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  • Alcoa Is A Bubble Cyclical Trading At 20+ Times Normalized Earnings [View article]

    Thank you for the comment. Revenue has fallen roughly 3% through the first six months of this fiscal year (1). We're modeling in roughly flat top-line performance in 2014 and mid-single-digit revenue growth in 2015 fading to ~3% by year 5 of our model. This is generally consistent with consensus expectations and results in the CAGR, as you mention. Our valuation model is based on Alcoa's future free cash flows, which are inherently tied to volatile metals pricing.

    Thanks for reading!

    The Valuentum Team

    Jul 17 12:36 PM | Likes Like |Link to Comment
  • Alcoa Is A Bubble Cyclical Trading At 20+ Times Normalized Earnings [View article]

    Thank you for your comment. As you mention Alcoa is inextricably tied to the price of aluminum, which is volatile and cyclical in nature. These dynamics have been a part of its business for decades, and we don't expect them to change.

    Thanks for reading!

    The Valuentum Team
    Jul 17 12:30 PM | Likes Like |Link to Comment
  • Alcoa Is A Bubble Cyclical Trading At 20+ Times Normalized Earnings [View article]

    Thank you for this observation. This is precisely the point we are driving home. Alcoa's performance (and by extension, fairly or not), so is its stock price. Eventually, we would expect the company to revert to its fair value estimate, which is based on normalized earnings -- not peak earnings such as those achieved in 2007.

    Thanks so much for reading!

    The Valuentum Team
    Jul 17 12:29 PM | Likes Like |Link to Comment
  • Alcoa Is A Bubble Cyclical Trading At 20+ Times Normalized Earnings [View article]

    Thank you kindly for your comment. Our discounted cash flow model, which derives the fair value estimate of Alcoa, is completely forward-looking.

    Thanks for reading!

    The Valuentum Team
    Jul 17 12:27 PM | Likes Like |Link to Comment
  • Energy Transfer Partners' Return To Distribution Growth Was Predictable [View article]

    Thank you again for your curiosity.

    We would highly encourage you to become a member of our services if you have specific questions about the valuation model. However, let's see if we can build some common ground first.

    The easiest way to answer your questions rests in the concept of what value truly is. The value of any asset is the present value of the future free cash flows (EBI less NNI) that are generated by the operating asset, adjusted for the capital structure of the entity (cash less debt) and then divided by the number of units outstanding. There is absolutely no mention of the historical financial statements, or the future cash from financing aspects of the business. Okay, so far?

    This value concept (EBI less NNI adjusted for the capital structure dividend by units outstanding) is the same whether the structure is a corporation, an MLP, or a REIT, or other. Though we understand that many investors look at these entities through a difference lens, the reality is that all assets are based/valued on the future free cash flows that they generate. Future free cash flows as measured by EBI less NNI. Still okay?

    Another important concept is that value is based on the FUTURE free cash flows of the entity. The questions that you are asking are from an accounting standpoint as it relates to how we communicate the firm's 2013 financial performance, which as we have stated, is immaterial.

    Value is based on the future dynamics of the business--a company's future free cash flows. Understanding this concept may help clarify why we've stated that your question about how ETP classifies its cash flow from financing activities on the cash flow statement in historical periods is immaterial to valuation consideration.

    Again, value is based on the future -- and the proforma accounting statements are a reflection upon future forecasts as driven by the valuation model. The goal of a FCFF model is not to arrive at exact and precise future accounting statements. In fact, it is an impossibility because of cash tax consequences as well as sources and uses of cash in the future that are inherently unpredictable. This is a fact of the FCFF model.

    Said differently, our model considers the future free cash flows and the existing capital structure of the entity. There is a whole host of information on our website where we explain all of this as well. The historical cash flow from financing activities section on the cash flow statement is not a factor in the valuation concept within the context of a free cash flow to the firm (FCFF) model.

    What we are trying to hit home in this comment is that the valuation that we perform is based on tried and true principles and represents the accepted professional and academic use of a free cash flow to the firm model. What you are pointing to in your questions is how the accounting is presented in the financial statements.

    Another important dynamic is that the valuation that you see is based on the common unitholders, which is why the cash outflows on the financial statements reflect this as such. Implicitly embedded in the model is an understanding that there will be additional cash outflows from a financing activity. However, this particular dynamic is already considered in the above the line EBI less NNI calculation. In the model that we use, we do not calculate the distributions from the cash flow from financing section. We calculate them from the operating line less the NNI -- there's also another adjustment made for maintenance capex in any MLP model that we use. to your questions. But first, let us repeat. The value of any business is based on the future enterprise free cash flows it GENERATES -- not pays. The free cash flows that ETP generates are not found in the cash flow from financing section but in the future CFO less maintenance capex. You are inquiring about the financing section, but all of the value of an entity is determined in the operating and investing sections of the cash flow statement.

    To your questions -- are we forecasting a decline in total distributions? No. Are we considering granularity in the cash flow from financing section, which is immaterial to the valuation? No. Are we forecasting a decline in distributions paid to ETE? No. Is the focus of our valuation on the cash flow from financing section? No, because it is represents cash flows that are paid out not generated. We focus on cash flow generation. Is our future proforma financial statements precise in this respect? Absolutely 100% not.

    How does your model handle IDRs? Through EBI that is attributed specifically to ETP unitholders. It is adjusted on the front-end (generation) -- not on the back end (paid). Does this cause imprecision in the future proforma cash flow statement in the immaterial financing section? Yes.

    Would our valuation change if there was no relationship with ETE? Yes. Are we projecting that ETE's distribution will be $0. No. Is it shown that way on the preform financial statement. Yes. Why? Because we're valuing ETP and the associated cash flow stream and payment stream associated with ETP.

    Our valuation model is not the proforma financial statements. Our valuation model is a FCFF model. Hope this clarifies. The only thing about precision is that it will be "precisely wrong."

    Kind regards,

    The Valuentum Team
    Jul 16 05:34 PM | Likes Like |Link to Comment
  • Energy Transfer Partners' Return To Distribution Growth Was Predictable [View article]
    Hi Phillip,

    Thanks for your question. We make the valuation models available to all members, so we'd be happy to share. If you're a member, just shoot us an email, and we'll send that along.

    What you see for dividends/distributions paid in 2013 is a number of line items lumped together into the $2.18 billion number. We've provided a link to the firm's 10-k, so you can see how that number is derived (1). Importantly, however, your questions are immaterial to the valuation of the firm or to its future distribution growth.

    To be clear, we're not forecasting a dividend cut. Here's the landing page on ETP, where we show what we're forecasting in terms of dividend per unit growth. The company's dividend report can be downloaded (it is a pdf report on the top right):

    As you mention, we are forecasting share issuance as well as unit growth at ETP. For example, the $1.387 billion in distributions paid in 2014 (that you reference) represents $3.74 per share distribution times 371 units outstanding. This is the math that you should do to confirm that our dividend forecasts reveal growth from last year's per-share level.

    Said differently, there are a lot of moving parts on the firm's cash flow statement in its regulatory filing that we've simplified into our template.

    Hope this helps -- and thanks for your questions!

    Jul 16 01:21 PM | Likes Like |Link to Comment
  • Evaluating GlaxoSmithKline's Dividend [View article]

    Our near-term, 5-year forecast of a firm's dividend is based on a number of factors, including the board's willingness to increase the dividend regardless of the financial risks.

    We fully expect APU's board to continue to fund dividend growth via the capital markets (equity and debt issuance) over the next 5 years, but its long-term dividend growth prospects aren't great, which is why we rate it as having very poor long-term dividend growth potential (long-term = beyond 5 years). Declining end market demand and lost customers are key fundamental concerns regarding sustainable dividend increases at APU, while the Dividend Cushion metric, which is below 1, is the most critical concern.

    The Dividend Cushion considers a firm's future free cash flow (CFO less capex) and compares this to future cash dividends, while considering the health of the balance sheet. A Dividend Cushion score above 1 is good, while a Dividend Cushion score below 1 is poor or very poor, in some cases. In the most simplest sense, this accounts for the different opinions on APU's and GSK's dividends.

    In GSK's case, the firm's Dividend Cushion is 1.3, which is greater than 1, implying both safety and growth potential without need for capital market access (unlike APU). GSK, therefore, receives a good rating with respect to dividend growth, though we forecast its future dividend growth at a similar pace as that of APU. But why?

    It comes down to the fact that boards can do whatever they want with respect to the dividend, regardless of the financial risks, and we have to acknowledge this very real fact. In APU's case, even though its dividend growth prospects are very poor, we accept that the firm's board will continue to raise it using non-organic, capital market issuance as the source (very low quality). In GSK's case, we target a similar growth rate over the 5-year forward period, but because GSK can fund dividend growth organically (high quality), its dividend growth potential is good. This is a subtle but very important difference.

    Explicit growth rates over the 5-year period = near-term

    Quality assessment of dividend growth (e.g. good) = long-term

    Thanks for reading!

    The Valuentum Team
    Jul 12 12:50 AM | 4 Likes Like |Link to Comment
  • Declining Propane Demand Will Eventually Threaten AmeriGas' Dividend [View article]
    Thank you all for your comments. We very much appreciate your opinions. We think there are two material items worth clarifying in the comments chain:

    1) Distributions and dividends have different tax consequences for the investor, but they are accounted for the same on the balance sheet via shareholders' equity and on the cash flow statement via cash from financing activities. From an analytical standpoint, they are accounted for the same.

    2) There has been a reference to AmeriGas' cash from operations, capital expenditures and distributions. In 2013, cash from operations was $355.6 million and capital expenditures were $111.1 million, resulting in free cash flow of $244.5 million. Distributions for 2013 were $327 million. Free cash flow divided by distribution payments was well below 1 in 2013, and well below 1 in 2012 and 2011 as well.

    The Dividend Cushion highlights this free-cash-flow shortfall in the future, and the firm's dependence on financing (capital market) activities to support the distribution. It becomes clear looking at the firm's financial statements that free cash flow (CFO less capex) is not sufficient to support the distribution alone (1). Importantly, however, management can still raise the distribution in the face of these risks, as long as the capital markets (or non-core activities) are conducive.

    We understand that many of you may be holders of the firm's equity, and we trust that you have learned more about the financial risks related to AmeriGas' operations. Thank you again for reading.

    Kind regards,

    The Valuentum Team

    Jul 9 01:30 AM | Likes Like |Link to Comment
  • Why This Oil Giant Is Tried And True [View article]
    Hi Phenom1,

    Thanks for the comment. It's important to note that valuation is based on the marginal cost of borrowing and the discount rate is matched to the future free cash flows 10, 20 years and longer. The cost of capital also includes a cost-of-equity component, which is larger than the after-tax cost of borrowing.

    About the risk free rate: In our discounted cash-flow models that we use to value every non-financial operating company in our coverage universe, we match the duration of future free cash flows (from year 1 to perpetuity) with expectations of the average discount rate over this forecast horizon (from year 1 to perpetuity). We think the best way to achieve expectations of the long-term future average rate of the 10-year Treasury (risk free rate) is to use the weighted average of the historical 10-year Treasury and the current spot rate. The goal of using a weighted average risk free rate in our DCF process is to achieve balance with respect to the duration of future cash flows. For example, discounting a cash flow in Year 20 at the current spot rate doesn’t make much sense to us. Other methods consider the yield curve in discounting future free cash flows, or use a long-term average of the risk free rate without considering near-term changes in the 10-year Treasury rate. We think the use of the spot rate on the 10-year Treasury as the risk free rate in any valuation model would not only cause significant fair-value volatility but also result in a systematic overvaluation of companies relative to their true long-term intrinsic worth.

    About the weighted average cost of capital: We derive a company-specific cost of equity (using a fundamental beta based on the expected uncertainty of key valuation drivers) and a cost of debt (considering the firm's capital structure and synthetic credit spread over the risk-free rate), culminating in our estimate of a company's weighted average cost of capital (OTC:WACC). We don't use a market price-derived beta, as we embrace market volatility, which provides investors with opportunities to buy attractive stocks at bargain-basement levels. The cost of capital can also be viewed as a project hurdle rate expectation. We don't think, for example, that investors would be happy with ROICs above 5%, for example. We generally think a double-digit ROIC is value-creating in almost all cases. Most of the discount rates in our coverage universe fall between 8%-12%. Exxon's is on the lower end of this range.

    Thank you for reading!

    The Valuentum Team
    Jun 29 12:26 PM | Likes Like |Link to Comment
  • Why Intel's Dividend Is A Head-Turner [View article]

    Thanks for the comment. Information and biographical credentials on our principals are on the website as you mention. Here is the link:

    We attend conferences through the course of the year with the AAII and MoneyShow, and we'd be happy to meet you at one in the future.

    Thanks for reading and visiting!

    Kind regards,

    The Valuentum Team
    Jun 27 06:50 PM | 4 Likes Like |Link to Comment
  • Why Intel's Dividend Is A Head-Turner [View article]
    Dividend Accumulator,

    Thank you for your question. A company can theoretically raise its dividend significantly if it starts with, let's say, a penny and raises it consecutively to a dime by the end of Year 20. This would be a ten-fold increase.

    However, if the firm trades at $100 per share during this time period, its dividend yield is practically irrelevant to income seekers and to the valuation consideration. This dynamic is outlined in the article with respect to the grandfather paying his grandson an incremental dollar with each birthday.

    We think Intel is one of the best dividend growth stocks over the next few decades that currently pays a meaningful yield. We'd consider a meaningful yield of ~3% or higher. Hope you'll come visit us.

    Thanks for reading!

    The Valuentum Team
    Jun 27 05:53 PM | 3 Likes Like |Link to Comment
  • Energy Transfer Partners' Return To Distribution Growth Was Predictable [View article]
    Delta David,

    Can you imagine investors not making these long-term assumptions? If investors aren't using a DCF, then they aren't even considering this parameter. The long-term simply cannot be ignored.

    We think a low-single-digit rate is reasonable for the second stage of the model (i.e. Years 6-20). Though one can reason through a higher rate, we're comfortable with modest expansion, given the size of the firm and its cyclical end markets. The 3% perpetuity number is universal across our 1,000+ coverage universe. In a more theoretical sense, a firm cannot grow faster than GDP forever -- so the long-term growth rate is tied to this measure (or lower).

    I think the correct takeaway is that we are looking at the long-term in the valuation, and while the long-term is more unpredictable than the short-term, it cannot be ignored just because it's difficult to forecast. Stock prices (valuations) are driven by future cash flows, and the future will always be unpredictable to a degree. It is just a fact of investing.

    Using a variety of valuation approaches is the Valuentum style, as you mention. We not only consider the DCF, but also consider a relative valuation approach and yield analysis. Please let us know if we can be of further assistance. Hope you'll come visit us.

    Kind regards,

    The Valuentum Team
    Jun 22 05:34 PM | Likes Like |Link to Comment
  • Why Qualcomm's Economic Castle Is Remarkable [View article]

    Thanks for reading! There will never be good comparisons because each company, no matter if it's a peer or competitive, is a different company. The relative valuation analysis is used to show the relative value versus companies in the industry in which it operates -- sometimes, in fact most of the time, this includes closest competitors, but not always. There's a great write-up on the PE here, and how it is used incorrectly:

    Thanks again for commenting!

    The Valuentum Team
    Jun 22 11:52 AM | Likes Like |Link to Comment
  • Why Kinder Morgan Energy Partners Is Alright In Our Book [View article]
    Thanks for the endorsement Donald!

    Just a quick clarification for new readers. The Best Ideas portfolio and Dividend Growth portfolio represent our best ideas at any given time. The Best Ideas portfolio is exceeding its benchmark by 25 percentage points since inception (May 2011) -- it has increased ~80% since that time. The Dividend Growth portfolio is more than doubling its annualized targets of a mid-to-high-single digit annual return and has never experienced a dividend cut of a constituent. The portfolios are low turnover, which is what we think Don meant to say. They minimize transaction costs and tax implications.

    The Valuentum Buying Index, which considers the valuation of a firm and its technical/momentum indicators, informs which ideas we include in the Best Ideas Newsletter, while the Valuentum Dividend Cushion score informs which ideas we include in the Dividend Growth portfolio. Constituents in the Dividend Growth portfolio generally have long track records of dividend increases, healthy balance sheets, and excellent free cash flow generation.

    Pasted below is a link to download how the VBI ratings are derived for each company in our coverage:

    Thanks for reading!

    The Valuentum Team
    Jun 22 12:32 AM | 1 Like Like |Link to Comment
  • Why Kinder Morgan Energy Partners Is Alright In Our Book [View article]
    Hi bsfitzhigh,

    How We Use the Valuentum Buying Index in the Best Ideas Newsletter Portfolio

    First and foremost, firms in our Best Ideas portfolio should be considered our best ideas at any point in time. The Best Ideas portfolio can always be found on page 8 of our monthly Best Ideas Newsletter. Firms in our Dividend Growth portfolio should be considered our best dividend growth ideas at any point in time. The Dividend Growth portfolio can always be found on page 5 of our monthly Dividend Growth Newsletter.

    Let's talk about how the Valuentum Buying Index (VBI) informs which ideas we include in our actively-managed portfolios. We've noticed via our statistical backtesting that the momentum factor behind our process tends to be much more pronounced (powerful) over longer periods of time. This was one of the interesting findings of our academic white paper study. We try to replicate this dynamic with the update cycle of our reports (and the time horizon for our ideas to work out). That's why our reports are updated regularly (at least quarterly) or after material events and not daily or weekly. We don't want to whipsaw our membership, nor do we think churn is the way to generate outperformance.

    Though the time frame varies depending on each idea, we expect our best ideas to work out over a 12-24 month time horizon (on average) -- any shorter than that is mostly luck, in our view. We tend to add firms to our Best Ideas portfolio when they register a 9 or 10 on our Valuentum Buying Index (VBI) and tend to remove firms from our Best Ideas portfolio when they register a 1 or 2 on our VBI. You'll notice that we have a qualitative overlay in the portfolio, which is necessary and similar in thinking as if you were to imagine a value investor not adding every undervalued stock to his/her portfolio. There are always tactical and sector weighting considerations in any portfolio construction.

    As for the time horizon for ideas, we like to maximize profits on every idea, with the understanding that momentum does exist and that prices over and under shoot intrinsic value all of the time. A value strategy (10 --> 5) truncates potential profits, while a momentum strategy (4 --> 1) ignores profits generated via value assessments. We're after the entire profit potential. So, for example, if a firm is added to the Best Ideas portfolio as a 10 and is removed as a 5, we would have tuncated profit potential. Most of our highly-rated Valuentum Buying Index rated stocks have generated the vast outperformance of the Best Ideas portfolio. Please view the pricing cycle below.

    Importantly, regarding our process, we don't blindly and immediately add firms to our portfolio once they score a 9 or 10 (and we do not add all firms that score a 9 or 10 to our portfolio). For example, Google (GOOG), a current Best Ideas portfolio holding, registered a 10 on our scale, but we remained patient and didn't add the company to our portfolio until after it reported earnings in late 2012, which provided us with an even better entry point (as new information came to light). We engage in a qualitative portfolio management overlay to maximize returns and minimize risk. The number informs our process, but the team makes the allocation decisions of the portfolio.

    After adding firms to our Best Ideas portfolio, we may tactically trade around these positions when they have VBI ratings between 3 and 8 depending on the size of their weighting in our portfolio or their attractiveness relative to other opportunities (a score of 3 through 8 is typically equivalent to a 'we'd hold'). We tend to remove firms from our Best Ideas portfolio when they register a 1 or 2 on our process. Importantly, however, firms in our Best Ideas portfolio, which have generally registered a 9 or 10 on our scale when we added them, should be considered our best ideas at any point in time.

    Take eBay (EBAY) as another example of our process in action. The firm initially flashed a rating of 10 in late September 2011 (at $32 per share), and we added it to our Best Ideas portfolio. The VBI rating changed to a 6 in December 2011 and then back to a 10 in May 2012. Because the rating never breached a 1 or 2, we did not remove the position from our portfolio. In fact, we tactically added to it. eBay is probably one of the better examples to use for illustrating the prolonged outperformance driven by undervalued stocks that are beginning to generate good momentum. We like to capture the entire pricing cycle and not truncate it as most value investors do.

    Though eBay may register a lower VBI rating in a subsequent update, we would still view it as one of our best ideas, as it is a holding in our Best Ideas portfolio (it has never flashed a 'We'd Sell' signal, 1 or 2). Obviously, there have been more straight-forward opportunities in our Best Ideas portfolio, especially in the case of EDAC Tech (EDAC), which had tripled since we added it to the portfolio (never registering below a 9 along the way). The VBI ratings on our most recent 16-page reports, downloadable directly from our website, reflect our current opinion on the company.

    The Valuentum Buying Index, like all methodologies, informs the investment decision process, but in constructing a portfolio, a qualitative overlay is not only necessary but has been shown to optimize performance in the white paper study.

    Thank you for reading!

    The Valuentum Team
    Jun 20 01:35 PM | 1 Like Like |Link to Comment