Category Archives: Valuation Techniques

Paying for Growth? Case Study

nonsequitur_sheep_opt

What Price for the whole business would YOU pay? Then tell me the per share price.  The company had operations for 25 years prior to going public. The company’s stock price will under perform the market (SPY) about 1/3 of the time over the next forty years.

 

BUSINESS XXX? 1974 1973 1972 1971 1970
Cash $2,238,263 $2,168,224
Working capital 27,132,580 16,796,897
LT Debt ** 10,578,269 5,065,567
Shareholders’ Equity 30,734,128 $24,753,623
Outstanding Shares 6,542,250 6,512,950
Net Sales $167,560,892 $124,889,141 78,014,164 44,286,012 30,862,659
Income Bef. Taxes 11,883,754 8,917,188 5,569,027 3,170,599 2,198,764
Pro-forma Net Income $6,158,520 4,591,469 2,907,354 1,651,599 1,187,764
EPS $0.93 $0.70 $0.47 $0.30 $0.23
Units in operation 78 64 51 38 32
ROE 38.67% 36.02%
** Co. has a $12 mil. Credit line renewed yearly of which it has borrowed $4 mil.
Assume Co. needs all cash for operations
Assume strong growth for 40 years.You need a required rate of return of 15%

XXX Company Worksheet (Excel Spreadsheet)

Can you guess the actual name of the company?

To give you some historical perspective of 1974 see:A Study of Market History through Graham Babson Buffett and Others

Winner gets a date with my Ex: http://youtu.be/E55ni_xc4ww  (PLEASE do NOT click on the link unless you win the prize)

 

Gold Discipline Melts Away or Case Study in Reading the News

This morning I read the news…Oh boy!  –The Beatles

(Editor: Read the following article and ask how YOU, as a reader or investor whether you have no opinion; are hyper bearish or hyper bullish gold or miners, benefit. Is there a particular BIAS? Finally, what is the main question you want answered? So what is the acquisition __________?  Prize awarded.

Gold Discipline Melts Away from Heard On The Street Column (WSJ April 17, 2014)

And they were doing do well. The intensifying battle of Osisko Mining is fast undoing gold miners’ work to restore credibility.

Wednesday Yamana Gold raised its offer to 8.15 Canadian dollars (U.S. $7.42) a share, this time roping in Agnico-Eagle Mines as a joint bidder, valuing Osisko at C$3.9 billion. Goldcorp raised its own bid to C$7.65 a share last week.

Takeover battles, with their risk of overpaying, are always unnerving for investors in the bidders. With gold miners thate is added concern: The sector has dropped about two-thirds since September 2011 as a history of overpriced deals an busted investment budgets caught up with it.

Miners have worked to address this, cutting costs and investment and, in many cases changing top management. Citigroup estinmates the average all-in cash cost per ounce, which includes things such as capital expenditure, fell by a fifth last year.

It remains more than $1,400 an ounce, though–still above today’s gold price of about $1,300. So this is no time to succumb to the old ways. Yet, even before Wed, both Yahmana and Goldcorp had made offers dilutive to their own value, ssays adam Graf at Cowen. That they are engaging in this now suggest talk of discipline is just that–or that their own project pipelines aren’t as robust as though.

Osisko’s stock now trades at C$7.94, and the break fee on the latest bid is worth 44 Canadian cents a share. To counter, Goldcorp would have to raise its bid roughly C$1, or 13%.

It should resist the temptation, but may not. One thing is clear. With the recently rediscovered discipline now apparently crumbling, it makes more sense to own junior gold miners, the potential targets, then their bigger rivals. –Liam Denning.

I will post my “answer” this weekend. Your thoughts?

Editor: Also, this article should spur you to do a valuation of Detour (DRGDF)–hint! hint! See: http://wp.me/p2OaYY-2m2

536584-13976660696117253-Dave-Kranzler

Note the extreme tightness for leasing gold. See: Gofo It will be interesting to see if gold can continue to decline in the face of bullion demand. Leasing rates are close to the most negative since mid-August 2013 when gold rallied to $1,400.

You can update your charts with the gold price vs. 1 month and 3 month GOFO rates.  Is this the canary in the coal mine for financial stress? Gofo Rates and Gold.  Low interest rates mean–all things being equal–gofo rates would be lower, But negative rates can ONLY mean two things:

  1. Investors don’t want to lend their gold because of counter party risk
  2. and/or they don’t have the gold.

Blog for special situations

http://www.cablecarcapital.com/blog/

Michael Price’s Case Study on Hospira HSP) Valuation

Michael-Price

I wait for large discounts; I look for the growth guys selling to the value guys.”

Video Lecture: http://youtu.be/Nph-sDz1EtA on November 9, 2013 in London.

Thanks to London Value Investor Conference, 22nd May, Featuring Mason Hawkins and Don Yacktman,  April 7, 2014 by Tobias Carlisle

SEARCH STRATEGY

Wait for bad news; wait for things (news/events) that can drastically affect the company. Be prepared to act on it. At MFP, we spend all our time determining intrinsic values (“IVs”). Try to lead them. Determine IV beforehand, so you can act quickly when events push prices below IV. The Sell-Side talks about this last quarter. How the hell helpful is that?  I don’t think one or two quarter’s matters or even a year’s worth of earnings reports. Understand what MIGHT HAPPEN not what DID HAPPEN.

Get prepared and wait for these opportunities like HSP,  today (Nov. 8, 2013) at $32. It will be worth $45 in a year.

HSP

Management has said they have fixed problems at the plant, the balance sheet is clean. Management will buy-back stock. The company has $2.00 per share in earnings now and in a year it will have $3 per share. A fifteen multiple (conservative given the business and competing investments) gives you $45.

VALUATION

See:HSP VL

Hospira (HSP) is a manufacturer of generic drugs, a pharmaceutical company. The Federal Drug Administration (FDA) regulates their plants for certain standards of cleanliness and to ensure the bio equivalency of their drugs.

So HSP was earning $3 EPS and was an absolute growth stock that never disappointed Wall Street up until 2010. Earnings were growing at a nice rate.

Then one day, the FDA shuts down one of HSP’s larger plants. The stock opens at $28, down $17 points from $45. So what happens when a company has 200 million outstanding shares and the stock declines 17 points—HSP loses $3.5 billion of market cap. I do not believe it will cost $3.5 billion to fix the plant to FDA’s standards. HSP has 17 plants and the FDA closed only ½ of one plant.

The stock market puts $3.5 billion discount on the bad news from Hospira. The market is OVER-discounting or over extrapolating the bad news (perhaps to ALL of Hospira’s business).

THAT situation—a good company hit with a temporary/fixable problem to go on sale—is what value guys wait for.

HSP was consistently growing, earning $3 EPS and trading at 15 times earnings. It was owned by all the growth guys. So what happens when a stock goes from $45 to $28 or 17 points? The growth guys are selling to the value guys and the value guys, at $28 per share, are saying that the company will be hit now for $1 per share (earning $2.00 per share temporarily) but will be back to $3.00 per share after the company fixes the plant, buys back stock, etc.

It will take two years to get back to earning $3 per share and cost the company about $500 million or a $1 billion to fix the large plant. Meanwhile, the company will earn 50 cents or a $1 less than it would with the plant operating normally ($2.00 to $2.50 per share), but the intrinsic value of the company is about $45 with a 15 multiple on normalized earnings of $3.00 per share that the company should earn once they get religion and run their plants a bit better.

Then the growth guys will come back into the stock and then the value guys sell to the growth guys.

You look for the most down stocks; down 25% to 35%. I look for the growth guys looking to sell the value guys.  Ask yourself if the discount is great enough. WAIT FOR BAD NEWS.

Michael F. Price 13F


% of Portfolio as of 12/31/13
Hess Corporation 7.48%
Intel Corporation 6.2%
FXCM INC. CLASS A COMMON STOCK 3.87%
Alleghany Corp. 3.85%
Boston Scientific Corporation 3.1%

See a more detailed Case Study: Case Study Hospira by Price London 2013

and a prior lecture: M PRICE Columbia Lecture Notes_2009 and G&D Spring 2011

A student should listen carefully to the above lecture and try to also value Hess, another company mentioned in his London speech.

Value AMEX during the Salad Oil Scandal (A Great Blog)http://hurricanecapital.wordpress.com/

Case Study: Valuing Detour Gold; Industry Map

miners

A gold mine is a hole in the ground with a liar on top–Mark Twain

Industry Map:

Industry Map of the Precious Metals Sector   OK, I give myself a D- for effort and appearance but time has been passing so we need to move forward to a valuation of Detour Mines (DRGDF). Please see where Detour is highlighted in my industry map.

A reader was kind to share a brokerage report on the industry: Merrill_Global_Gold and Precious Metals and Gold-Special-Report-Time-to-Mine-2014 (I personally do not spend much time on jewelry demand, etc. because investment demand, in my opinion, drives the price of gold).   When you hear that China’s demand for gold is higher per year than annual production and the only reason gold is lower is because of manipulation in the “paper” (Comex/LMBA), think for yourself!  Because of the huge stock to flow ratio (190,000 tonnes supply vs. 2,500 annual production) what matters is the NET hoarding (buying) and/or dishoarding (selling) at the current price. Gold doesn’t disappear like wheat, it simply changes hands at a certain/specific price.  When silver hit $50 in 1980, Grannies started melting down their silver tea sets to sell into the market. 

Try to value Detour Mine with today’s gold price give or take $100 to $200 dollars–the range we have been trading through for the past year.  On Monday, I will give a big hint in how you might value Detour, but let’s see if you can spot the obvious, first.  Good luck!  What prize would folks like for their effort?  Money, gold bullion, or a date with my Ex?

Have a Great Weekend!

REMEMBER: It is a long, long way from searching for gold to this:

Gold Bars

Part 2: Analyzing a Gold Mining Company–Initial Steps

Mark Twain: “A mine is a hole in the ground with a liar standing next to it.” 
2-BGMI-Gold both-W2 (1)

Initial Steps

We first have to understand the product/market of our gold company. Gold companies produce gold and silver which is money. What is money?  Precious metals have exchange value which makes up a large part of their value.  You first have to understand the gold market. Note: why did gold go down LESS than other commodities such as oil in the 2008/2009 credit crisis?

You need to draw up an industry map. How? Find out who the participants are.

Start with history: http://www.fgmr.com/gold-mining-stocks-have-outperformed-the-djia.html

BGMI http://www.sharelynx.com/chartstemp/free/fchart-BGMI.php

QUIZ: What is the best environment to invest in Gold mining equities. Why?

We will circle back to an industry map after you have read about the industry.

What determines the price of gold: http://www.acting-man.com/?p=10251 Also, do a search for gold and/or mining stocks and then read his posts.

The Case For Gold by R Paul

Gold Dollar by Rothbard

Roubini Why Gold Won’t work

Study: www.monetary-metals.com

Gold as collateral: http://www.alhambrapartners.com/2014/02/26/gold-and-reverse-repos/   Also, do a search for gold.

Read free research on gold as money: http://www.myrmikan.com/port/

View all five videos on money: http://hiddensecretsofmoney.com/

Two excellent books: Gold, the Once and Future Money by Nathan Lewis. Also, Gold: The Monetary Polaris by Nathan Lewis.

Gold and inflation: http://www.garynorth.com/public/department32.cfm

The case for gold:  http://www1.realclearmarkets.com/2011/11/18/my_thoughts_on_lewis_lehrman039s_gold_standard_120618.html

Understand royalty companies: http://seekingalpha.com/article/1341411-gold-and-silver-royalty-companies-part-1-the-pros-and-cons-of-royalty-companies   (read all five parts)

Then read presentations of Royal Gold, Silver Wheaton, Franco-Nevada, Sandstrom from their websites for a good overview of the gold mining market(s).

These sites can get you started. Don’t believe the hype!

www.goldsilverdata.com Also, go to http://youtu.be/VjjLhPqO8bY to view video on valuing gold and silver stocks.

Go to www.youtube.com and search for Jim Grant AND gold,   John Doody and mining stocks.  Ditto for Brent Cook, Rick Rule. Search for their comments.

That will get you started and then next week, I will post an industry map. Ask questions.   In two weeks we will crack a company.

Update March 17, 2014: Discussion of Junior Resource Sector

Gold1800to2000

 

Part 1: Analyzing a Gold Mining Company–Where to Start?

Idaho_Gold_Minegold mine 2

Gold mine 3gold mine

 

 

 

Assignment: Analyze and value a gold mining company

Mario Gabelli once suggested to a group of Columbia MBA students to become an expert in an industry. The process will take at least six months of intensive reading and research to get to a level of what you need to know and what you can ignore. Then in a year or so move on to another industry. After five or six years you will have competency in five to six different industries.   Since investing is all about context, we first need to learn about the gold (precious-metals) mining industry.

Whether you will analyze a gold mining company, a shipping firm, a title insurance business or a media company, you will need to develop an understanding of the industry within which your firm operates.

Since we do not have six months to study, we will move at an accelerated pace.

OK, so what do you need to start with and how would you begin?  Pretend that you wanted to build a mining company from scratch, how would you do it? If you were airdropped into Northern Pakistan, what would you first need after hitting the ground?

Friday, I will post my suggestions and information sources. Meanwhile, you can think and search for yourself. Eventually, we will move on to the particular company.   Don’t hesitate to post questions if you are unclear or my instructions are incomprehensible.

Good luck!

Looking At Bottoms; Gold Stocks

200205666-001

No, not these…..

Bottom

 

 

 

I mean these……….. (Thanks to http://www.classicvalueinvestors.com/

Gold Stocks

The table below is meant to highlight the HUGE price ranges of the micro-cap junior precious metals sector. I tend to avoid or make allowance for some of these companies going to $0.00 or diluting shareholders with equity offerings.

GroupofMinersPerformanceFebruary182014-300x90

 If you go back and read the author’s post over the past two years, you will get a feel for the suffering of investors who ride a BIG BEAR market in small junior mining stocks. Be aware of the downside as well! See:  http://classicvalueinvestors.com/i/2014/03/goldgroup-mining-this-is-what-i-call-a-great-day/

How one investor changed his life by developing his OWN method of investing.

Below is an advertisement to get you to hear the audio story. The ad places the HOOK, “an unusual money-making secret.”  Baloney, he doesn’t use any “secret”. He simply found a method to value, buy cheaply, and manage a portfolio of precious metals’ stocks.  And over the years he has done extremely well while stomaching swings of 50% or more. He can hold on, because of his work and confidence. THAT is his secret. I know this guy and you should listen to the interview. Yes, a bit hokey at first –who cares that he got revenge on his ex-wife–but a true story. There are LESSONS here.

Dear Reader,

If you’re a middle-aged guy, divorce is one of the worst things that can happen to you. It can ruin you, both financially and emotionally.

But I recently heard the story of a Ft. Lauderdale man named John  (Actually, John Doody of www.goldstockanalyst.com) who discovered an unusual moneymaking secret after going through a bitter divorce.

John says this secret has made him a multimillionaire over the past decade… even though his ex-wife took almost all of his assets. And he asked us if he could share his story with you.

In fact, he says he even went through the expense of having his transactions verified by an independent auditing firm… just so he could prove his incredible story to the world.

Click here to listen to John’s story.

Jan. 2014 Interview of John Doody (down 50% in 2013!) http://youtu.be/95gjTXIGsgU

Regards,

Will Bonner, Publisher, Diary of a Rogue Economist 

Who Wants to Analyze a Gold Stock?

If there is interest, we can work through a company in a few posts next week.

HAVE A GREAT WEEKEND!

A Great Individual Investor’s Investment Letter; A Reader’s Questions

NSA-Santa

A successful individual investor recaps 2013 (Must Read) David Collum_2013_year_in_review  

Note how few long-term decisions he made. Owning long-term bonds from 1980 to 1988, etc.  Buying precious metals in 2001 and STILL holding on through 2013–now that is long-term investing! 2013 was only his second losing year in several decades thanks to gold and silver being down 39% and 55% this year.

Video

A Reader’s Question

I have a couple of valuation questions that I have been wrestling with recently.  I would love to hear your take.

First, do you ever use a PE ratio for valuation?  I have always used a EV to EBIT or something ratio whether pre-tax or after-tax.  (I have an idea of the multiples that interest me in both cases.)  Sometimes I come across something that has a low PE but not so low EV/EBIT.  I think this is when the company has financial leverage and is paying an interest rate substantially below the earnings yield.  If it’s a high quality business and the leverage does not harm the company is it sometimes better to use a PE?
John Chew: No, I would use EV (enterprise value which includes net debt) rather than “P” or market cap because debt is part of the price that you pay. Also, look at the terms and conditions of the debt. Note the quality as well as the quantity of the debt. Bank debt is more onerous than say company-issued bonds. 
Also, if you are normalizing earnings, and current earnings are depressed and may be for a while, do you account for this in the valuation, perhaps as a liability?  Or is this an effort to be overly precise?  This quote from Jean-Marie Eveillard in The Value Investors suggests that the former method is overly precise because the future is uncertain:
  “There is no point asking about a company’s earnings outlook because if we are investing for the long-term, then short-term earnings never affect our intrinsic value calculation. Asking management about long-term plans is also pointless to me because the world changes. No one can predict what will happen, and so what is important for us as analysts is to discover the underlying strengths and weaknesses of the business ourselves.”
John Chew: You do not count this as a liability when you normalize earnings.  You look back over a long enough history 12 to 15 years (including the 2008/09 credit crisis) to sense what normal earnings are.  Part of normalizing earning would be assessing the competitive advantage of the business or the uniqueness of the assets.  For example, you should be able to have confidence in the earnings power of the assets owned by Compass Minerals (rock salt positioned near the Great Lakes giving a cost advantage). 
Finally, I want to share a quote from Dylan Grice that I recently found and thought you may find interesting:
Dylan Grice in the July 17, 2012, Popular Delusions
The power of a discounted cashflow model is that it allows us to achieve a value which is objective. With a model based on discounted future cashflow we can arrive at intrinsic value.
But is this correct? Can cash flows be objectively valued? Suppose I’m a fund manager worried that if I underperform the market over a twelve-month period I’ll be out of a job. What value would I attach to a boring business with dependable and robust cash flows, and therefore represents an excellent place to allocate preserve and grow my client’s capital over time but which, nevertheless, is unlikely to ‘perform’ over the next twelve months? The likelihood is that I will value such cash flows less than an investor who considers himself the custodian of his family’s wealth, who attached great importance to the protection of existing wealth for future generations, values permanence highly, and is largely uninterested in the next twelve months.
In other words, an institutional fund manager might apply a ‘higher discount rate’ to those same expected cash flows than the investor of family wealth. They arrive at different answers to the same problem. The same cash flows are being valued subjectively and there is no such thing as an objective or ‘intrinsic value’ embedded in the asset, even though it has cash flows.
John Chew: Well, I agree that investors have different discount rates. You need to use one that fits your situation.  We are discussing human beings making decisions under uncertainty or human action.  All value is subjective. To learn more go to: http://mises.org/austecon/chap4.asp
Thanks for the questions and to all a Happy, Healthy and Prosperous New Year in 2014

 

Selling All My Gold (Not!)

Fisher on Gold

Anyone care to receive a prize? What is the fatal flaw(s) in the above presentation? Another case study in why you must IGNORE the pundits and Wall Street. What proof can you provide that the above video is nonsense?

If you don’t answer the question, then you will end up like this guy: http://youtu.be/qPGUM5PZWEw 

or………….

Buy, Sell or Hold? Schiller Free Finance Course

Truck Photo

Arkansas Best Trucking

Annual 2012 Ark Best

Investor_Presentation_05-14-2013

2013_Proxy

big

Buy, Sell, or Hold?  Why? Is this a good business? Can costs be passed through to customers?  Is growth profitable?

Wrong answers will result in: http://youtu.be/6eXFxttxeaA

Free On-Line Finance Course from a Nobel Prize Winner:  http://oyc.yale.edu/economics/econ-252-11#sessions