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  • Why Verizon Is Dead Money [View article]
    Hi Ernie,

    Thank you for the correspondence. It's very important to consider Verizon's commitment to dividend growth investors as well as the incremental debt-service costs associated with the obligations. The total obligations are ~$90 billion. This will absorb free cash flow. Debt repayment could also potentially jeopardize future dividend expansion should the global economy not cooperate. We'd expect the agencies will re-evaluate the firm's credit rating if EBITDA does not pace with expectations. Though we have confidence that Verizon will be able to handle the increased debt load, we believe that it is a negative event for the firm's equity.

    Thanks again!

    The Valuentum Team
    Jun 19 08:15 PM | Likes Like |Link to Comment
  • Why Verizon Is Dead Money [View article]
    Clayton,

    The market has advanced at roughly a similar pace. Our thesis is focused more on a 3-year horizon, and we're not expecting a significant drop in Verizon's shares. We think they are fairly valued at present.

    Thanks for reading!

    The Valuentum Team
    Jun 19 05:19 PM | Likes Like |Link to Comment
  • Why Verizon Is Dead Money [View article]
    Qualified to Represent,

    Thank you so much for the question. We make all of our Excel-based discounted cash flow models available to advisor members. As a member, you can see exactly what we put in them, and adjust forecast to arrive at your own estimate of intrinsic value. We are completely transparent.

    Thanks for the comment!

    The Valuentum Team
    Jun 19 05:17 PM | Likes Like |Link to Comment
  • Why Verizon Is Dead Money [View article]
    Excellent comment bdoors.

    Thanks for reading!

    The Valuentum Team
    Jun 19 05:15 PM | Likes Like |Link to Comment
  • Why Verizon Is Dead Money [View article]
    Qniform,

    Thanks for your comment. Balance sheet cash is a source of liquidity, but only is a source of value if it exceeds total debt. It has ~$90 billion in debt on the balance sheet. That means it has a net debt position of ~$40 billion. This is a mountain of net debt.

    Thanks for reading.

    The Valuentum Team
    Jun 19 05:13 PM | Likes Like |Link to Comment
  • Why Verizon Is Dead Money [View article]
    Palladium,

    Thank you for your comment. Importantly, we are not factoring in the new debt on the balance sheet. This is why we've been pounding the table on the debt load. It is a mountain of obligations that the firm is taking on 5-7 years into the global economic recovery.

    Regarding 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.

    Thanks for reading!

    The Valuentum Team
    Jun 19 05:09 PM | Likes Like |Link to Comment
  • Why Verizon Is Dead Money [View article]
    Just Some Guy,

    Thanks for reading. The cost of capital is one of the most debated topics in all of finance. We'll start with an explanation of why we use the risk-free-rate we use, and then we'll add to how the cost of capital is derived within the DCF process. It's important to view the cost of capital as a hurdle rate as well. For example, we'd like Verizon to pursue projects in excess of its cost of capital -- still, we'd be less enthused if they used the current 10-year as the hurdle rate. Here's a few excerpts from relevant articles that we publish on http://www.valuentum.com:

    Q: Why do you use a risk free rate assumption of 4.25% when the current spot rate of the 10-year Treasury is about 2%?

    A: 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.

    ---

    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.

    ---

    Thanks for the comment!

    The Valuentum Team
    Jun 19 05:07 PM | Likes Like |Link to Comment
  • Why Verizon Is Dead Money [View article]
    Hi jondoo, mark3smith, and Purple_K,

    We apply a fair value range in our analysis. The fair value estimate is the most likely intrinsic value of the firm, but we think an appropriate valuation spans the fair value range of the firm. Shares have advanced in-line with the market since the publishing of this article. We'd expect underperformance in a tightening credit market and in a less-optimistic economic growth environment.

    Thank for reading!

    The Valuentum Team
    Jun 19 05:01 PM | Likes Like |Link to Comment
  • Calling An Activist Shareholder To Push To Raise Danaher's Dividend [View article]
    Hi bericm,

    Thank you for participating. Danaher has significantly raised its dividend following this January report. We are very pleased that management is now focused on dividend growth investors.

    Danaher is not attractive as a dividend growth holding at this juncture, in our view, given the company's dividend yield. We are not considering the firm in the Dividend Growth portfolio.

    We'd consider the firm in the Best Ideas portfolio should the firm fall below the low end of the fair value range. Here is more information about the newsletter portfolios:

    http://bit.ly/15mt0mQ

    Thanks for your comment!

    The Valuentum Team
    Jun 19 04:51 PM | Likes Like |Link to Comment
  • Why Realty Income's Portfolio Risks Are Exaggerated [View article]
    Thank you all for your comments! Though we acknowledge the importance of the yield decision in assessing appropriate entry and exit points on high-yielding equities, an intrinsic value assessment is based on the future free cash flows of the entity. Said differently, we think the market is placing a higher discount on Realty Income's future funds from operations than otherwise should, as a result of its portfolio composition. Dividend yields can influence REIT pricing, but it is their future free cash flows that determine their intrinsic worth. We think shares are worth $60 on the basis of our discounted cash flow model.

    Kind regards,

    The Valuentum Team
    Jun 8 03:08 PM | 2 Likes Like |Link to Comment
  • Why Realty Income's Portfolio Risks Are Exaggerated [View article]
    smurf,

    Thank you so much for bringing up this topic. Pasted below is a link to the topic on REITs and interest rates. We think the answer may surprise you. It does require a membership:

    http://bit.ly/1pTut14

    Thank you for commenting!

    The Valuentum Team
    Jun 8 03:04 PM | 1 Like Like |Link to Comment
  • What's Embedded In Outerwall's Current Price? [View article]
    sid,

    Our future forecasts for shares outstanding are not material to the valuation (due to the impact on the balance sheet). In order for a company to have a lower share count, an asset on its books is typically reduced (cash in the case of share buybacks).

    Said differently, in order to use a lower share count in the valuation, we'd also have to use a lower cash balance -- you'll see in the analysis that we give the firm credit for more cash on its balance sheet than it currently has at the end of the most recent quarter. The firm's valuation is completely balanced. We cannot use a lower share count and still give the firm credit for the higher cash balance.

    To repeat, we use the last fiscal year end shares outstanding in the valuation process. This is a documented academic and professional way of applying the DCF, and within an enterprise model, unless issuances/repurchases are done at a different price than fair value, they are immaterial. Here is an excerpt from Valuentum's e-book about the pitfalls of precision in investing:

    "9) Value Is a Range and Not a Point Estimate. I can't begin to tell you how surprising it is to hear even well-seasoned analysts say a company's shares are worth precisely $25 each or a firm's stock is worth exactly $100. The reality is that, in the first case, the company's shares are worth somewhere between $20 and $30, and in the latter case, the stock is worth somewhere between $75 and $125. Value is not a precise point estimate, but a range of probable outcomes. Why? Because all of the value of a company is generated in the future (future earnings and free cash flow), and the future is inherently unpredictable (unknowable). If you or I could predict the future with absolute certainty, then we can say a company's shares are worth precisely this, or that a firm's stock is worth precisely that. But the truth is that nobody knows the future, and we can only estimate what a company's future free cash flow stream will look like. Certain factors will hurt that free cash flow stream relative to forecasts, while other factors will boost performance. That's how a downside fair value estimate and an upside fair value estimate is generated, or in the words of Warren Buffett and Benjamin Graham a "margin of safety." We call the "margin of safety" a fair value range at Valuentum. Only the most likely scenario represents a point fair value estimate. Any investor that says a stock is worth a precise figure--whether it's $1 or $100--doesn't understand one of the most important factors behind valuation. Key takeaway: The value of a company is a range of probable outcomes based on its future free cash flow stream. Value is not a precise point estimate."

    Thanks for reading!

    The Valuentum Team
    Jun 4 10:37 AM | 1 Like Like |Link to Comment
  • What's Embedded In Outerwall's Current Price? [View article]
    Thank you for pointing out the current 'shares outstanding' number. It is important, however, that we relay to the Seeking Alpha community and to our members that the last historical fiscal year number is the one that is applied and the one that is supposed to be applied in the DCF analysis. Future expectations of shares outstanding are immaterial to the valuation calculation as the balance sheet is offset by any share issuance/repurchase (via changes in net cash). As we describe below, only when there is a material difference between the share price and intrinsic value when share issuances or repurchases are made is the transaction material in any way.

    Here's how to think about share buybacks/issuance in the interim within the DCF process. We are reiterating our fair value estimate at this time.

    "Let’s get this out of the way first: share buybacks are not always a good thing. The general rule of thumb is that they reveal that management feels its stock is underpriced and that the team thinks there are no better investment opportunities out there than its very own company. This sounds good.

    Management Teams Are Not Independent, Unbiased Sources of Information

    But the reality is that management teams are always biased (except maybe Netflix’s Reed Hastings?), and they are full of faulty analysis. A recent example of this is RadioShack (RSH), which in August 2010 went on a buying spree for its own shares (click here and here), specifically announcing an accelerated share repurchase program August 23, 2010.

    With the idea that share buybacks are not always the best use of shareholder cash firmly entrenched in your analytical tool kit, let’s now move forward.

    Many believe that a stock will automatically be re-capitalized at a certain earnings multiple based on its forward earnings per share, which will be enhanced as share buybacks are implemented (all else equal). The thinking goes that more earnings per share times the same P/E multiple as before will equal a higher stock price than before. Unfortunately, this is not how things work.

    The market participants that buy into this line of thinking are missing one big thing: the balance sheet. Only through an understanding of the fundamental components of equity value can market participants truly determine if share buybacks are value-creating (they add to the fair value of a company) or if they are value-destructive (they detract from the fair value of a company).

    Talking about the balance sheet with respect to an action that enhances the earnings per share on the income statement doesn’t seem connected, but if you can accept the fact that a firm with $100 billion in net cash is worth more than a firm with $1 million in net cash, all else equal, then you’re starting to get a feel for what we’re talking about: not all value rests on the income statement and can be appropriately captured by earnings per share. The balance sheet is a source of firm value, too.

    Understanding the Components of Equity Value

    The end result of a share repurchase program is as follows: shares are reduced by the number of shares repurchased and cash on the balance sheet is reduced by the cost of the share repurchase program (price paid per share multiplied by number of shares outstanding).

    The intrinsic value of any non-financial equity (stock) is as follows: the discounted future free cash flows to the firm (enterprise cash flow) are added to the company’s current balance-sheet net cash position, and that sum is divided by current shares outstanding. The result is a firm’s fair value per share.

    You’ll notice that we didn’t say future shares outstanding or future earnings per share in this case. The intrinsic value of a firm considers its current balance-sheet net cash position and current shares outstanding position. We capture the company’s future outlook via the entity’s discounted future free cash flows. In valuation, we focus on the operating and investing dynamics (capex) of the company; share buybacks (and dividends) are financing activities.

    << What are the sources of cash from financing on the cash flow statement?

    Therefore, we spend most of the time spent on forecasting on thinking about a company’s future free cash flow stream (revenue, operating earnings, net income, working capital movements, capital expenditures). A company’s future earnings per share changes that are exclusively driven by future share buybacks (made at the fair value price) are already captured in our value equation either with 1) today’s current balance-sheet net cash position or 2) future free cash flows to the firm.

    Only when share buybacks are completed at a price that differs from our estimate of the company’s intrinsic value does value-creation or value-destruction occur.

    As you have read, we’re not concerned with earnings per share in the out-years as a result of a share buyback program. Instead, we focus on future operating earnings (or net income) and the capital requirements of the entity (the future free cash flows to the firm). Share buybacks are assumed to be fair value neutral, until they are completed.

    Key concepts thus far:
    1) Intrinsic value considers the balance sheet
    2) Share buybacks impact earnings per share and cash on the balance sheet
    3) Future share buybacks are assumed to be made at the fair value price until they are completed

    What happens to a company’s intrinsic value when share buybacks are completed?

    This is where management teams can add or destroy value. In the case where share buybacks are completed, there are a few things that happen:

    --> Shares are reduced by the number of shares bought back
    --> The amount of cash on the balance sheet is reduced by the number of shares bought back multiplied by the price per share
    --> The resulting addition to fair value or detraction from fair value rests on which change is more powerful. Either:
    a. the impact of the reduction of the number of shares has a smaller impact on the fair value than the reduction in cash on the balance sheet
    b. the impact of the reduction of the number of shares has a greater impact on the fair value than the reduction in cash on the balance sheet

    ...

    Share buybacks are not always a good thing, and only through a focus on the entire value composition can investors truly understand whether share buybacks create or destroy value.

    Rule of Thumb: If share buybacks are completed at a price level that is under a firm’s fair value estimate, the activity is value-creating. If share buybacks are completed at a price level that is above a firm’s fair value estimate, they are value-destroying."

    Thank you for reading!

    The Valuentum Team
    Jun 3 11:14 PM | Likes Like |Link to Comment
  • Why Lockheed Martin's Dividend Is Solid [View article]
    Hi PriusBob,

    Here is the firm's first-quarter results (1).

    Revenue has faced pressure, but the company can execute upon higher-margin orders, pursue other efficiency initiatives and engage in other cost take-outs to drive the dividend higher. Importantly, the company has a solid net cash position on the balance sheet, which can also fund continued dividend increases.

    Though firms cannot cut costs forever to bolster earnings and free cash flow in a declining revenue environment, the defense industry is cyclical and will once again increase at some point in the years ahead. Our valuation model considers this dynamic.

    Don't forget about the health of the balance sheet when considering dividend growth potential. Thanks for reading!

    (1) http://bit.ly/1jPIe9d

    The Valuentum Team
    Jun 3 10:59 PM | Likes Like |Link to Comment
  • Philip Morris: Not The Best Dividend Growth Play In Tobacco [View article]
    Hi all,

    Thank you all for reading. We always appreciate your comments!

    Kind regards,

    The Valuentum Team
    Jun 2 05:30 PM | 1 Like Like |Link to Comment
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