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Ján Mazák

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  • Are Flat Revenues Really IBM's #1 Problem? [View article]
    As Buffett has clearly stated, languishing stock price is a benefit for IBM shareholders since IBM buys back shares.
    On the other hand, companies like KMP have to raise equity by consistently issuing shares. That is what one should be wary of: being dependent on the stock market for the business success or growth.
    With IBM's reliable dividend, you can forget about the market and enjoy rapid dividend growth.
    Jul 22 08:13 AM | Likes Like |Link to Comment
  • Hidden Leverage At Kinder Morgan [View article]
    An important concern for Kinder Morgan is that it is dependent on issuing equity for growth. From this perspective, KMI is much better off because it can grow per-share cash flow from incentive payments even if per-unit distribution of KMP stays the same or grows very modestly. There is little doubt that there are plenty of growth opportunities available in the industry, but KMP unitholders will benefit only if KMP's share price is favorable at the times of equity issuances. Kinder Morgan has little control over that; and I would prefer to limit or avoid investments in companies whose success depends in a large part on the stock market.

    The leverage of KMI is certainly significant, but the assets being leveraged are mostly pipelines with very stable cash flows which decreases the risk. Even Berkshire's subsidiaries are borrowing heavily to invest in pipelines and other regulated infrastructure, and Buffett hates debt and undue leverage.
    Jul 20 05:32 AM | 10 Likes Like |Link to Comment
  • Warren Buffett's Secret Leverage... And Why You Should Be Using It [View article]
    Check the story of Rick Guerin for an example of what could happen to a successful investor employing value investing (with returns similar to Buffett's), but using leverage subject to margin calls as suggested in the article. (He went almost broke in '73-'74.)

    Buffett has used various ways to employ leverage, but always only in a way avoiding margin calls. (E.g. his partnership where risk was carried by the partners but a share of above-average profits was his, investing in businesses with float (American Express etc.), hoarding insurance float like that from worker compensation insurance where you receive premiums upfront but pay compensations over tens of years and so on.

    It's somehow sad that people use Buffett's name in conjunction with ordinary leverage subject to margin calls. They are turning his philosophy upside down; his first rule is to avoid losing money, and especially to avoid catastrophic losses from which it is too hard to recover.
    Jul 16 06:42 PM | 2 Likes Like |Link to Comment
  • The New Chowder Rule And How To Find Value In Owner Earnings [View article]
    I would say we are counting retained owner earnings twice: once in EBIT yield, once in earnings growth. What is the reason to include that portion of earnings twice? Or have I missed something? (Note that there is no such problem with the original Chowder rule.)
    Jul 1 05:43 PM | Likes Like |Link to Comment
  • Large-Cap, Dividend Growers' Portfolio That Can Outperform The Market: Deere [View article]
    No, Deere's debt is not a problem if rates rise; a rise in rates could perhaps even boost Financial Services profit. And the debt is not that huge as it seems.

    However, increased rates would probably lead to lower sales (perhaps significantly lower for a few years if rates rise by a lot), so Deere would be hurt indirectly. But higher rates or not, farm machinery has to be replaced anyway after 12-20 years.
    Jul 1 04:43 PM | 1 Like Like |Link to Comment
  • Kinder Morgan: Strap Yourselves In And Prepare For Lift-Off [View article]
    I would like to understand the competitive position of an operational fully depreciated pipeline. I have read somewhere that regulators allow to charge only a small management fee plus operating costs (so no return on invested capital goes into the tariff). But then, such a pipeline has the low-cost advantage compared to newer pipelines? Is it true?
    Jun 12 02:29 PM | Likes Like |Link to Comment
  • Kinder Morgan: About To Pull A Rabbit Out Of Its Hat? [View article]
    The trouble is that those 14% is actually not dividend tax, but mandatory health insurance (which is a kind of tax anyway since you cannot avoid it and it does not give you anything in addition to the health insurance you have to pay from your salary).

    The income tax on dividends is zero in Slovakia (we just have that "insurance" for individuals). Thus those 15% withholding is money entirely lost.
    Jun 9 03:59 AM | Likes Like |Link to Comment
  • Kinder Morgan: About To Pull A Rabbit Out Of Its Hat? [View article]
    Thanks a lot for your reply. Essentially, I am trying to compare KMI and KMR. For me, KMI dividend is taxed at 15% in US and then by 14% again in Slovakia, so KMI's effective dividend yield is about half compared to KMR for me. Both companies pay a lot in dividends so capital appreciation will be modest (say, 5 to 8%) and so dividend taxes are profound.

    On the other hand, I like KMI more as an investment. KMP retains no cash, so depleted reserves have to be offset by capex financed by newly issued units and debt. (Which is no concern for KMI, only for KMP/KMR.) The depletion is not that material, of course, it is only significant for the CO2 segment which is not that large. I just wanted to really understand the company before taking a large position.

    There is also the risk of falling price of KMP units which means larger dilution for unitholders. Again, no such problem with KMI. No matter how I slice it, KMI looks to have significant advantages over KMP.
    Jun 8 12:56 PM | Likes Like |Link to Comment
  • Kinder Morgan: About To Pull A Rabbit Out Of Its Hat? [View article]
    And while we are at questions, I have another one. I am almost sure someone will give me an answer -- most of KMP's unitholders should have one.

    I do not understand how is it possible that KMP raises the distribution so much. I will illustrate this by an example. Let's say KMP has 10B of assets yielding (after expenses) 700M a year with all that cash being distributed (so, we have 7% yield). If KMP was to raise the distribution by 5% in the next year, then it can do this either by inflation indexation of their contracts (or similar features or direct fee increases), or by adding new assets. I do not believe that revenue can be increased too much by fee increases since there are regulators watching and inflation is rather low. But let's say it would be 3% increase of fees on existing assets, offset by a 3% inflationary increase in expenses. Thus the existing assets yield 721M next year. A moderate addition to assets of KMP is something like 1B, we assume that the capital structure remains intact (so KMP issues new units and debt). To keep the per unit distribution raised by 5%, now we need 700M * 1.05 * 1.1 = 808.5M of cash. So 808.5M - 721M = 87.5M have to come from the newly added assets. That is, that 1B of assets have to yield 8.75% (compared to the old assets with net yield of 7.21%). Consequently, the newly added assets are bought cheaper or have higher quality than the average of old assets. If this is to be maintained for many years, KMP has to add cheaper and cheaper (or higher-yielding) assets, which does not make much sense to me -- I doubt that KMP would be able to build/buy something yielding 20, 30 or 40 percent. So a sustainable distribution growth is theoretically impossible.

    However, KMP has managed to grow its distribution by CAGR of much more than 5% throughout its history. What am I missing? Low interest rates in the past five years might have helped, but KMP has grown before, too.
    Jun 7 03:30 PM | 1 Like Like |Link to Comment
  • Kinder Morgan: About To Pull A Rabbit Out Of Its Hat? [View article]
    Thanks for this special opportunity for questions :) I have a couple of them.

    1. The calculated distributable cash flow (DCF) of KMP includes depletion. I have not found the precise amount anywhere in the financial statements. But if depletion is material (which should be, given that a material amount of income comes from oil production), the only way how this adjustment of DCF would make sense if the depleted reserves are replaced. I have trouble finding the appropriate accounting entry for reserve replacement. Is it expensed, or in capex, or in payments for acquisitions?

    2. I believe that some of KM pipelines have rather short life because their purpose is limited to transporting some almost depleted reserves. Of course, I have no idea about the distribution of estimated pipeline life. If a material number of pipelines have a short life, they are depreciated very fast. Consequently, the depreciation in the calculation of DCF should be offset by capital expenditures to "maintain throughput", which for the mentioned short-life pipelines means something like building new ones elsewhere. However, the stated sustaining capex is rather small to contain anything like this. Isn't the DCF overstated because of this? (If this was true, it would be better to hold KMI instead of KMP since it does not matter for KMI that KMP will have to issue new units to build those replacement pipelines.)

    3. How much of KMP's revenue is indexed to inflation (or has a similar feature allowing raising fees year in, year out?
    Jun 7 03:26 PM | Likes Like |Link to Comment
  • Berkshire Hathaway Invested In Verizon, Should You? [View article]
    Perhaps the possibility of rising interest rates is already accounted for in their valuation. In other words, the sectors you mention are about as likely to contain good opportunities as any other sector. Without a detailed look at the debt structure (maturities etc.) I would not write off Verizon, REITs, John Deere or any other company just because of the present close-to-zero rates.
    Jun 1 08:33 AM | 6 Likes Like |Link to Comment
  • IBM: How To Get The Company's Growth Options Without Paying For Them [View article]
    I just want to point out that humans tend to be very overconfident in assessing their understanding of things. For instance, you claim here that a layman could follow the logic of the article. In a broad sense, it is true; most layman investors would agree that buying companies with sustainable competitive advantages is sound. But the devil is in the details.

    Consider the definition in the article:
    "We define sustainable competitive advantage as the difference (the performance spread PS) between the return on capital and the cost of capital (a difference correctly measured, that is after transforming GAAP numbers into a rigorous computation of economic profit, after deducting the full cost of capital, and eliminating the accounting distortions)."

    Most of the steps in the described process require more knowledge, experience and effort than a layman investor can contribute. In particular:
    1. the performance spread in a given year measures the comp. advantage in that year; where does the sustainability come from? how is one to judge without a deeper long-term industry experience?
    2. eliminating the accounting distortions: this can be only done company by company, and a thorough job has to be done in analysing all the notes to financial statements, management discussions etc. (Check, say, KMI's 10-K -- I have spent hours perusing those 200 pages, but still cannot answer even basic questions about the business, e.g. whether their pipelines have enough product to be transported for many years to come, and how to figure out how depletion of their oil fields being added to distributable cash distorts the measure so it becomes not sustainable).
    3. rigorous computation of economic profit -- maintenance capex is always just a guess if your are not an insider (and even as a CEO you can only estimate future needs)
    4. full cost of capital -- again nothing for a layman -- CAPM is not a layman's weapon and does not work anyway; anyone can come up with his owns way of computing the cost of capital. So the numbers presented in the article are not that useful without understading the particular method of how they were derived. For the author: Thanks for the article, I do not mean this as a criticism, I believe those numbers make perfect sense to you and you are being consistent across companies -- it's just that I personally cannot act on your opinion without understanding the details, and other laymen are in a similar position. (I think that the cost of capital can be best expressed via lost opportunity costs. This is how I view my own capital I invest -- buying a particular stock should be a better use of capital than buying another stock or some index. But I cannot imagine how to make any precise calculations with this notion in comparing companies.)

    Disclosure: quite a big chunk of my portfolio is in IBM.
    May 31 06:14 PM | 2 Likes Like |Link to Comment
  • Understanding Deere: Competitors And Risk Factors (Part 2) [View article]
    Thanks. I did not invest any effort in trying to determine a precise value for equipment economic life; it depends too much on equipment type and utilization. It's actually better to measure it in hours and not years from a farmer's standpoint, but that is very impractical from investor's standpoint.

    It seems that the equipment is often re-sold several times during its lifetime. For instance, Slovakia's farmers consider buying older combines from Germany, and use them for 20-25 years, perhaps thanks to lower utilization. And small farmers use their tractors "indefinitely", continuously patching them in their yard with whatever spare parts available in their vicinity -- but we are not speaking about Deere's tractors here :)
    May 22 07:33 AM | Likes Like |Link to Comment
  • Understanding Deere: Impressive And Sustainable Returns (Part 3) [View article]
    I am willing to admit that I am looking at Deere as it would look like in a reality harsher than it is (that is, as if some risks have hurt the company). And perhaps I have made a plain error in deducting something which does not make sense, e.g. deducting too much of interest expense. Thanks for pointing this out. :) Hopefully, I have not done the other type of mistake that really matters here: forget to deduct something that has to be deducted.

    The growth rate of earnings is not an entirely arbitrary number, it depends on how much earnings will Deere retain and profitably reinvest. For those 8.5%, it's 20% of retained earnings reinvested at 25% ROE (=> 5% growth) and 3.5% pricing power (consistent with history). Of course, the crucial number is those 20%, and no one can predict this with any reliable accuracy for the years to come. Hence, two scenarios; an even in a very poor one you get 9% total return; in a realistic one, you get 13%; I am optimistically hoping for something even better thanks to the factors listed before conclusion but not entering the calculation.

    To repeat it once more: I am trying to avoid permanently losing money. With Deere, about the worst-case long-term scenario I could imagine is getting 9% annual return; realistic scenario suggests something like 12-14%, and slightly optimistic 15+% for 5-10 years perhaps, and then maybe some slowdown, who knows.
    May 21 08:33 PM | Likes Like |Link to Comment
  • Understanding Deere: Impressive And Sustainable Returns (Part 3) [View article]
    Basically, the problem is what maintenance capex is, and I do not know how to reliably find out. Some people (e.g. Jae Jun) count all capex as maintenance, but that is too conservative IMHO. Deere spends a lot on plant upgrades, and I have explained that I am using 140% of D&A as a proxy for maintenance capex in Part 1.

    For instance, in 2009, Equipment operations capex totaled 772M, but D&A was only 450M. (So capex is at 170% of D&A). According to the 10-K forms, 2009 capex is related to "modernization and restructuring of key manufacturing facilities" and also include development of new products.

    In 2010, there was 796M of capex and 477M of D&A (capex = 166% of D&A). Capex "relates primarily to Tier 4 emission requirements and the modernization and restructuring of key manufacturing facilities, and will also relate to the development of new products." Most of this sounds like maintenance to me (e.g. without Tier 4 compliance you won't sell much); even those new products are partially used to replace some obsolete products.

    I did my best to avoid arriving at a conclusion of the type "well, Deere looks 30% undervalued, but maybe I was too optimistic with capex, and maybe the interest rate rise risk is bigger than I feel, and what if a new regulation will lead to a major revamp of plants with no earning benefits to Deere, blah blah blah, what if the discount is actually just 10%"?

    If I had managed a Deere-like manufacturing company, I would know better, but as it is, I would rather increase the margin of safety by severe deductions where unsure. With such an approach, even having a 5-10% margin of safety is enough to avoid overpaying. I could have been less conservative and compensate it by requiring a larger margin of safety.

    Similarly, I have just listed the factors possibly leading to improved returns. I could have tried to reflect them in my calculation, but they aren't easily measurable. And I am very skeptical with forecasting. E.g., in 2008, Deere has estimated 2009 capex at 1 billion, and then only 772 millions were realized --- I won't do any better with my prediction, that's for sure.

    But you are right: I do not see many opportunities around today, everything I look at looks close to or slightly above fair value :)
    May 21 08:15 PM | 1 Like Like |Link to Comment