Intrinsic Valuation

Intrinsic Valuation
Contributor since: 2011

Hi babcocdr,
Great comments, and I agree with them all. Your comment: "The shareholders would be better served if BP became an exploration company and turned over their discoveries and other assets to competent, compliant and efficient operators." made me laugh out loud. You are absolutely right!
BP is the worst of the supermajors. BP has grown its Intrinsic Value from about 20 to about 70 over the past decade whereas Chevron has grown its from around 20 to around 130. Not even the Macondo disaster can explain the massive difference in performance.
From a purely quantitative point of view BP is very much in value at the moment. And investors could do much worse than an investment in BP right now. But the other supermajors are better run - but currently offer a lower Margin of Safety.

Hi Daniel,
Share-price and Intrinsic Value always converge... eventually. There are no exceptions to the rule.
It is the very principle that has made Warren Buffett so rich and the very principle that has proven Ben Graham correct.
The problem is it can take years for it to happen and most people have a short term mentality..
Your analysis is proof that one should never look at the latest 3 month or 6 month or 9 month data. Look at yearly data only. The company will vary its investing activities through the year. Look at annual data to see how the numbers look.
World Acceptance's Free Cash Flow has been nothing short of exceptional for the past decade, and it continues to be so. The company is using its extraordinary cashflow generation to buy-back shares while its share-price is well below its Intrinsic Value - a great way to enhance shareholder value while they can. It is also using debt to buy back its own shares - which as you point out is not an agreeable practice.
Over the last 10 years the share-price has performed extraordinarily well on the back of an extraordinary business performance.
I, like many others, don't necessarily agree with the business that World undertakes - perhaps they exploit the vulnerable - but wow their economic performance is remarkable.

Hi Andrew,
Good question. I know there were some safety concerns on some of Baxters products recently.
And many of Baxters products are not complex, hence low barriers to entry would exist, meaning that any decent returns could be eaten into by existing and new competition.
An expert in any of the medical devices, pharmaceuticals or biotechnology industries (of which I am not) might be able to shed more light.

Hi All,
Great comments!
Kirk Otis, their debt and interest costs are high relative to just about anything. Even companies that are purely financial - if their net debt to equity was north of 300% they would have too high a net debt. A company like Deere & Co spending 23% of net income on interest is just a waste. It seems to me that just like the US and much of the Western World - they have needed debt to fund growth - it is simply not sustainable.
Perhaps I am an idealist, but I firmly believe the best companies grow on the back of their own Free Cash Flow generation - and Free Cash Flow has been lacking of late for DE, which is a big concern.
There are some (younger) companies growing at an impressive rate on the back of their own cashflow - employing zero debt. I place much greater emphasis on those companies.
Hi PalmDesertRat, you too make some great points. Your 2nd paragraph is what concerns me about DE. Having said that I also agree with your 4th paragraph! I too believe they can manage their business, and I believe their future looks reasonably secure. I also believe there are plenty of better opportunities out there.
The above points are all just my opinions of course!
Hi David,
The top 10, indeed the top 100 - are only for subscribers. I don't want to dilute subscriber value even one little bit.

Hi mailer-daemon,
That's a fair comment. It does look to be a highly competitive industry.
I guess the attraction for DELL is that it is a new industry (especially for tablets) so there might be some opportunities. It looks like DELL has stopped producing their cheap "netbooks" and are perhaps looking to manufacture cheap tablets instead.
Hopefully DELL is focusing more on its services offerings which appears to be an attractive market.
Hi David,
Thanks for the comment.
My valuation basically values companies as zero if they are not making a profit.
But for BP, depending on how its 2011 numbers come in, its Intrinsic Value I forecast to be about $51 for 2012, rising to around $56 in 2013.
Hi Hungry for Knowledge,
Thankyou for pointing that out. My mistake.
To "Southof30a" and "sld1976" - well done for repeating exactly what Hungry for Knowledge pointed out with your first ever comment. You have proven the value of your contribution here.
Dear All,
Please note that I made a mistake - the first word of paragraph 5 should be "EBAY's" not "PayPal's".
Mods, can you please fix that for me?
Hi David,
EPS of 31.04 and 34.70 for 2011 and 2012 which is part of the input that derives the IV for 2012 and 2013.
Derived from analyst estimates.
Hi yingcpa,
You are right! I stand corrected.
I felt something was amiss. If they retire the treasury stock, it will have zero net effect on the book value, as the changes will all occur under the shareholders equity items. Assets and liabilities will not change.
The middle paragraph of my comments addressed to brianhutch is incorrect. IBM have been using excess cash to repurchase shares which keeps their shareholders equity (book value) very low. If they simply kept the cash in the bank, their shareholders equity would be much higher, and their return on equity and net debt to equity values would look a lot different.
Apologies to all for the mistake. Whether a company retires shares or keeps them as treasury stock makes absolutely no net difference to shareholders equity.
Hi Franc,
Note that I am not a Buffett fanatic like some people (I actually believe he should be paying a huge dividend to his shareholders because he can't generate great returns on retained earnings anymore), but you need to look at his performance over the past 50+ years. It is truly astronomical. His performance is so far better than anyone else, at least anyone within the last 100 years, he is truly in a league of his own.
And through his letters and articles he has brought equities analysis to the world, continuing the work that Benjamin Graham did, and expanding on it.
See my few paragraphs under Conclusion in the article above as to why, in percentage terms, it is impossible for Buffett to post amazing gains like he used to when he was younger.
Hi brianhutch,
Can you kindly clarify your comments on PE? PE is not even mentioned once in the article. The Intrinsic Valuation method is a Return on Equity valuation method.
As I mention in the article, the shareholders equity figure (which is currently around $22B), is distorted somewhat by the $107B of treasury stock. It could be argued perhaps that a more realistic book value is $22B + $107B = $129B
Note that it has around $24B of long term debt, $6B of short term debt, and $11B of cash. This gives me a net debt of $19B.
Hi churchman,
Great point! Perhaps that helps to explain CPLA's great profitability. Low price companies always have a competitive advantage over their competition.
To maintain their competitive position, whereas other education companies spend to upgrade buildings, CPLA can spend to improve the quality of their education.
Hi Mr Clark, you make a great point, and Australia's "mining tax" is perhaps a look at what's to come in other countries in the future.
Charging for carbon emissions will also be on the agenda of governments over the coming decade which would affect mining companies too.
Hi Marc,
Yes, the most important question that an investor will want to ask before investing in CPLA is - can they comfortably overcome the new regulatory requirements?
I present in my article a few points indicating that it looks like they can.
Are you of the belief that they may struggle to meet the new requirements?
Good report. I agree that Nike is a great performer. Apart from a hiccup in 2009 the company has increased EPS every year for the past 10 years albeit at a pretty slow rate. It achieves a poor return on its retained earnings which is common for such a large company.
Its ROE has been over 20% every year over the last few years except for 2008 where is was 18%, and it has zero net debt. It truly is a wonderful company. Unfortunately I have an Intrinsic Value of around $50 on Nike, so I feel it is way overpriced at the moment. Having said that, great companies like Nike stay almost permanently overpriced based on my valuation method.
LinkedIn is trading at, what 400 times earnings? Groupon is another hot stock that will be here today gone tomorrow. Irrational exuberance is alive and well. Groupon has proven themselves quite capable of making a loss - hundreds of millions of dollars down the drain. Until they start to make a profit not many people can take them seriously.
It is a "hot stock" at the moment, so the media (who have to write about something) will keep writing their Groupon headlines for a while like they did with LinkedIn. That will keep the shareprice going up for a while perhaps.
Most valuation methods value Groupon at a big fat 0 because they have not made a profit. The only valuation method that would value Groupon at anything other than 0 is the discounted cashflow method which allows for wild forecasts to be used.
Groupon will come crashing down eventually, the thing is that no one knows when and no one knows how high the shareprice will go before it does crash.
Hi Robys,
Great points. BBVA may have to spin off BFR if it gets itself into trouble. That may not be a great thing for BFR, agreed.
The re-elected government has been in power for a while. Further taxes on banks is certainly something they could impose, as could any government in any country, but the government in Argentina is unpredictable and it certainly makes the country a higher risk than others.