Ron Sommer

Long only, value, deep value, growth
Ron Sommer
Long only, value, deep value, growth
Contributor since: 2009
Company: Measured Approach
Have you read through the SEC filings?
Since I am unable to quantify what might happen in the future, I do not reflect those factors in my analysis. When these new technologies show up in the numbers then this analysis becomes obsolete and I take a new look.
Bahamas1,
First of all, there is no need to be rude. Secondly, you did not read the article. If you had, you would know that I did not reference Graham or his formula. What I did do is respond to Tom Armistead's comment about Graham and a PE of 15. Graham made two points, i.e., a PE of 15 and a PB of 1.5. He theorized that the maximum an investor should pay is the product of PE and PB or 22.5. If the math is not too difficult for you, take the square root of eps x book x 22.5 to get the maximum price.
I did not reference Graham's formula anywhere in the article and did not use this formula to establish a value baseline.
I agree and made that same point in the article.
You are right about Graham. He also said that PB should not exceed 1.5. Using Graham's formula to calculate value, MMM has a value of about $59. I also described interest coverage as "solid" and FCF to LTD as "good." My concern is the doubling of long term debt in just a 2-3 year period and declining free cash flow.
If we look at PSR and price to free cash flow, we find that MMM is selling at a significant premium to the S&P 500.
The sweet spot is the nexus of valuation and opportunity.
The sweet spot is the nexus of valuation and opportunity.
Thank you for your comment. If you will note, I made comment concerning stock performance. Past performance is self-evident and I make predictions as to the future. I spoke about valuation. Whether the market will "recognize" the current undervaluation and and correct the stock price is another matter.
I will not speculate on the court case. However, in my opinion the barn door has closed and near universal health coverage is inevitable. It will not matter if one group gets a subsidy and another not. As with all other social programs, there will be changes of one kind or another.
I have both owned owned TEVA shares and written about the company here on SA. I would not hold TEVA shares now waiting for a turnaround that may never happen. As an alternative, I suggest looking at TARO. I have a position in TARO.
I watch Bezeq in relation to the other Israeli telecom companies.
Hi Debbie,
I think DISCA is a bit overvalued, perhaps by 8%-10%. The free cash flow yield is minuscule. I would also want a better cash return on invested capital. Overall, the company's free cash flow is not what I require for an investment.
I am a big believe in free cash flow backing up whatever earnings a company reports. The accounting numbers are just management estimates and cash tells its own story.
The other aspect to consider before more widespread use is the learning curve for the surgeons. It takes time before a critical mass is reached and the technology becomes accepted. This is a long-term play on a nascent technology.
Gary,
I note that you reproduce a table that appeared in my recent article and that you provide an oblique link to my article. It would be appropriate, in my opinion, to attribute the table to the author.
robros,
I understand your point of view and I find no fault in it. For myself, I do not invest in turnaround situations. Though the potential rewards are high, so is the risk. I do not have a great deal of faith in what management has to say nor do I focus much on the "story" behind the stock.
You are right that the numbers tell a story for a particular moment in time. I invest based on those reported numbers and then follow them closely. If they fall out a zone that I have set - either too high or too low, I sell out. Sometimes for a loss but mostly at a profit.
Different approaches are appropriate for each of us.
Not much interest in reading about DOV even with the recent announcements.
My data comes from Thomson Reuters Research Inc. I used the following for my calculation:
EV = MkVal (33,422.85) + LTD (11,712) + Preferred Shrs (0) + STD (3,006) - Cash (2,879) = 45,261.50
EBITDA = Pretax Inc (1,819) + Interest (355) + D&A (1,708) = 3,527
EV/EBITDA = 12.83
Diamondblues,
Your association of the diamond industry and alleged Israeli war crimes betrays your prejudices.
The following is from Globes:
"Last week, Given Imaging, which has developed and sells the diagnostic PillCam endoscopic camera for the intestinal tract, filed its F-20 report with the US Securities and Exchange Commission (SEC), in which it disclosed Shamir's salary cost. His basic salary totaled $432,640 in 2012, and he received a cash bonus of $515,923. He also received 30,000 vested convertible units, which are currently worth about $500,000. Vested units are free capital compensation, in contrast to options or shares for which a realization fee has to be paid."
"An examination by "Globes" found that since Shamir took up his post in April 2006, he has accumulated NIS 30 million in capital. While this amount is not large for a company of Given Imaging's size and accumulated over seven years, but when compared with the yield Shamir has generated for shareholders during his tenure, NIS 30 million might be an amount that ought to cause the company's directors to squirm."
"The 30% drop in Given Imaging's share price during Shamir's seven-year tenure contrasts to Nasdaq's overall 39% gain."
"The "Globes" investigation also found that Shamir has enjoyed consistent salary and bonus hikes during his tenure, as well as changes in the capital composition from stock option grants to vested stock grants. His starting salary in 2006 was $330,000, rising to $400,000 in 2007, and $416,000 in 2008. During the 2009 credit crisis, he gave up 10% of his salary, but this did not materially affect his circumstances. A year later, he won a 4% pay hike on his early full salary, not the reduced salary of 2009, to $432,640. His cumulative pay hike in 2006-10 was 31%. "
This suggests to me the company is not shareholder friendly and that the CEO has enriched himself even as shareholders suffered.
I do not follow Elron and have no opinion.
The same people who pay the bill now, i.e. either the consumer who will pay higher premiums to the insurance company or the taxpayer. The other option is not to invest in better medical care.
As I understand it, there is very tight integration between diagnostic testing to identify cell characteristics at the molecular level with the specific treatment. It would be the opposite of using a broad-spectrum antibiotic.
The issue of drug trials is important. I assume there is enough commonality across the population to identify traits at the molecular level.
The company's trailing earnings are $2.45 per share. With the restructuring costs, I do not see EPS expanding to $5+ per share. The press release included the following:
" Non-GAAP earnings per share as projected for fiscal year 2013 excludes primarily the impact of acquisition, restructuring and other expenses, asset impairment charges, amortization of purchased intangible assets, legal settlements, and costs related to regulatory actions. We also exclude any tax benefits related to these expenses Most of these excluded amounts pertain to events that have not yet occurred and are not currently possible to estimate with a reasonable degree of accuracy. Therefore, no reconciliation to GAAP amounts has been provided. Future amortization of intangibles is expected to be approximately $300 million per quarter. "
I use industry-wide comparisons wither medians or averages to avoid the problems associated with cherry picking comparables.
In my analysis, I could not find the drivers to justify higher EPS for 2013. Sales will be flat or down. Earnings from cost savings are ephemeral.
My last point refers to my expectations for ROE, ROIC and CFROI. When I invest, I require higher returns than that offered by TEVA. If Levin succeeds, then these metrics will improve perhaps to the level I require.
I am also concerned with the share dilution and this would support your idea that management was enriching itself at the expense of shareholders. I am encouraged to see the net reduction of shares outstanding. The other reason this company's share price does not reflect the fundamentals, I think, has to do with its customer base. Tobacco industry companies are just not very popular. In the developed countries, fewer people are smoking. However, for better or worse, smoking is still a growth business in the less developed countries. SWM is a slow grower but very profitable. I look to management to return more capital to shareholders. As you know, I have a long position in SWM so I hope I am right.
You ask a good question. Short term estimates, i.e. are just that and may be used by some people looking for that pop. I you look at the past 1,3,5 and 7 year growth rates for DOX, you find they are 24.2%, 13.7%, 7.0% and 8.0%. Do the growth rates revert to the mean (average)? Some would argue that they do. DOX's 7-year sustainable growth rate is 13.0%. Another way to estimate growth rates is to multiply ROE x Retention ratio. In this case we get a growth rate of 12.72% (ROE=13.0% and RR=94.4%). Analyst estimates range from 7.8% to 10.0%. Which estimate is correct? Pick your poison. This is also why forecasting intrinsic value is so difficult. Which assumption do you use? Personally, I tend to favor the sustainable growth rate.
AT&T accounts for about 29% of revenenue. The ten largest customers account for about 73% of revenues. These figures are from the 2011 20-F.
They do business in Germany with with Deutsche Telekom, Vodaphone Germany and VimpelCom.
Thank you for the article. readers may be interested in knowing that Aswath Damodaran, Professor of Finance at the Stern School at NYU posts on his website market-wide regressions of multiples that serve the purpose of your own estimates. For example, Damodaran uses the following formula to estimate PSR:
PSR = 0.36 + (2.81 * EPS Growth Rate) -(0.22 * Beta) + (12.94 * Net Margin)
If we use AAPL as the example with EPS growth at 22% and beta at 1.21 and net margin of 21.52, PSR + 0.36+0.618-0.266+2.78 = 3.49 or $582.43. In this example I used a five year average net margin.
Damodaran provides similar formulas for a number of valuation ratios. These are all updated annually. I should add, he provides the same regressions for equities traded in Europe, Emerging Markets and Japan.
Freedomtx,
Excellent point that should have been made in the article.
Vertical Spread,
I think the share price will fluctuate as long as the price of oil fluctuates. Eventually, barring a disruption in supply, oil prices will stabilize. When supply and demand for natural gas come into balance, gas prices will also fluctuate. XOM is for the long term and these short term swings are just noise. At least, this is my opinion.