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Tony Abbate

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  • 12 Large Caps for the Next Decade [View article]
    Your have a reasonable basis for your points. My valuation estimates will be wrong about one-third of the time. The two biggest reasons my valuation estimates are wrong is either I make the wrong valuation comparison or I misunderstand the fundamentals or competitive position of the company.

    The key is to follow a disciplined process. When you are wrong, my losses are minimized. It's like being a baseball player. If you swing at strike you have a much better chance getting hits than when you swing at pitches outside of the strike zone. I have followed this process religiously since the end of 2000 and have beaten the market by a substantial margin. (Check out my website: granitevaluecapital.com for the results.) I will not beat the market every quarter or every year. However, with some discipline and original thought I think one can beat the market by a sizeable margin over a 10 year time period.
    Mar 29 01:24 PM | Likes Like |Link to Comment
  • 12 Large Caps for the Next Decade [View article]
    Outside of the utility sector, I have studied every U.S. merger and acquisition since 1997. I have a database of over 1,800 companies. I use this as a basis for determining intrinsic value. Depending on the sector, I value companies based on EV/EBITDA, P/E or P/B.

    I will walk through Wal-mart as an example of how I calculated its intrinsic value. I have 69 retailers in by database in which to determine the intrinsic value of Wal-mart. I value retailers on an EV/EBITDA metric. The average retailer has been acquired at an EV/EBITDA of 8.6. I think most will agree that Wal-mart is not your average retailer and deserves an above average valuation. If we look at the top end of the valuation range of acquired retailers, Arbor Drugs was acquired in 1998 at an EV/EBITDA of 17.7. Lands' End was acquired in 2002 at a 12.5 multiple. Uni-marts was acquired at a 12.4 multiple. Saks was acquired at 11.9. The average operating profit margins for these four companies over the last 5 years before being acquired was 4.5%. The average return on invested capital for these companies was 21.1%. Over the past 5 years, Wal-marts average operating margin is 5.4% and their average ROIC is 27.0%.

    My estimate of a fair value multiple for Wal-mart is 12.0 or $88.46 per share. Based on Friday's closing price of $55.51, my estimate is the company trades at 63% of intrinsic value.

    In addition to looking at my database for comparables, I will also look at a company's historical valuation range to see if the company has ever traded at my intrinsic value estimate. Each of the 12 companies I listed have all traded at my estimate of fair value. In the case of Wal-mart, over the last 20 years, the average EV/EBITDA multiple it has traded at is 15.9. I think the company was dramatically overvalued for years. However, I think a 12 EV/EBITDA estimate is reasonable based on comparables and the wide economic moat it has around its business is reasonable.

    I think the market is wrong in terms of the valuation of these 12 companies because I have the information in my database that I think disagrees with it. I think the market goes through cycles. As a group, from 1993 to 2007 a lot of large cap stocks were overvalued. During this time period small cap stocks were undervalued. We have reached a point where as a group, large cap are more attractively valued than small caps.

    All 12 of these companies I consider to be high quality and deserve a valuation premium to the average stock. I have a number of comparable companies that have been acquired at the EV/EBITDA multiple I have assign to each stock.

    I don't want to give the estimate for each stock because the basis of the article was written on the opinion that as a group these stocks are cheap and an investor should do well over the next decade owning these stocks.

    In terms of my confidence of intrinsic value, studies have shown if you are right 60% of the time, you will beat the market and probably by a significant margin. I am think it is likely 8 of the 12 stocks will outperform the market over the next decade and as a basket they should outperform. All 12 of these stocks have consistent operating histories, above average businesses, management that has bought back shares when the stock is cheap and sell below my estimate of intrinsic value.

    In terms of Wal-mart, the market may be discounting a K-Mart or Woolworth's decline scenario for the company. It's pretty hard to stay on top in the retail space. I think Amazon is Wal-mart's biggest competitive threat. It's possible in 10 years Wal-mart may not be the dominant retailer it is today.

    However, as I said, you need to look at these companies as a group. I think the market is undervaluing these companies. I think 10 years from now the odds are high that you will look back and see that these stocks beat the market. I may be wrong, but that is what makes the market interesting. Each stock price, valuation assigned to a company is a summation of the collective opinion of all market participants.
    Mar 29 10:10 AM | 11 Likes Like |Link to Comment
  • Gross: American-Style Capitalism Has Reached Dead End, Buy T-Bills Anyway [View article]
    Bill Gross is one of the smartest investors around. However, politically, he is an extreme leftest. I think he uses the celebrity status he as attained as an investment manager as a platform for pushing his leftest ideas. Investors like Gross and George Soros should stick to what they know best and leave the politics to those lowlifes like John Edwards and Mark Sanford.
    Mar 27 10:37 AM | Likes Like |Link to Comment
  • High Conviction: A Restaurant Chain Benjamin Graham Would Have Loved [View article]
    I don't have the ability to predict if they will have higher costs or if they will be able to pass it along to consumers. That is certainly one of the risks you face with any business. This is why I look to buy stocks that are significantly undervalued. If something goes wrong, your downside is somewhat limited because you acquired the stock with a margin of safety.
    Mar 27 01:26 AM | 1 Like Like |Link to Comment
  • 6 Low Yield, High Payout Dividend Growers [View article]
    In addition to having a nice dividend, OSG is very attractive on valuation basis. As of March 24 it sells at 65% of book value. Since March 1985 OSG has sold an average of 102% of book value. The current valuation is in the bottom decile of its historical range. I think this is a stock that has an attractive risk-reward ratio.

    (Note: Clients of Granite Value Capital and myself are long OSG.)
    Mar 24 05:33 PM | Likes Like |Link to Comment
  • What if It Was All Just a Big Bubble? [View article]
    Nice, concise and understandable article. While I think credit expansion is the major reason for the recent run-up in asset prices, I am of the opinion that a good portion of these cycles are driven by generational changes in attitude across time.

    It wasn't that long ago when most investors biggest concern was a repeat of a Great Depression. As those folks passed away, these concerns almost vanished. The financial crisis would have evolved into a Depression if the government did not flood the economy and markets with liquidity. I think it is little coincidence that these depression scenarios rear their ugly heads every 80 to 90 years. (The last depression in the U.S. before the Great Depression was in the 1840s.) Unfortunately most human beings do not seem to read history books. Or they always say, "This time it's different."

    I have read and heard stories of people in their 20s who after having experienced two 50% declines in the market over the last decade are questioning the wisdom of owning stocks. I think the pendulum is swinging towards risk aversion. I think this will undoubtedly have a negative effect on economic growth as 'Generation Y' shifts their saving and spending habits. It will be probably be their kids that create the next big bubble 40 years from now.
    Mar 24 04:33 PM | 13 Likes Like |Link to Comment
  • High Conviction: Starbucks Has Its Buzz Back [View article]
    SBUX is a wonderfully run company. They have just north of $800 million in next cash on their balance sheet. They bought back their stock aggressively when it was trading at about half of its current stock price. They are in a class of their own as I think the quality of their product is second to none. They have a wonderful business and franchise. Whenever I am on the road I am constantly looking for one because I know that I will get a very high quality product.

    This stock is not a screaming buy as it is not cheap. It trades at an EV/EBITDA of 11.5. At most this company is worth an EV/EBITDA of 14 or $31/share. The company traded just below a 5 EV/EBITDA multiple in November 2008 or $7.06/share. The stock has more than tripled off its financial crisis low. I like to buy stocks when they trade at 50 to 65 cents on the dollar. SBUX trades at 82 cents on the dollar. There is no margin of safety at the current price.

    Another item I find interesting is if you take a cue from management, they do not view the stock as cheap. From 12/31/04 to 12/31/2007 diluted shares outstanding shrunk from 805.6 mil to 727.6 mil through stock buybacks. From 12/31/2007 to 12/31/2009 shares outstanding increased from 727.6 mil to 762.9 mil.

    Any idea on why the share count increased so much? Is it stock issued to management or have they resold the shares they repurchased in the mid-2000s?

    What are their growth prospects? Based on the fact that they closed a bunch of stores a year ago or so, this stock is priced for growth. However, given the anemic economic backdrop, I think they are going to have a hard time generating much growth.

    SBUX is a great company. However, the stock is not undervalued and I would pass.
    Mar 24 11:01 AM | 5 Likes Like |Link to Comment
  • Value Line: Iconic, Debt-Free Name Near Decade Low [View article]
    Value Line is a value trap. The stock trades at an EV/EBITDA multiple of 11.3. This is at the top of its historical 5.0 to 12.0 range. Their business is shrinking. This is much too high a mulitple to pay for a shrinking business. Their mutual fund business is tainted by the scandal and investors are fleeing. Their flagship research product is overpriced. As of their 2009 10-K, year over year revenues from their investment publications are down 8.1%. These losses are accelerating. Why would anyone pay $800 per year for their original Value Line Investment Review product when they could buy Morningstar's far superior product for $174/year?

    My estimate of fair value on this stock is $15.25 or an EV/EBITDA of 7.0. This is 34% lower than March 23rd's closing price. If anything, Value Line is more of a short than a buy.
    Mar 24 07:09 AM | 3 Likes Like |Link to Comment
  • High Conviction: A Restaurant Chain Benjamin Graham Would Have Loved [View article]
    Comparing PZZA to MCD, I think there are two reasons why MCD's margins are higher. First, MCD's SG&A expense is much lower. As a percent of revenue, MCD's SG&A is at 9.8% while PZZA is at 15.1%. Second, my estimate from data in each of the recent 10-Ks, is that MCD's operating margins on franchised business is at 72.3% vs. PZZA's 61.7%. MCD has a much more recognized brand than other restaurants. Hence they can charge higher rates for franchising and earn higher margins.
    Mar 23 01:15 AM | 1 Like Like |Link to Comment
  • High Conviction: A Restaurant Chain Benjamin Graham Would Have Loved [View article]
    I am a huge fan of looking at tangible book value. However, in this case, it is meaningless. Shares outstanding have decreased from 60.39 mil in 1999 to 27.74 mil in 2009. Reducing the shares outstanding by this much over a decade greatly distorts tangible book value.
    Mar 23 12:55 AM | 3 Likes Like |Link to Comment
  • High Conviction: A Restaurant Chain Benjamin Graham Would Have Loved [View article]
    Walter,

    Your question is a good one, but one that as a value investor I think is hard to quantify. In 2007 operating margins shrank to 7.8% from 8.3% in 2006. I don't think PZZA can pass along all potential input increases. However, as a value investor I tend to focus on what is known vs. trying to predict what is well-known.
    Mar 22 04:59 PM | Likes Like |Link to Comment
  • High Conviction: A Restaurant Chain Benjamin Graham Would Have Loved [View article]
    I have seen commercials in regards to Domino's claim. Each company claims their pizza is better. I think there is conflicting information in regards to which pizza is better. The four reasons for buying the stock are still very attractive. I think these four reasons make it highly probable this will be a successful investment.

    In regards to earnings estimates, the low valuation of the stock already accounts for a flat sales environment. The company generates a large amount of free cash flow that they will use to pay down debt and buy back stock. Theoretically, the company could have flat sales for a decade and still significantly increase its stock price.

    Let me walk you through my thought process. They generate free cash flow equal to about 10% of its enterprise value. Over the past decade they have decreased shares outstanding by 52%. Let's say they decrease their share count by 50% over the next decade. If we assign a 9 EV/EBITDA multiple, I get a share price of $77.40. If the valuation remains at a 6 EV/EBITDA multiple, I get a share price of $49.90. So my estimated annualized rate of return is between 7.0% and 11.8%. If the stock hits my estimated 9 EV/EBITDA multiple in 5 years, I get an estimated annualized return of 15.2%. Of course there is a chance that margins could shrink and earnings could decline. However, that is where buying with a 'margin of safety' should minimize a potential loss. Overall I think the chance of investment success with PZZA is high.
    Mar 22 10:34 AM | 3 Likes Like |Link to Comment
  • Financials' Rock-Bottom Valuations: Outlook Is Bright [View article]
    There is still a lot of risk in financial stocks. It is unknown whether the values on companies' balance sheets are correct. Debt relative to income levels and GDP is still an all-time high. What happens when the real estate tax credit expires on May 1st. Look out below on real estate prices! The deleveraging cycle still has a ways to go. Unlike other economic downturns that were more cyclical in nature, this economic downturn is secular. I would stay away from banks until about 12 to 18 months from now.
    Mar 17 09:02 PM | 2 Likes Like |Link to Comment
  • High Conviction: An American Legend Repositioned for the Digital Age [View article]
    EK is a value trap. They TTM free cash flow has been negative for the past five quarters. I would not buy the stock at the current price. With net cash per share of $3.10, it may be attractive near this level. However, it's not attractive at its current stock price.
    Mar 8 05:38 PM | Likes Like |Link to Comment
COMMENTS STATS
212 Comments
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