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Ed C.

Ed C.
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  • Intel And Inevitability [View article]
    Russ,

    If you look at the inverse, imagine if Stacy Smith made a statement saying that Intel was operating at ~50% loading factor because he considered Fab 42 as "capacity" when it's an empty shell. I think it would be a misleading and irresponsible statement for him to say such a thing.

    I don't think Intel is hiding anything in terms of capacity. They've consistently said that Fab 42 can reach COD much faster because having the shell in place gives them a big jump on bringing new capacity online.

    BTW, if I wear my speculation hat, I would say "it makes sense" for Intel to build NAND flash at Fab 42 if/when they ever win the Apple foundry business. That's a lot of iOS devices with a lot of NAND flash
    Dec 7, 2014. 03:51 AM | 1 Like Like |Link to Comment
  • Intel And Inevitability [View article]
    Russ,

    In your view, what happens if/when "it makes sense" for Intel to start manufacturing NAND SSD inside an intel fab? Does Micron bring on-going technology know-how to keep Intel engaged in the IMFT JV?

    I could see a scenario where they fast become competitors
    Dec 3, 2014. 04:39 AM | Likes Like |Link to Comment
  • Why The 'Buffett Put' Provides Berkshire With Perpetual Positive Asymmetry Hidden In Plain Sight [View article]
    Hi Xiang,

    The reason why I see a high likelihood for BRK to compound earnings at 10% per year is as follows:

    1) BRK's operating businesses (BNSF, MidAmerican, Iscar, etc.) are hand-picked by Buffett and I make the assumption that collectively, they can compound earnings by 5-7% per year, in line with S&P 500 companies. In actuality, I wouldn't be suprised to see them do better than the S&P, since Buffett has hand-picked these wide-moat businesses run by managers he trusts.

    I actually wrote Warren a letter asking if he expected the operating businesses to grow earnings at a higher rate (not inclusive of elephant sized acquisitions) vs. the S&P 500 companies, but he wrote back declining to make a prediction.

    So I'm sticking with the 5-7% assumption with BRK's operating businesses.

    2) Insurance float increases moderately each year, giving BRK extra money to invest in stocks or to acquire entire businesses.

    3) If you combine the free cash flow from the operating businesses (1), and add insurance float & interest/dividend income (2), both of which are in the billions per year, a picture emerges where BRK could annually pick up companies at a 20-25x P/E ratio (in this scenario it assumes he's overpaying) and likely compound earnings above 10% per year.

    The "aha" moment I had was, seeing the above picture, I realized that when Buffett is gone, a "ham sandwich" could run BRK, slightly overpay for acquisitions the next ten years, and BRK would STILL likely outperform the S&P 500 and compound earnings by > 10% per year.

    As a data point, in FY 2012 and FY 2013, BRK compounded earnings at 12.8% and 15.7% respectively, so it's clearly being done in the absence of a major elephant-sized acquisition.

    BRK's corporate structure alone helps position it to outperform the S&P 500.

    No wonder Buffett recently wrote in his shareholder letter that he expects BRK to beat the S&P 500 by a few percentage points a year.

    Sorry Jim, I keep finding myself pounding the table even harder than you!
    Oct 9, 2014. 04:47 PM | 2 Likes Like |Link to Comment
  • Why The 'Buffett Put' Provides Berkshire With Perpetual Positive Asymmetry Hidden In Plain Sight [View article]
    Jim,

    I'd like you to entertain the idea (for a moment) that BRK's intrinsic value could be much higher than you assume in the article. Let me present the ways:

    1) Charlie Munger has publicly stated that Berkshire's operating business are worth "far more" than Berkshire's investments (once in an interview with Becky Quick, and again at the 2013 BRK annual shareholders meeting).

    At the close of FY2013, BRK's investments per share was $129,253.
    If you use Charlie's thinking, we would assume the operating businesses are worth more than $129,253 per share and arrive at an intrinsic value of:

    $129,253 investments per share
    $130,000 intrinsic value of operating businesses

    $260,000 total per share intrinsic value (Dec 31, 2013) or roughly 1.95x book value

    Forgetting about Charlie, let's look examine using a more quantifiable method:

    2) You mentioned that BRK is likely to compound earnings at 10% per year for the foreseeable future. I agree with you (I'll spare you all the analysis I've done and simply say I think your point is a highly, highly intelligent one).

    With a 10% earnings growth rate for the next decade, and 6% for the next 10 years, discounting future cash back to present value using an 8% discount rate, the rational P/E placed on BRK's net operating earnings is about ~20x (If we use pre-tax operating earnings, then the multiple is somewhere around 13-15x).

    In 2013, BRK earned ~$15.5 billion in pre-tax operating income (operating income of ~$3 billion from insurance has been excluded). Assigning a 14x multiple to operating earnings, we arrive at an intrinsic value of $217 billion for the operating businesses (not counting insurance), or about $130,000 per share.

    Adding the operating business side and the investments per share together, the intrinsic value estimate is ~$260,000, which is essentially identical to the 1st example, with intrinsic value somewhere around 1.95x book value.

    If you instead use "look through" earnings (which is how Buffett says he and Charlie think of their investment portfolio) of Wells, Coca Cola, IBM, Amex, etc. and add those earnings to BRK's operating business earnings, the intrinsic value estimates out to about $270,000 per share, right at 2x book value.

    Again, these estimates are all based on Dec 31, 2013 financial figures. We're 9 months removed and (I would argue) somewhere around 7-10% higher in intrinsic value today.

    Lastly....

    3) From 2009-2013, the average P/B ratio for the S&P 500 was 2.27 (ranging from 2.19 to 2.60). Somewhere in this range Buffett sees a "zone of reasonableness" for the S&P.

    It's likely not a straightforward apples to apples comparison to compare book value ratios of the S&P vs. BRK, but at least it's a stake in the ground you can look at.

    Good investing,

    - Ed


    Oct 8, 2014. 04:35 PM | 2 Likes Like |Link to Comment
  • Google Shopping Express: Flawed Concept For Google And Retailers [View article]
    Money Investor,

    Here is what I learned today from a Google Shopping Express driver:

    - He works an 8-hour day
    - He serves a 10 mile radius from the fulfillment center
    - He makes approximately 30 deliveries in an 8-hour day
    - Base pay is $12.50 / hour for 40 hours per week
    - Overtime pay is 1.5x, up to 20 hours per week
    - The fulfillment company provides a company car and gas card

    Using the above data points paints an interesting picture:

    - Labor Cost: $100 / day
    - Transport Cost: $0.565 / mile x 10 miles per package x 30 packages = $169.50
    - Packages Delivered: 30 / day

    Delivery Cost (Labor + Transportation): $8.98 per package

    The $8.98 per package doesn't factor in the overhead and profit for the company that Google uses to fulfill the orders.

    My guess is we're looking at a ~$12 per package cost, all-in, to Google.
    Aug 20, 2014. 05:49 AM | 1 Like Like |Link to Comment
  • A Re-Analysis Of Gilead After Q2 Results And The Early Idelalisib Approval [View article]
    Your clear and articulate writing is a great service to your readers. Many thanks for sharing your insight!

    I think the risk lies in nobody knowing what the annual run rate for Sovaldi treatments will be.

    John Milligan, COO of Gilead, stated on the Q1 2014 conference call:

    "In a typical year about 60,000 patients are treated, near about 30,000 last quarter, and so that put us certainly in a faster pace than the last few years, but certainly far below some of the peak years and well over 140,000 patients were treated."

    By my count, to support a $12 billion annual run rate for Sovaldi would require roughly 150,000 treatments per year (at $80,000 per treatment). That's what Gilead is guiding for FY2014...but what about the next few years? I submit that it's unknowable, but I think the odds are weighted in favor of Sovaldi growing into a more and more lucrative juggernaut.
    Jul 25, 2014. 05:25 PM | Likes Like |Link to Comment
  • Intel: How Would You Use $50 Billion Of The Best Semiconductor Capacity On Earth? [View article]
    Russ,

    "Mobile, of course, is a possibility, but as I mentioned above it is not large enough to fill what amounts to a $50 billion chunk of capacity."

    I think mobile is a big enough opportunity to fill that $50 billion of capacity.

    1 billion smartphones shipped last year, and IDC expects 1.5 billion smartphones to ship in 2017:

    http://bit.ly/1pXv2Vq

    The apps processor ($10-15 per chip) and comms chip ($20-30 per chip) represent around $30-45 of revenue potential per smartphone. With these two chips (or an integrated SoC solution), the addressable market for smartphone chips alone would be north of $50 billion.

    And that doesn't include tablets, NAND, etc.

    Jun 14, 2014. 11:24 AM | Likes Like |Link to Comment
  • Intel: What Is Apple Worth To Intel And What Is Intel Worth To Apple? [View article]
    Russ,

    Here's a speculative curveball for you:

    What if Apple buys the 10nm equipment for Intel and locks in a lower price on the chips Intel makes?

    Intel could leverage it's process technology for Apple, it would have less cap-ex spend (Apple buys the equipment) and Intel could deliver a higher return on invested capital to its shareholders.

    Apple would benefit by locking up massive foundry capacity with Intel and not have to incur risk on wafer yields with TSMC (NVidia's complaint about TSMC). Wafer yields would become Intels' problem but that's something I bet Intel would be very comfortable with - even after watching Samsung drop out of the A8 chip.
    Feb 19, 2014. 04:32 PM | 1 Like Like |Link to Comment
  • Intel: Don't Believe The Lies [View article]
    Ashraf,

    For the $8 MFG cost, how many chips per wafer are you assuming?
    Jan 25, 2014. 12:21 PM | Likes Like |Link to Comment
  • Intel: Earnings Post Mortem [View article]
    Russ,

    Here are my numbers for an assumed Fab42 producing NAND:

    - 175,000 wafer starts per month (300 mm)
    - 2 million wafer starts per year (approx.)

    - 256Gb chip @ 100 mm^2 (10 nm)

    - 600 usable chips per wafer x $17 revenue per chip = $10,000 revenue per wafer

    - 1.25 billion 256 Gb chips per year (enough to meet global smartphone & tablet demand)

    - 60% gross margin implies a $4000 MFG cost per wafer. This seems low, doesn't it? If there's a red flag that leaves me doubting, this is it.

    Since I'm assuming 10 nm, I can't see this generating revenue until 2015 at the earliest. Given that Fab 42 is an empty shell and Intel guided flat revenue for 2014, NAND seems destined for another year IMO.
    Jan 19, 2014. 01:54 AM | Likes Like |Link to Comment
  • 'Buffett's Alpha' Misses The Real Source Of Growth In The New Berkshire Hathaway [View article]
    Jim,

    "Thus the New Berkshire operates like a giant piston-like piece of machinery which take inputs of capital from one side and employs it profitably in the other."

    Bulls-eye!

    The cash flow sources coming into Omaha - operating income, underwriting profit, dividend & interest income, and insurance float - can all be allocated by Buffett.

    It's nothing short of amazing that Berkshire has compounded operating earnings by ~20% per year - since 2000. Any normal company that compounds earnings by 20% per year would almost certainly have a premium P/E multiple attached to it. But not Berkshire.

    The 'Alpha' that jumps out at me is the ~$5 billion (float, investment income, underwriting profit) of annual cash flow that Buffett can invest - on top of the cash flow from Berkshire's operating businesses.

    Applying that extra cash flow to acquire wide-moat businesses at even an expensive 20x P/E, straightforward calculations reveal why Berkshire can compound earnings at such a phenomenal rate. (I estimated a baseline 6% CAGR in collective operating profits, which rose to a collective 10% CAGR with the addition of acquisitions fueled by the 'extra' cash flows from Berkshire's insurance operation)

    I feel like that angle is missing when I see analysts break down Berkshire's operating businesses and assign P/E ratios for each business segment. They're missing the forest by focusing on the trees.

    The structure of Berkshire itself is the biggest Alpha; however, quantifying it is highly subjective.

    Great stuff, I look forward to reading more of your articles.
    Dec 28, 2013. 12:39 AM | 3 Likes Like |Link to Comment
  • Apple Isn't Dead [View article]
    Ashraf,

    "Buybacks are a nice gimmick to split the pie among fewer players, but Wall Street prefers "growth"

    Disagree. Large stock buybacks - at a discount to fair value - are a sensible way for companies to increase EPS. IBM, American Express, and Intel all buy back large amounts of shares. Warren Buffett even encourages the use of this "gimmick".

    "12% discount rate"

    I think your discount rate is too high at the moment.

    If you apply a 12% discount rate to Intel's flat $2.13 EPS, the NPV of future cash flows is ~ $16 / share. Add in $2 / share for cash and you get to $18 per share.

    If you apply an 8% discount rate to Intel's flat $2.13 EPS, the NPV of future cash flows is ~ $21 / share. Add in $2 / share for cash and you get to $23 per share.
    Dec 26, 2013. 12:50 PM | 3 Likes Like |Link to Comment
  • Samsung Is Apple's Worst Nightmare [View article]
    Ashraf,

    A few points:

    (1) There's real risk to making "commodity" components because parts inside of a phone / tablet evolve very quickly; display technology changes; camera technology evolves; communications chip requirements change; by being "agnostic" to all technologies, it lets you pick the best one for the job. You pay for it in lower margin, but I bet Tim Cook's ops team considers those trade-offs every day.

    Heck, the iPod had a spinning hard disk drive, now everything is NAND flash. Computer makers who vertically integrated to make CRT monitors would look foolish today.

    (2) DRAM was a terrible business for the past few years, and now it's pointing up; in the downturn, Apple locked in low component pricing in 2009/2010 and enjoyed high margins; now the tables have turned in this cyclical business in favor of the DRAM guys. Nobody was calling for Apple to buy a DRAM maker 4 yrs ago.

    (3) There's also no guarantee that Samsung / Apple would be the low-cost commodity leaders. On displays, Samsung and LG are already getting pressured from low-cost Chinese LCD makers.

    (4) By making chips, Samsung has to fight two fronts - a war with INTC/TSMC and a war with Apple on the consumer end. Those are two major wars. Apple maintains flexibiltiy by being "agnostic"; if Samsung falls behind TSMC and/or INTC, Apple can plan a move accordingly. Samsung can move too, but it has massive CapEx expenditures.

    -------

    Apple appears to be vertically integrating on the "high value" areas of their products: software & chip design. Both of these areas they are arguably much stronger than Samsung, and likely contribute meaningfully to the strong pricing power Apple enjoys. So in that sense, one could argue Apple is vertically integrating, but they pick and choose for what makes the most sense.
    Nov 8, 2013. 02:10 PM | 1 Like Like |Link to Comment
  • Intel's Winning Strategy [View article]
    Ashraf,

    Maybe a dumb question, but can Intel even technically serve Apple in a foundry capacity for the A7 chip if TSMC/Samsung are on 28nm nodes while Intel is on 22nm?

    It would seem that an A7 chip coming out of an Intel foundry would not be identical to an A7 chip coming out of TSMC/Samsung.
    Oct 24, 2013. 02:23 AM | Likes Like |Link to Comment
  • Micron: Why This Time It Really Is Different [View article]
    Russ,

    "the Elpida operation comes loaded with Apple (AAPL) orders for highly profitable mobile DRAM chips"

    Apple has a history of locking in very favorable contract prices for NAND and DRAM components. They capitalized on low component prices in 2009/2010, locking in long-term contracts with huge up-front payments to vendors.

    Elpida was at it's weakest point when Apple did the deal with them. I don't know the pricing terms of the Apple-Elpida deal, but I would bet that it was favorable to Apple with slimmer profit margins for Elpida.
    Jul 30, 2013. 12:46 PM | Likes Like |Link to Comment
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