S&P 500 Valuation: Earnings Expectations Versus Reality [View article]
Sunil,
Thanks for the note. Yes the R&D comes from the SEC 10-Ks and pro-rated for quarterly estimates. I use a 7 year amortization schedule and adjust NOPAT for the delta when calculating ROIC. Its a rough cut way of doing it but I am comfortable enough with the process. The main reason I do it is so that the ROIC/WACC numbers fit more with reality (ie tendency towards 1X). (Typically if its <10% then I might be tempted to skip it.
As for outperformance -- MSFT has had a strong recent gain along with pretty much everything else but I think the cash flow profile will likely trump growth concerns. Furthermore I am leaning more conservative so I think this type of investment has some attractive downside protection. We shall see.
Industrial Sector Review: Defense Stocks In The Bargain Bin [View article]
Thanks for the comment. I tend to work with non-financials so its pretty open. EV is the firm value (so net debt position) versus just the equity piece. EVA would be (ROIC-WACC)*IC and I didn't really go to that detail on this note.
Also don't typically look at PE in the scenario -- a bit different than other's but this would be more inline with P/B or other asset based metric. In the future I might add P/S and P/E to provide more depth but again just wanted to focus on the EV/IC multiple.
Good question to which I don't know. I think with CAPE earnings at all-time high means they are near long-term growth trends. And with recent earnings above the average -- history has shown that this won't last and should be part of one's expectation set. Timing however is much trickier and will likely be a catalyst that few were expecting!
Sorry Bears, We're In A Secular Bull Market [View article]
ittybittymonkey,
I agree -- secular bear market since 2000 and a cyclical bull. (I would argue the end of a cyclical bull given it began in 2009 as you pointed out). Valuation multiples have to decline quite a bit before this secular bear market is over. Based on today's valuations -- were not close.
Outside of central bank action -- demographics and deleveraging are the two items that I believe will push the secular bear thesis until later this decade or early 2020s.
Thanks for the comments. As you might recall from Stern & Stewart that established firms can either be X-,X,Y,Z, and pre-Z. I didn't spend the time to explain all of the categories except that I feel that a new category Y+ should be added. An X company is typically valued such that EV is par with IC. An X- company where EV is less than IC. Utilities for example are currently trading at less than IC.
As for the EV-to-IC expansion -- the idea is somewhat nuanced so I apologize for the lack of clarity or if I mangled the concept. However, I am sure the EV would expand if management declared that it was going to double the amount of fcf returned to shareholders as of tomorrow. That would reflect an expansion of EV-to-IC multiple. In any event I will look at expanding on the idea for clarity in the future.
The Utility Sector On Discount Plus One For The Radar [View article]
dsr70,
Right -- no specific mentions of coal/nat gas/nuclear. That is definitely warranted as well as other issues when making specific investments. But the focus was on capital deployed and based on recent 5 year historical values the market wasn't providing a premium which seems contrary to a fair amount of other opinion.
The Utility Sector On Discount Plus One For The Radar [View article]
Interesting question:
I would be more comfortable saying that there is mean-reversion at the sector level versus at the individual firm level within the sector. Again that is why I wasn't more confident than suggesting it for the radar although clearly interesting. There is value that can be unlocked -- and the mean-reversion to me suggests that the the industry can support better valuations for the underlying assets that Exelon is currently being rewarded for. I would rather consider it a management issue/power generation pricing etc issue versus a classic mean-reversion bet.
The Utility Sector On Discount Plus One For The Radar [View article]
The 16% discount referred to the .84X multiple for Exelon which is 16% less than 1.0X. Then there is the discount to the .84X multiple of approximately 59%. So the upside in my opinion was the 59% to the .84X multiple. A forward-based dcf/eva analysis makes the value even higher so I am not doing any heavy lifting here.
The Utility Sector On Discount Plus One For The Radar [View article]
I don't think my message was conveyed properly: I am merely pointing out the delta between return on capital and cost of capital. I am not making any judgements on what I would prefer -- rather that based over the past five years the market is discounting the group slightly and therefore not overvalued like some have expressed. While I didn't try to make the argument in the note -- at .86X capital -- there seems to be room for improvement -- whether that is pricing in natural gas or rate adjustments from regulators etc.
As for utilities in general -- I am interested because I am interested in low volatility equity investments and utilities happen to be a large chunk of that universe. Turtle versus the Hare I suppose.
The Utility Sector On Discount Plus One For The Radar [View article]
Just like HPQ has been a value trap so might EXC -- again the profile is not pretty but at some point you must wonder that someone will be able to right the ship. Unfortunately fear of a value trap is why I hesistated to fully commit to saying something more bullish for EXC despite the potential value to be unlocked.
The Utility Sector On Discount Plus One For The Radar [View article]
PompanoFrog,
Not sure I follow exactly what you want me to respond to. 5 years should get close to a business cycle so the normalized 5yr multiple should be reasonable. Each multiple was reviewed for outliers. For instance I only used 4 years for EXC given the first year was completely different and would have biased the #s up.
Have I done a t-test or something on a stat side -- no and don't plan on it.
I understand the yield comments completely. However if you read the article you would see that I was looking at the firm value based on the invested capital -- irrespective of the dividend yield. My personal interest is in the low volatility aspect. Anyway -- point taken on 40 year low.
It could be that the industrials are selling cheaper but again 30% of the Low Vol index is Utilities and thus the kernel of the idea for the article plus the fact that EXC is an interesting candidate for further due diligence.
S&P 500 Valuation: Earnings Expectations Versus Reality [View article]
Thanks for the note. Yes the R&D comes from the SEC 10-Ks and pro-rated for quarterly estimates. I use a 7 year amortization schedule and adjust NOPAT for the delta when calculating ROIC. Its a rough cut way of doing it but I am comfortable enough with the process. The main reason I do it is so that the ROIC/WACC numbers fit more with reality (ie tendency towards 1X). (Typically if its <10% then I might be tempted to skip it.
As for outperformance -- MSFT has had a strong recent gain along with pretty much everything else but I think the cash flow profile will likely trump growth concerns. Furthermore I am leaning more conservative so I think this type of investment has some attractive downside protection. We shall see.
Industrial Sector Review: Defense Stocks In The Bargain Bin [View article]
Industrial Sector Review: Defense Stocks In The Bargain Bin [View article]
Also don't typically look at PE in the scenario -- a bit different than other's but this would be more inline with P/B or other asset based metric. In the future I might add P/S and P/E to provide more depth but again just wanted to focus on the EV/IC multiple.
Matthew
S&P Valuation: Shiller CAPE Heresy Edition [View article]
The 4 Horsemen Riding To The End Of The Secular Bear Market [View article]
Thanks!
Sorry Bears, We're In A Secular Bull Market [View article]
I agree -- secular bear market since 2000 and a cyclical bull. (I would argue the end of a cyclical bull given it began in 2009 as you pointed out). Valuation multiples have to decline quite a bit before this secular bear market is over. Based on today's valuations -- were not close.
Outside of central bank action -- demographics and deleveraging are the two items that I believe will push the secular bear thesis until later this decade or early 2020s.
Value Investor Radar: Stryker [View article]
Thanks for the comments. As you might recall from Stern & Stewart that established firms can either be X-,X,Y,Z, and pre-Z. I didn't spend the time to explain all of the categories except that I feel that a new category Y+ should be added. An X company is typically valued such that EV is par with IC. An X- company where EV is less than IC. Utilities for example are currently trading at less than IC.
As for the EV-to-IC expansion -- the idea is somewhat nuanced so I apologize for the lack of clarity or if I mangled the concept. However, I am sure the EV would expand if management declared that it was going to double the amount of fcf returned to shareholders as of tomorrow. That would reflect an expansion of EV-to-IC multiple. In any event I will look at expanding on the idea for clarity in the future.
Thanks again
Matthew
The Utility Sector On Discount Plus One For The Radar [View article]
Right -- no specific mentions of coal/nat gas/nuclear. That is definitely warranted as well as other issues when making specific investments. But the focus was on capital deployed and based on recent 5 year historical values the market wasn't providing a premium which seems contrary to a fair amount of other opinion.
The Utility Sector On Discount Plus One For The Radar [View article]
The Utility Sector On Discount Plus One For The Radar [View article]
I would be more comfortable saying that there is mean-reversion at the sector level versus at the individual firm level within the sector. Again that is why I wasn't more confident than suggesting it for the radar although clearly interesting. There is value that can be unlocked -- and the mean-reversion to me suggests that the the industry can support better valuations for the underlying assets that Exelon is currently being rewarded for. I would rather consider it a management issue/power generation pricing etc issue versus a classic mean-reversion bet.
Again interesting point/question
The Utility Sector On Discount Plus One For The Radar [View article]
Matthew
The Utility Sector On Discount Plus One For The Radar [View article]
As for utilities in general -- I am interested because I am interested in low volatility equity investments and utilities happen to be a large chunk of that universe. Turtle versus the Hare I suppose.
The Utility Sector On Discount Plus One For The Radar [View article]
Thanks for the comment
Matthew
The Utility Sector On Discount Plus One For The Radar [View article]
Not sure I follow exactly what you want me to respond to. 5 years should get close to a business cycle so the normalized 5yr multiple should be reasonable. Each multiple was reviewed for outliers. For instance I only used 4 years for EXC given the first year was completely different and would have biased the #s up.
Have I done a t-test or something on a stat side -- no and don't plan on it.
I understand the yield comments completely. However if you read the article you would see that I was looking at the firm value based on the invested capital -- irrespective of the dividend yield. My personal interest is in the low volatility aspect. Anyway -- point taken on 40 year low.
It could be that the industrials are selling cheaper but again 30% of the Low Vol index is Utilities and thus the kernel of the idea for the article plus the fact that EXC is an interesting candidate for further due diligence.
Thanks
Matthew
Symmetrical Triangles Indicate A New Trend Soon [View instapost]