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I am an author of books related to the decision framing and optimizing processes of Buffett and Munger. These books are available at www.frips.com and: http://www.amazon.com/Bud-Labitan/e/B002D1ERT4 With integrity and patience, we can also earn superior profits by carefully evaluating facts and... More
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The Four Filters Invention of Warren Buffett and Charlie Munger
  • A Value Guy looks at Siemens 0 comments
    May 9, 2010 12:39 PM | about stocks: EGY

    A Value Guy looks at Siemens ADR

    Siemens AG is a Germany-based company engaged in electronics and electrical engineering. The Company is an integrated technology company with core activities in the fields of industry, energy and healthcare. Siemens operates in more than 190 countries through six segments: Industry, Energy, Healthcare, Equity Investments, Siemens IT Solutions and Services, and Siemens Financial Services. Industry, Energy and Healthcare segments are reported along with 15 divisions, which comprise the divisions Industry Automation, Drive Technologies, Building Technologies, Osram, Industry Solutions and Mobility belonging to the Industry Sector, the divisions Fossil Power Generation, Renewable Energy, Oil & Gas, Energy Service, Power Transmission and Power Distribution belonging to the Energy Sector, and the divisions Imaging & Information Technology (NYSE:IT), Workflow & Solutions and Diagnostics belonging to the Healthcare Sector.
    fyi Last Price 86.52
    52 Week High 103.10

    Does SI make for an intelligent investment or intelligent speculation today?

    Starting with a base estimate of annual Free Cash Flow at a value of approximately $6,000,000,000 and the number of shares outstanding at 869000000 shares; we used an assumed FCF annual growth of 5 percent for the first 10 years and assume zero growth from years 11 to 15.  Review the Free Cash Flow record here:


    The resulting estimated intrinsic value per share (discounted back to the present) is approximately $94.66.

      Market Price = $86.52
      Intrinsic Value = $94.66  (estimated)
      Debt/Equity ratio = .69
      Price To Value (P/V) ratio = .91  and the estimated bargain = 9. percent.

    Before we make a purchase, we must decide ( filter #1 ) if SI is a high quality business with good economics. Does SI have ( filter #2 ) enduring competitive advantages, and does SI have ( filter #3 ) honest and able management.

    The current price/earnings ratio = 19.7
    It 's current return on capital = 5.57.

    Using a debt to equity ratio of .69, SI shows a 5-year average return on equity = 9.2

    Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding.

    Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.

    Does SI make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today?

    Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misapraised. In terms of Opportunity Cost, is SI the best place to invest our money today?


    How will SI compete going forward? Keep in mind that a financial report like this is a reflection of the past and present. It may be used to project a future, but it may not account for factors yet unseen. Therefore, pay attention to competitive and market factors that may affect changes in profitability.

    In summary, using a debt to equity ratio of .69, SI shows a 5-year average return on equity = 9.2 . Based on a holding and compounding period of 10 years, and a purchase price bargain of 9. percent, and a relative FCF growth of 5 percent, then the estimated effective annual yield on this investment may be greater than 5.9 %.

    Going forward, are there any tranformational catalysts or condition indicators imaginable on the horizon?

    As always, I appreciate hearing your views,

    Bud Labitan
    Author of the new book 'Price To Value'

    Author of 'The Four Filters Invention of Warren Buffett and Charlie Munger'

    Labitan Partners
    budlabitan@ aol.com


    Disclosure: no positions
    Stocks: EGY
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