Interview with Bud Labitan, author of the book "Valuations."
By Ben Albaitis
Here is an interview with my friend Bud Labitan - a physician, author, and value investor. Bud has published 3 books on value investing and his latest book offers real practical examples in business stock valuation.
Ben: Bud thank you for joining me for this interview. We are here to talk about your new book - Valuations, 30 Intrinsic Value Estimations in the
style of Warren Buffett and Charlie Munger.
This book seems to focus on estimating intrinsic values using a rough approximation.
Bud Labitan: Thanks Ben. You are correct. I applied the basic focus of
Buffett and Munger on to Free Cash Flow and Shares Outstanding.
Ben: Why? What motivated you to do this?
Bud Labitan: A few years ago I was talking with the writer and investor
Charles Mizrahi about my desire for a book with several case studies with
real valuation examples. I first suggested to Charles that he do such a book
because I like the way Charles writes in a clear and easy to understand
Ben: Interesting. What moved you to finally put one together?
Bud Labitan: As a book, "Valuations" came about in my mind after I had
posted a few example valuations at seekingalpha.com. I wanted a book that
showed cases on how to sensibly value a business. Previously, I had designed
software for myself that captures data and generates a template report that
reads like a conservatively written document. The reports are full of
warnings and admonitions.
Ben: Tell me which companies are covered in your book.
Bud Labitan: Here is a list:
Chapter 1 : AAPL, An estimated valuation of Apple Inc.
Chapter 2 : ABC, AmerisourceBergen Corp
Chapter 3 : APOL, Apollo Group Inc.
Chapter 4 : BDX, Becton Dickinson & Co.
Chapter 5 : BUD, Anheuser Busch Inbev ADR
Chapter 6 : CMCSA, Comcast Corp.
Chapter 7 : CSCO, Systems Inc.
Chapter 8 : CX, of Cemex ADR
Chapter 9 : DIS, Walt Disney Co.
Chapter 10 : DOW, Dow Chemical.
Chapter 11 : EBAY, eBay Inc.
Chapter 12 : FO, Fortune Brands Inc.
Chapter 13 : GCI, Gannett Co Inc.
Chapter 14 : GD, General Dynamics Corp.
Chapter 15 : GE, General Electric Co.
Chapter 16 : HD, Home Depot Inc.
Chapter 17 : INTC, Intel Corp.
Chapter 18 : IRM, Iron Mountain Inc.
Chapter 19 : JEC, Jacobs Engineering Group Inc.
Chapter 20 : JNJ, Johnson & Johnson
Chapter 21 : KO, Coca-Cola Co.
Chapter 22 : LOW, Lowe's Companies Inc.
Chapter 23 : MCK, McKesson Corp.
Chapter 24 : MMM, 3M Co.
Chapter 25 : MSFT, Microsoft
Chapter 26 : PEP, Pepsico Inc.
Chapter 27 : PG, Procter & Gamble Co.
Chapter 28 : TAP, Molson Coors Brewing Co.
Chapter 29 : UNH, UnitedHealth Group Inc.
Chapter 30 : YUM, YUM! BRANDS INC.
Ben: So, how do you perform the qualitative valuations of intrinsic
Bud Labitan: As you know, Buffett and Munger state that before we make a
purchase decision, we must decide ( filter #1 ) if XYZ business is a high
quality business with good economics. Does XYZ business have ( filter #2 )
enduring competitive advantages, and does XYZ business have ( filter #3 )
honest and able management."
For the quatitative valuations of intrinsic value, I focus on FCF and
Shares. For example in the case of Apple Computer; Starting with a base
estimate of annual Free Cash Flow at a value of approximately $9,500,000,000
and the number of shares outstanding at 909,900,000 shares; I used an
assumed FCF annual growth of 13 percent for the first 10 years and assume
zero growth from years 11 to 15. Review the Free Cash Flow record here, and
think about its sustainability:
The resulting estimated intrinsic value per share (discounted back to the
present) is approximately $243.12.
On the date it was performed, the Market Price = $255.9 Intrinsic Value =
$243.12 (estimated). Therefore, while Apple is a great company with great
products, on that day, it was not a super bargain.
Ben: Interestingly creative. How did you go about your research?
Bud Labitan: Well, a lot of the research was already done for my first book
"The Four Filters Invention of Warren Buffett and Charlie Munger. Two
Friends Transformed Behavioral Finance." So the challenge was to take what
they said and imagine a reasonable estimating method based on the
individual's growth assumptions.
Ben: I read your first book and I liked the way you reviewed Buffett and
Munger's decision making process. I believe that you reiterated different
ways they repeated their four step seeking process. Something like. a search
for: "1. Understandable first class businesses, with 2. enduring competitive
advantages, accompanied by 3. first-class management, available at 4. a
Bud Labitan: Yes. You would be amazed at how that has been repeated over the
years in several ways. For example, sometimes Buffett will say to students:
"I want to find a business that I understand with good economics." Well that
is step #1. Then he may something like: "with sustainable competitive
advantages" instead of using the word enduring. Next, he may say "able and
trustworthy managers" instead of "first-class managers." Finally, it always
ends up with a bargain price relative to the business' intrinsic value.
Ben: What do you think is the key takeaway from your book?
Bud Labitan: Combine the best of Qualitative thinking and Quantitative
estimation. Acquiring this ability can raise your attitude and thinking
effectiveness. Before runnning your valuation estimations; Decide ( filter
#1 ) if XYZ business is a high quality business with good economics. Does
XYZ business have ( filter #2 ) enduring competitive advantages, and does
XYZ business have ( filter #3 ) honest and able management."
Ben: Bud thanks again for joining us. I appreciate you taking the time to
answer our questions. Do you have any final thoughts for our readers?
Bud Labitan: My pleasure Ben. Thanks for having me. These valuation cases
are estimations written in a style that emphasizes a focus on free cash flow
and the number of shares outstanding. In reality, these businesses may
outperform or they may underperform any of my projections.
Ben: If you enjoyed this interview, take a look at Dr. Labitan's other
books like: Price To Value: Intelligent Speculation Using The Decision
Filters of Munger and Buffett. The book is currently available in paperback,
hardcover, and large print versions from Lulu.com and on Amazon.com.
His first book "The Four Filters Invention of Warren Buffett and Charlie
Munger. Two Friends Transformed Behavioral Finance" is also available via
Valuations is available on Lulu.com and it will be available on Amazon.com
by the middle of July 2010.
Disclosure: no positions