as a "CapEx" expense but then you need to give them credit for future growth. Or you can exclude it and not give them credit for future growth. Like you said it's one or the other, but not both. I agree with that entirely. Here's the thing though, I think their past growth benefited from acquisitions they've done in the past and since some analyst (me included) use the past as a guide to estimating the future, I think part of AMZN's growth rate is at least partially attributable to these acquisitions. So if you assume they stop acquiring, you need to assume the growth rate slows. And that it slows beyond what it was going to slow anyway given their increased size.
Hope that helps clarify my view and again thanks for the very thoughtful reply above.
Why Amazon's Worth North Of $200 Per Share [View article]
Another interesting thing about AMZN (and many tech companies) is that given that they pay many of their employees with stock-based comp this non-cash expense is added back when calculating free cash flow. The true effect of stock comp is to increase the share count down the road. However, since most analyst use a single share count in their DCF (the latest period), the future growth in share count from employee stock comp gets entirely lost. The way to compensate for this is to use a different share count for each future period, essentially discounting back FCF/share for each period (not several periods of FCF and then dividing by the current share count). Very few analysts do this and thus often overstate the value of firms that are heavy share comp users. Hope that makes sense.
Valuentum, interesting thorough approach. Thanks for writing.
+ Chris
Own JPMorgan For The Second Best Risk/Reward Profile In The Banking Sector [View article]
I think reasonable people can disagree whether the past 10yrs in this case (again, making some adjustments for leverage) is a good predictor of the future. I certainly agree with you that as a country we are likely to see a reasonably protracted period of global de-leveraging and that will no doubt affect the ability of these banks to grow. Having said that even if they are unable to re-invest in their business, they should still be able to return capital to investors & repurchase their stocks at a discount to book value which can continue to increase their earnings (and dividends) on a per share basis at a double-digit rate.
Also while there are some similarities btwn the Japanese period of de-leveraging over the last two decades and the US's next decade, I think one big difference is that the US injected huge amounts of capital into the banks essentially preventing them from becoming zombie banks like we had in Japan. The banking system in the US is pretty well capitalized (with a few exceptions) and likely to become more so over the next few years. Part of what I like about these investments is that I don't need to make heroic growth assumptions or predict outrageous multiples to get a pretty decent return on my money. In fact my forecasted multiples and returns on capital are well below what the banks have generated in the past. In Citi's case for example, I'm just predicting a return on tier 1 common equity of 10.25% and a price-to-tier 1 common of only 1.1x, those are far from a very aggressive assumption and well below their historical numbers. And even if you think my assumptions are too aggressive, in my sensitivity analysis, I ran a scenario where I assume the firm can only earn an 8% ROT1C and adjusted my P/T1C lower accordingly and I could still generate an IRR in the mid-teens with relatively limited downside. So even if you do believe that I've over-estimated the firm's long-term returns in a global de-leveraging cycle, I think the returns you can get on the stocks from this level, still look compelling assuming you are willing to wait.
At least in my view, the current price bakes in a pretty good margin of safety. Hope that's helpful.
Revisiting The Intrinsic Value Of Berkshire Hathaway [View article]
Own JPMorgan For The Second Best Risk/Reward Profile In The Banking Sector [View article]
1. Assumed the left tail was generally fatter than the right. This basically implies that as levered & regulated companies, there is a greater likelihood that they trade at a lower multiple to T1C than a high one. It also just makes my estimate a little more conservative.
2. Overtime, I have the weighted average P/T1C gravitate towards my calculated long-term sustainable P/T1C. In JPM's case that's 1.4x. This is much lower than what it's been historically, but it should be lower because capital requirements are going way higher.
Hope that helps. Also since these are entirely my own estimates and maybe not consistent with how other people view the probability distributions, anyone who wants can download my model here and tweak the probability distributions as they see fit. You can download my model here - http://bit.ly/LasdMV
Thanks for your question Andrew and thanks for making it all the way through a VERY long and dense piece!
Revisiting The Intrinsic Value Of Berkshire Hathaway [View article]