Joe Ponzio

Joe Ponzio
Contributor since: 2007
Company: Ponzio Capital
That's what will make the sell decision so hard. When the dividend comes back, it may not come at $2.00 but will likely come at a high yield relative to the purchase price. Do you keep the cash flow stream, or sell and reinvest in another opportunity. It all depends on the timing, the dividend, and the market price at that time (likely in the next quarter or two).
I don't see too much threat in the lawsuit, especially when it comes to valuation.
Yes, but their "worst case scenario" bottom line was natural gas at $8. When it fell below $8, their hedges flopped and went against them. Companies will often hedge for pricing in a range of highs and lows in an attempt to smooth out cash flows. Above or below those levels, their hedges tend to work against them.
The company didn't plan on natural gas falling from $14 to $3. Everyone essentially got hosed on their hedges. Still, it was a temporary condition that the market seemed to predict would go on forever.
Yeah. I'm working on changing the name to something catchy, like Madoff or Enron. :)
The valuation is discussed more in my quarterly letter to clients. You can download (free) the two pages that discuss BreitBurn from my blog:
I address that in another article here on Seeking Alpha, originally posted on my blog under Coca-Cola, Ten Years and Still No Growth. In 1996, KO investors could have avoided a near 0% 10-year return. Still, Buffett got in around $4 a share and rode it to $52 today. Great investment in 1988, not great in 1996.
Hi Sridhar,
To me, there is no such thing as a "growth" stock or a "value" stock - they are joined at the hip. I understand that Wall Street likes to separate the two, but don't we expect all of our investments to <i>grow</i>... in </i>value</i&... Why would you invest in any business that didn't?
The MOS depends on the moat of the business. A wide moat, industry leader like JNJ can be purchased with a 25% MOS. A weak- or no-moat business should be purchased with a 50% or more MOS, if at all. So, what do you think of Starbucks' moat? I'd say it is good, but hardly impenetrable. McDonald's is already trying to encroach on it, offering Premium Coffees. I'd want a 50% MOS on Starbucks. If I can't get it, there are plenty of other companies that might be worth my investment dollars. Remember, your goal is not to own Starbucks - it is to grow your money. <strong>Put your dollars where you'll get the best value</strong>.
CROIC is not a function of the size of a company, it tells us how well management is employing the capital it has. It is essentially a function of interest rates. If businesses have to borrow at 8% and CROIC is at 6%, our company had bad debt that is eating up cash. On the other hand, a 15% CROIC would indicate that management is using debt as an asset.
I got an email from a visitor to F Wall Street that asked the same thing. For the calculation, I don't round the numbers. On the blog, for simplicity, I round. The 16.1% is actually 16.0754315618% - and even that is rounded a bit. Try the longer "16%" figure and you'll get the $966B.
S O,
The valuation methods are the same - shareholder equity plus the future free cash flow. The only difference is in the Margin of Safety (MOS, the discount to its intrinsic value). When investing in large, brand name, industry leaders, I am comfortable with a 25% MOS. It is tough to become an industry leader; it is easy to remain one. If JNJ feels threatened by a mid-size or small competitor, it can price them out of the market or buy them up - helping protect its status in the process.
With smaller companies, I like a 50% MOS. My rationale is two-fold:
1) The smaller companies have a tough battle against the leaders (as stated above). Anything can happen to their business - especially the inability to gain market share leading to slowed growth.
2) Smaller companies tend to grow much faster that large ones (on a percentage basis). If you project the value based on 25% growth in free cash flow, and the actual free cash flow grows at 15%, you'll have overvalued and overpaid for your business.
The 50% MOS reduces the risk of both. If you expect your company to grow at 20%, but it only grows at 12%, the 50% MOS still gives you a very nice, double digit return.
Why not go for a 50% MOS on companies like JNJ? I don't think you'd have the opportunity to buy it. The goal, according to Buffett, is to pay a "fair" or "bargain" price. Companies like JNJ have additional value as an industry leader - their "safer" than their smaller competitors. As such, a 25% MOS on JNJ provides roughly the same protection as a 50% MOS on its smaller competitor.
<strong>Why smaller companies?</strong&... Smaller companies can grow faster on a percentage basis and are often beat around by traders - offering us the opportunity to acquire a ton of shares of a rapidly growing business on a regular basis. Their businesses are also usually much more simple than those of the mega caps. Simple business = easy investing decisions. Sounds good to me.
I like when my investments are easy. Petrochina (857HK) is one of those companies that generates a ton a cash which means that it has the <i>opportunity&l... to grow. In the case of Petrochina, it has shown that it can grow.
The only problem with determining a value of Petrochina at this point is that I don't have access to the company's 1997 &amp; 1998 financial statements. The SEC only has the numbers from 1999 on. Without ten years of history, I do not feel comfortable trying to predict the next twenty years of the business.
Buffett was able to make this purchase, I assume, because he had access to the company's reports as filed in China. Armed with enough information, he was able to value Petrochina and move in. Not having access to that information, I have to be patient for another two years until I have ten full years of data.
Will Buffett load up on Petrochina? I would assume so. It depends on whether or not the stock market gamblers give him the opportunity to buy it at a fair price.
That's a long way of saying, "I don't know the value of Petrochina so I can't comfortably and confidently invest today." I'll just have to find another wonderful opportunity.