Dayanand Menashi

Value
Dayanand Menashi
Value
Contributor since: 2006
I am somewhat cautious about the valuation of the company. Following is my calculation applying the DCF Valuation.
Base Free Cash flow = Current average Free cash flow for last 3 years (CFO - Cap Exp) = $300 million.
With a growth rate of 15% (for a next 10 years) , discount rate of 8% and the discounted terminal value (at the end of 10 years) as $2.4 billion, this brings the current value of the business to $6 billion.
One more point to note that the company has leveraged to power its growth. Its total debt in 2007 was $75 million , when book value was $1.49 billion. Whereas the total debt jumped to $1 billion by end of 2014 while book value was $2.37 billion. One can see that the Debt to Equity ratio has really spiraled and thus the company will have very little scope to further use debt for its growth.
The company's market cap is $6.5 billion (For stock price $91.30). Thus I feel the stock is still overvalued. I like the long term outlook, but would wait for further pull back. Would like to buy around $75.
I agree with "experienced" comments. This article is missing the big picture. Sandisk's future is all about Enterprise computing. Because of the huge growth in BIG Data , the next challenge for the Enterprise IT world is how they could access all this data quickly???....the answer is FLASH , where Sandisk has a great edge over others. If you want to know more details as to why Sandisk's current results are poor and how their future is bright then please read my blog post
http://bit.ly/1HR4YI3
Following are Fossil's revenues and receivables for last 4 years
2014 2013 2012 2011
SALES (S) $3,509 $3,259 $2,857 $2,567
RECEIVABLES (R') $430.49 $454.76 $363.45 $302.46
(R')/(S) 12.27% 13.95% 12.72% 11.78%
As you can see the ratio of Receivables to sales was 11.78% in 2011 and was 12.27% in 2014. I agree that there have been variations , but the magnitude of variation seems reasonable.
Just curious to know if you have any similar analysis related to comparable businesses , would like to see how their receivables have fluctuated compared to sales.
Hi Thomas,
Thanks for an informative article. I have a basic questions about the company’s source of revenues. I have referenced its latest 10-k report.
QUESTION : In your article you have just talked about the company’s aerospace business, it derives 68% of its revenues from this segment , 17% comes from power sector and 15% comes from industrial sector. I am curious to know about your inputs on company’s non-aerospace businesses...FYI Its segment revenues for 2014 were as follows:
Aerospace Power Others TOTAL
INVESTMENT CAST PRODUCTS $1,572 $714 $176 $2,462
FORGED PRODUCTS $2,488 $942 $842 $4,272
AIRFRAME PRODUCTS $2,497 $34 $351 $2,882
TOTAL $6,557 $1,690 $1,369 $9,616
Percentage 68.19% 17.57% 14.24%
Segment operating income for 2014
i) Investment cast products : $874 millions.
ii) Forged products : $1,088 millions.
iii) Airframe products : $863 millions
iv) Corporate : ($153) millions
TOTAL : $2,672 millions.
Following are the segment descriptions :
Investment Cast Products
The Investment Cast Products segment manufactures investment castings, and provides related investment casting materials and alloys, for aircraft engines, industrial gas turbine engines, airframes, armaments, medical prostheses and other industrial applications.
Forged Products
The Forged Products segment manufactures forged components from sophisticated titanium and nickel-based alloys principally for the aerospace and power markets, and manufactures metal alloys used to produce forged components for aerospace and non-aerospace markets which include products for oil and gas, chemical processing, and pollution control applications. The segment also provides nickel superalloy and titanium revert management solutions, re-melting various material byproducts and reusing them in casting, forging, and fastener manufacturing processes. The Forged Products segment also produces seamless pipe for the power and the oil and gas industries.
Airframe Products
The Airframe Products segment primarily produces highly engineered fasteners, fastener systems, fluid fittings, aerostructures, and precision components for critical applications in the aerospace, automotive and industrial machinery markets. The majority of our Airframe Products sales come from the same aerospace customer base served by our Investment Cast Products and Forged Products segments. The balance of the segment’s sales is derived from automotive and general industrial markets, including farm machinery, construction equipment, machine tools, medical equipment, appliances and recreation.
Hi ,
Do you feel its a buy now at $11 and change
When we project free cash flows then we take into account :
1. Growth rate.
2. Discount rate (This is sum of Risk free rate and Risk premium)
You can find my quick valuation at
http://bit.ly/1BfFWdS
To understand the logic of my quick valuation , please refer to the post "Discounted Cash flow basics"
http://bit.ly/1CyNTh4
Following link has analysis of Invensense's biz , It valued around $17
http://bit.ly/1IL6cBl
Thanks a lot for clarifying the points about Graham's formula........ I simply follow Buffett's advice to value a business as if one is going to buy it and hold forever.
Just think about a scenario :
If your friend asks for $10,000 and in exchange gives 10% of his Pizza business , the first and foremost thing that will come to your mind is how you would get back the $10,000. In other words you will first look at the FREE cash the business is generating.
So if you ask your friend "Hey how much cash did you generate last year ?" and if he replies ..."Well I have yet to generate cash....but don't worry , my business is based on a new hot new marketing concept which is getting popular every day....there are several other people ready to invest in this business....so after a while you can easily resell your 10% stake for $12,000 to others and generate a profit of $2,000..."
Will you lend $10,000 to such a friend???.....Obviously NO right....
Unfortunately when it comes to stocks people forget the basics of Valuation of a business which at the end of the day is all about CASH....
You can refer to the following post to understand basics of Discounted cash flow http://bit.ly/1xcRlvA
I would say Oracle's Fair value is $40 . I used Discounted Cash flow technique.
With reference to Oracle's latest 10-Q report's Cash flow statement http://1.usa.gov/1xcPlUc we can see that the Capital expenditures increased from $279 million to $426 million. This is because all the servers it needs to deploy in its datacenters for maintaining the Cloud.
In general Cloud computing is changing the basic nature of Software business. In the past it used to be a cash cow because one had to deploy very little Capital expenditure and could keep generating Cash by yearly licenses.....Not any more , companies like Oracle , Microsoft and IBM are being forced to deploy large amounts of Capital towards the infrastructure. One will need to gauge how smart are these guys in getting the maximum bang from these capital exp......because if one is generating $1 billion in Cash from Cloud computing and has to invest back $700 million back towards Capital exp then the Free cash flow is just $300 million....
You's last comment was on Sep-9-2014 when SeaDrill was at $33 , its at $13 , just curious if you still have the same views about the stock as you had 3 months back...
Dear Sir,
Thanks for your comments. It appears you are very smart investor. Good for you. I also wish you were a humble person too.
No worries.
Dayanand.
So I guess the bullish argument now for Seadrill is that its a niche Arctic region play that its competitors don't have access to because of Seadrill's extensive Newbuilding program.....
I looked at its 6K report http://1.usa.gov/1wfhOpA (I guess this is what you referred in the comment) . Following is what they say
Newbuilding program
Total remaining yard installments for our newbuilds are approximately US$5.4 billion and US$1.5 billion has been paid to the yards in pre-delivery installments. With 19 newbuilds still to be delivered Seadrill is well positioned for future growth. Seadrill, as a responsible market leader, will refrain for the time being from ordering more ultra-deepwater rigs until a clearer direction can be seen in the market. Seadrill does, however see opportunities for newbuilds backed by long term contracts in Arctic regions given the structural under supply in this unique market.
Thanks for the info...Can you please send me the link to that statement.
So can the company reduce its next year's spending on Newbuildings or they are more like fixed obligations that the company has to honor. The reason I am curious about this s because Newbuildings is squeezing cash from the business. If the company has to continue the current run rate of $3bn plus on Newbuildings every year then it will soon run out of cash and will have to do some fire sale of its assets in order to just survive.
Question on the Cash flow statement :
If we glance at the Capital expenditures in the year 2013 , the expenditures on Newbuildings was $3,884 million and addition to drilling units and equipments was $389 million. Thus the investments on Newbuildings is almost 10 times that of Newbuildings...following are some questions
1 Why the company is investing so much on Newbuildings. Is it really increasing their intrinsic value???
2. Can the company live for some time without investing on Newbuildings.
The answers to these two questions will help us evaluate the company's ability to sustain more cash and survive the tough market conditions.
A look at Oracle's latest 10-Q . Company generated $6.4bn Cash from operations (For six months May-2012 to Nov-2012) . Spent $660mn and $350mn on Cap exp. The rest $6bn was spent on share buybacks. The share count reduced from 5.13bn to 4.90 bn (reduction of 200mn shares)
Even if Oracle's earnings are flat for next 6 months and its able to buyback 200mn more shares. The shares outstanding will be reduced 4.7bn and assuming Net income to be $5bn its diluted EPS for six months will be $1.06/share . Thus giving $2.00/ share for the year 2012-2013.
This is the lower end of my estimate. If we add 15% to it the higer end turns out to be $2.30 / share. Current stock price is $35.54. Thus multiple is 15.4 (which I assume is OK for the company of this size and biz model)
As per current stock price of $35.54 the business is valued at $168bn. I would wait for some pull back and would buy when stock is below $31.00
I just wanted to highlight one very important aspect about this company which is to do with its Tax status. As of now its fighting in court over it. If IRS wins then the company might owe large amounts of $$$ to Uncle sam......this I feel is a risk that cant be downplayed....
Following are the details of its Tax status . Its published in its latest 10-Q report.
Tax return filing determinations and elections
Delphi Automotive LLP, which acquired the automotive supply and other businesses of the Predecessor on October 6, 2009, the Acquisition Date, was established on August 19, 2009 as a limited liability partnership incorporated under the laws of England and Wales. At the time of its formation, Delphi Automotive LLP elected to be treated as a partnership for U.S. federal income tax purposes. Prior to the Acquisition Date, the Internal Revenue Service (the “IRS”) issued Notice 2009-78 (the “Notice”) announcing its intent to issue regulations under Section 7874 of the Internal Revenue Code of 1986, as amended (the “Code”), with an effective date prior to the Acquisition Date. If regulations as described in the Notice are issued with the effective date indicated in the Notice and with no exceptions for transactions that were subject to binding commitments on that date, the Company believes there is a significant risk that the IRS may assert that Delphi Automotive LLP, and as a result Delphi Automotive PLC, should be treated as a domestic corporation for U.S. federal income tax purposes, retroactive to the Acquisition Date. If Delphi Automotive LLP were treated as a domestic corporation for U.S. federal income tax purposes, the Company expects that, although it is incorporated under the laws of Jersey and a tax resident in the U.K., it would also be treated as a domestic corporation for U.S. federal income tax purposes.
Delphi Automotive LLP has filed U.S. federal partnership tax returns for 2009 and 2010. In light of the Notice, the IRS is currently reviewing whether Section 7874 applies to Delphi Automotive LLP’s acquisition of the automotive supply and other businesses of the Predecessor. The Company believes, after consultation with counsel, that neither Delphi Automotive LLP nor Delphi Automotive PLC should be treated as domestic corporations for U.S. federal income tax purposes, and intends to vigorously defend any assertion by the IRS to the contrary, including through litigation if the Company were unable to reach a satisfactory resolution with the IRS. However, no assurance can be given that the IRS will not contend, or that a court would not conclude, that Delphi Automotive LLP, and therefore Delphi Automotive PLC should not be treated as a domestic corporation for U.S. federal income tax purposes. No accrual for this matter has been recorded as of June 30, 2012.
If the Company was treated as a domestic corporation for U.S. federal income tax purposes, the Company would be subject to U.S. federal income tax on its worldwide taxable income, including some or all of the distributions from subsidiaries as well as some of the undistributed earnings of foreign subsidiaries that constitute “controlled foreign corporations.” This could have a material adverse impact on our future tax liability related to these distributions and earnings. Future cash distributions made by the Company to non-U.S. shareholders could be subject to U.S. income tax withholding at a rate of 30%, unless reduced or eliminated by a tax treaty. In addition, the Company could be liable for additional U.S. federal income taxes on such distributions and earnings, and for the failure by Delphi Automotive LLP to withhold U.S. income taxes on distributions to its non-U.S. members, for periods beginning on or after, the Acquisition Date, which liability could have a material adverse impact on our results of operations and financial condition.
Hi Shaifel,
I agree with your point that Facebook is being priced way too high than what's its current earning power.
I have been following Facebook's IPO roadshow and have just heard about its lofty user base of 900 million people and how much its growing.....but there has been very little information as to how these users will eventually be monetized....
Let us say that by some magical means I get exclusive access to world's largest library which has all the books in the world. Does that instantly make me the most knowledgeable person in the world???.....I dont think so.....even though I have the potential to become one because of my access to all the knowledge but unless and until I have the means and mode to digest all that knowledge , all those books will mean little to me.
Similarly Facebook should have a stellar plan to make use of all that personal information they have. For instance I love to play tennis, but have yet to see any advertisement of tennis lesson on my facebook page. Instead I see the advertisement of mobile phones which to me are least interesting, not that I dont love phones. But that's not something I would like to explore.
Bottomline - Facebook has done a tremendous job of creating a unique platform that lets people explore about who they are. But they have done a very ordinary job of monetizing it.
Last but not the least, it pays to read the following investment lesson from Buffett "Investment vs Speculation"
http://bit.ly/L6L2DA
Thanks,
Dayanand.
Has anyone thought of the liability part of AIG's balance sheet and which are the companies that are paying it. As June-30 / 2008 it had a liability of $971bn. Out of which $162bn was long term borrowings. All the people who leant that money can just forget about it because it will be next to impossible to get money from its new owner.
IT outsourcing has in itself become a "CENTER OF EXCELLENCE" and calling it bodyshopping shows the ignorance towards this new business model. Achieving success in this business is as tough as achieving success is any other kind of IT business like Hardware or software development.
I feel Infosys is in the right track and have created their own circle of competance. Any further advancement should be linked with their present competence.
The latest contract from Phillips is worth $250mn . I am sure any guy who works in IT would agree the degree of complexness involved in winning such contracts.
Everyone always talks about how INFY can adapt the model of Accenture and grow further, but I would say before attempting that they should first become India's#1 IT consulting company by exceeding TCS's revenues....
I guess you have not Understood Perficient's core competance.They are not in the market for the big IT outsourcing deals.They mostly deal with projects that need quick turnaround and can solely dealt with onshore teams.
Madhusudan,
I agree with your point that the core competance of offshoring gained by the Indian IT outsourcing heavy weigths cannot be mimmiced by the MNCs in few years. They would take years before they can achieve expertise in outsourcing field.
Coming back to your point on which stock is best for investment, it should be kept in mind that not all good companies are good stocks to invest. The golden rule of investing is to figure out "IS THE STOCK UNDERVALUED COMPARED TO ITS INTRINSIC VALUE".
In order to explain my point: Just consider the case of Microsoft. It is one of the best companies in the world. Their growth has been phenomenal in recent years (24% growth compounded annually).Following is their growth of net income last five years.
2002 $5.3bn
2003 $7.5bn
2004 $8.1bn
2005 $12.2bn
2006 $12.5bn
Now looking at the stock price, it was $30 in may-2002 and was around the same price in May-2007. The reason being the stock has been overvalued last few years and the market has been contantly correcting its value by reducing its P/E. Which during the dotcom bust was around 84 and has come down to around 20 now.
Following are the P/Es of some of the leading outsourcing companies.
Infy P/E = 28.5
Wipro P/E = 27.4
Cognizant P/E = 36.3
IBM P/E = 17.9
ACN P/E = 19.5
EDS P/E = 18.2
I guess your analysis should be more on evaluating the P/E of the above mentioned stocks and figuring out if they would remain the same in near future.
visit me @ annualreportanalysis.b...
Asif,
Wonderful analysis.I got your bottomline that Netsuite's CRM and E-commerce capabilities. I just had couple of points to discuss.
1.As per your article the market for small sized businesses that use ERP and SAP was 31% of $12.7bn which is around $4bn. The projected growth rate is 11%. This means that to grow at present rate the company has to successfully acquire some small players. Any insight on this???
2. As per the S-1 filing the combined accumulated deficit has been $193mn. I guess this might continue in near future before they attain profitability. Let us assume that the net accumulated deficit reaches $200mn before they start becoming profitable. What will be the time frame required to generate $200mn cash???
Thanks,
Dayanand.
visit me @ annualreportanalysis.b...
Sankar,
If you see my equation, it boils down to the fact that the USD will change from Rs 40 to Rs 23 in 10 years.This is based on the fact that USD was Rs 16 in 1990 and Rs 40 by 1998. So actually I am still conservative in my approach.
I considered 10 years experienced professional just as a benchmark.The 3-5 exp folks comparison will also be in a similar line.
D
Deepak,
The gist of your reply what I understand is "VALUE ADDITION". I agree with you on that point.It is the oldest business rule that has never changed nor will ever change.In essence, till you bring value addition to your customers they will keep on coming to you.The day you stop it they will go somewhere else.
Till date the Indian consulting companies were bringing the value addition of "LOWER COSTS".But companies like Accenture, previously known as Andersen consulting were established in fifties and developed there expertise in helping the customers in improving their business processes.In fact in those days a consultant was purely hired for those reasons.
<b>FIRST PROJECT BY ARTHUR ANDERSEN :</b> Accenture originated as the consulting division of Arthur Andersen which was founded in 1913 by Arthur Andersen and Clarence DeLany as Andersen, DeLany &amp; Co. Its origin goes back to 1953, when General Electric (GE) asked Arthur Andersen to undertake a feasibility study about payroll processing and manufacturing automation using computers for GE's Appliance Park manufacturing facility near Louisville, Kentucky. Arthur Andersen recommended installation of a UNIVAC I computer and printer, and GE agreed, which is the start of what became the first-ever commercial computer in the United States. Joe Glickauf was Arthur Andersen's project leader for the GE engagement and was responsible for the payroll processing automation, launching the era of data processing. Considered to be the father of computer consulting, Glickauf headed the Arthur Andersen administrative services division for 12 years.
Accenture since its first project fifty years back has mastered the art of improving business processes of its customers , the most important thing to note is that it has taken them decades to master this.The challenge for Indian IT consulting companies is to mirror this achievement in years instead of decades.
<b>WHEN CAN WE SAY INDIAN IT CONSULTING COMPANIES HAVE ACHIEVED THIS THRESHOLD? :</b> The day revenue per employee for Infy or Wipro is same as that of Accenture or HP. We all know its a long way to go....
STRONG BUY.....provided you have the stomach for value investing. I mean an investment time horizon of around five years...
Yes Microsoft could buy Patni and use its resources for software development provided it suits there acquisition criteria. Microsoft bought hotmail for 400mn in 1996.As such hotmail was a free e-mail service providing very little revenue. But when it was combined with MSN it became a great asset with huge potential of getting advertising revenues.
Coming back to your point on Patni being acquired by Microsoft. Patni's resources are specializing in several technologiies: mainframe, web, SAP, microsoft to name a few....this means more than half of the resources wont be much of use for Microsoft's product development.........a cobol programmer with 10 years experience will be of little value to microsoft, and 30% of Patni's resources are COBOl experts (based on my personal experience of working in that company for 7 years).
Let us say there is an outsourcing company in India that is specializing in microsoft technologies and has about 1,000 employees and is selling at $x. If it costs Microsoft India more than $x to add 1,000 employees then obviously they would jump on that Indian outsourcing company because Microsoft will get its additional employees at a cheaper price......as of now I dont see any such company in India.
It is not necessary for an intelligent answer to contain world's all financial jargons . With my experience of interaction with an averrage investor , I guess he or she is looking for business analysis he or she understands which is PLAIN ENGLISH.
Coming out of the intricacies of finacial accounting on calculations of cash flow, lets talk PLAIN ENGLISH. As the whole deal was on cash so any shareholder will be curious to know as to what will be the time frame Wipro expects before it gets back its $400mn.As we are discussing IT outsourcing business so I guess it is not unusual to anticipate 20% ROI, because that is quite conservative compared to the growth rate of industry.
In this high growth IT outsourcing indutry if Wipro says that they will invest $400mn and wait for 10 years to get their money back (assuming your single digit ROI). The shareholders will get a heart attack.
The very reason people are investing in IT outsourcing business is because of its high growth rate.If they were to expect single digit growth rate then they might go to some less risk financial companies like Citigroup.
BASIS FOR WIPRO'S INVESTMENT : The whole world knows that Infocrossing will nobe generating $400mn in cash flow next 5 years, and that is not Wipro estimates. The reason they are taking over this infrastructure management company is to use Infocrossing's standing in the market to help its core business of application outsourcing.
Explaining this in plain english, let us say there is a IT staffing company in India that had 10 programmers who were working for Indian clients and earning about $1,000 evey month. If an American software company buys that Indian staffing company for $100,000 then they dont expect the programmers to generate a cash flow of $100,000 by working for Indian clients. What they would instead do is are-deploy those resources to develop their latest product . If they are able to develop the product in two years and sell the software product to its clients earning a net profit of $100,000 then they have recouped their investment in 5 years. Plus they have created two assets :
1. the software product that will have earning power for years to come.
2. Experienced programmers who are well versed with their product development.
STRATEGY OF REDEPLOYING THE ASSETS : This is the strategy Wipro is going to undertake once it acquires the company, it is going to re-deploy the assets in line with its business model.