Lecture 2: Intro to Value Investing with CS on Duff & Phelps

Please go to http://www.scribd.com/doc/64698012/Class-Notes-2-Intro-and-Duff-and-Phelps-Case-Study.

We continue on from lecture one focusing on two questions, “Is this a good business?” and “What price do I pay.”

There is a case study on valuing Duff & Phelps using what has been taught so far. Of course the valuation is “down and dirty” meaning the valuation is done quickly to see if there is potential to go further. Many assumptions would need to be further scrutinized.

A great movie to see how an activist investor values a business is Other People’s Money starring Danny Devito.http://www.youtube.com/watch?v=MfL7STmWZ1c&feature=related

Here is the script of a scene where Devito values New England Wire & Cable.

START

Well, let’s put it this way:

Back in New York, I got a computer. Her name is Carmen. Every morning, right after I brush my teeth, I punch out: Carmen, computer on the wall, who’s the fairest of them all?”

Now, most mornings, she spits out, “Garfield, you’re the fairest.” But three weeks ago, she said: “Garfield, Garfield, scratch your balls.

New England…” Pardon me. “New England Wire and Cable is the fairest of them all.”

New England Wire and Cable?

I said, “What’s it worth?” So she showed me the numbers.

You got equipment here that costs $120 million. Even at salvage, it’s worth $30 to $35 million.

– Can I use that blackboard over there? – Yeah, go ahead.

Thank you.

Come with me. Carmen will educate us. Let’s put down $30 million.

– How many acres you got? – A hundred and ten.

Carmen and I figure, even as farmland, grazing land…..it’s worth $10 million.

– Is that fair?

– Yeah.

Let’s lay the $10 under the $30. That makes $40 million.

You bought some other companies, didn’t you, Bill?

You have a plumbing, an electrical and some kind of adhesive company.

Boring, but all making a decent profit.

Carmen says they’re worth another $60 mil.

Let’s put the $60 under the $40.

And you have working capital of $25 million, $10 of it in cash.

Let’s put down $25 million, add them up and see what you got.

$125 million.

The only bad news is…

…that this wire and cable division isn’t making a profit…

…and all the other divisions have to support you.

Now, as a stockholder, that doesn’t make me very happy.

Are you finished, Mr. Garfield?

No, I’m not, Bill.

Let’s say Carmen was suffering from premenstrual syndrome.

No offense. A little nuts.

Let’s say she was too optimistic.

Let’s knock off $25 million. Here we go.

Let’s make it… $100 million. A nice round number. I like nice round numbers. Any debt? No. Any lawsuits?  Any environmental bullshit? You throwing your garbage in the water?  Of course not. Not you. What about pension liabilities?  Carmen says you’re fully funded.

You people are dreams.

—

– I think this meeting is over.

– No, no, wait a minute.

Here comes the fun part.

– How many shares outstanding you got?

– Four million.

Divide 4 million shares of stock into $100 million, what do you get?

– Twenty-five.

– Good.

That means each share is worth $25.

But that was all foreplay. Let’s go for the real thing.

The stock was $10 when I woke up three weeks ago. That’s a $10 for a $25 item. What a sale!

Something worth $25 I can buy it for $10.

The company’s not for sale, Mr. Garfield.

I don’t want your company, Jorgy.

I just want what every other stockholder wants:

– I wanna make money.

– You are making money, Mr. Garfield.

You bought the stock at $10. It’s now $14.

The stock is $14 because I’m buying it.

I’m doing my part. Now you do yours. Get rid of this wire and cable division. It’s a financial cancer.

Liquidation Valuation in $mils.	Low	High Estimate
Equipment at salvage	$30	$35
Land as grazing land	$10	$10
Sub-total	$40	$45
Other Profitable Businesses	$60	$60
Sub-total	$100	$105
Working Capital	$25	$25
Sub-total	$125	$130
Round Down conservatively	$100	$130
Number of Shares	4 mil.	4 mil.
Price per share	$25	$32.5
Purchase Price	$10	$10
Discount from Intrinsic Value	60%	69%

 

 

END

Questions, thoughts and discussion are welcome.