Tag Archives: Corporate Finance

Why Bad Multiples Happen to Good Companies (Corporate Finance)


We “Deserve” a Higher Multiple

Executives who worry that their multiple should be higher than the one the market currently awards them. “We have great growth plans,” they say, or “We’re the best company in the industry, so we should have a substantially higher earnings multiple.” Their logic isn’t necessarily wrong. Finance theory does suggest that companies with higher expected growth and returns on capital should have higher multiples. And the theory held true when we analyzed large samples of companies across the economy.

However, within mature industries, our analysis showed that regardless of performance, multiples vary little among true peers. Companies may occasionally outperform their competitors, but industry-wide trends show a convergence of growth and returns that is so striking as to make it difficult for investors, on average, to predict which companies will do so. As a result, a company’s multiples are largely uncontrollable. Managers would be better off focusing instead on growth and return on capital, which they can influence. Doing so will improve the company’s share price, even if it doesn’t result in a multiple higher than those of its peers.

In This Article

Read it here:Why Bad Multiples Happen to Good Companies

Thanks to all who suggested other learning blogs.


Buffett Tutorial on Accounting and Valuation: See’s Candies Case Study

I have always maintained that excepting fools, men did not differ much in intellect, only in zeal and hard work.  –Charles Darwin

Value investing works, because it does NOT work ALL the time. –Joel Greenblatt

Today’s post focuses on accounting (GAAP) and valuation through the words of Warren Buffett. The case study on See’s Candies and the other readings will help improve your skills. The burden is on you to understand and apply the lessons. If you do not understand FIFO or deferred taxes, then look up those terms in a basic accounting book, then do problem sets to grasp the concepts. Don’t take Buffett’s words on faith; try to apply the concepts of economic Goodwill to a commodity based company like, for example, US Steel (X) versus a franchise company like Coca-Cola (KO). Do you agree with Buffett’s analysis?

Prof. Joel Greenblatt’s book, The Little Book that Beats the Market, is (simply) an application of Buffett’s thoughts on economic Goodwill.

Helpful hint: Take a subject like share repurchases or divdend policy and try to find many different sources on the subject. Learn the subject to death. Master how, when or if a company should act in returning capital to shareholders.

See’s Candies Case Study:Sees Candies 2012


A Parable on Valuation: The Old Man and the Tree or a Parable of Valuation

Inflation:Inflation Swindles the Equity Investor and Buffett inflation file

EBITDA: Placing EBITDA into Perspective and TEV to EBITDA Research

Joel Greenblatt: Little Book That Still Beats the Market, The – Joel Greenblatt

Secrets of (view): http://youtu.be/3PShSES5nBc   25 minutes

Corporate Finance

Share Repurchases: Corporate Structure and Stock Repurchases and Assessing Buybacks from all Angles_Mauboussin

Dividends: Dividend Policy, Strategy and Analysis

You will beat Wall Street easily if you apply the above lessons. The hard work is in mastering the material.   Stay the course.

Capital Allocation and Compounding Machines

Readers’ Questions

Several readers have struggled with understanding the common success factors of the companies discussed in this post: http://wp.me/p1PgpH-Qw

Any company with exceptional returns has been able to generate returns above it cost of capital while being able to redeploy free cash flow at rates above its cost of capital (marginal returns on capital). See one poster child:WMT_50 Year SRC Chart.

Ok, its easy to look back at successful companies and say wow! But what can we know A priori that can help us in our search than just “good”management, “passion for excellence” and all the other corporate consultant buzzwords?   There may be no common theme between Altria, Aflac, or Danaher or Eaton Vance but we do know that all companies successfully generated above average returns for a long time.  Let’s try to think more deeply and test our assumptions.  The first place to start might be management’s allocation of capital because not all of these companies had barriers to entry (Leucadia comes to mind).

Allocating capital and operating the business are the main jobs of management. The two are intertwined.  Does the company retain its excess capital to reinvest in the same business, make acquisitions, pay a dividend and/or buy back stock (at what price?). There are no simple answers or one size fits all approach. And if it were that easy then there probably wouldn’t be as much opportunity for investors who do find good capital allocators.

The linked papers below will go in depth into the issues and problems around corporate capital allocation.  Take the time to read these because the readings should help you think more intelligently about a crucial aspect of investing–how management teams allocate YOUR capital.

Dividend Policy, Strategy and Analysis

High Dividends Research by Tweedy Browne


Corporate Structure and Stock Repurchases

Punishment and Prizes

For those who have not worked hard at understanding corporate finance and the implications of capital allocation while investing then you face a flogging: http://www.youtube.com/watch?v=W1Ipb0WpoGI

For those who feel they are experts at capital allocation then you win first place and a date with Sasha: http://www.youtube.com/watch?v=6a7Kf1e5lEI

Keep learning!

Corporate Finance: Dividend Policy, Strategy, and Analysis

Earlier we analyzed stock repurchases. http://csinvesting.org/2011/12/08/an-insiders-view-of-capital-allocation-corporate-financie-valuation-case-studies/

Now we beat the subject of dividends to death from all angles especially from an insider’s perspective. Munger, Buffett, Peter Lunch and others discuss dividends http://www.scribd.com/doc/75491721/Dividend-Policy-Strategy-and-Analysis-Value-Vault

Please refer to the charts of the companies mentioned in the document:

WDFC_30 year chart

MO_50 year chart

MRK 50-Yr chart

An Insider’s View of Capital Allocation (Corporate Finance and Valuation Case Studies)

This is includes an important reading found here: http://www.scribd.com/doc/75125923/Capital-Structure-and-Stock-Repurchases-Value-Vault.  Also in the Value Vault.

The 58-page document will start with buy backs from a corporate finance (an insider’s) perspective as described by Mr. Louis Lowenstein, the CEO of Supermarkets General and a Law Professor at Columbia University. Then you will read what the masters, Buffett and Graham had to say on the subject. If, when and how a company buys back its shares says a lot about the business and capital allocation skills of management as the Case Studies of Teledyne Corporation and others will show. You will learn the importance of context and circumstance as the principles of good and bad capital allocation are applied. I hope you find the lessons instructive.

From the introduction

Whether the business is a franchise or not, management has two major jobs: operate the business efficiently which is critical in a non-franchise business since earning the company’s cost of capital is the best outcome and allocating capital effectively. Growth is only profitable in a franchise business, therefore capital allocation is critical for shareholder returns.  If a franchise’s core business is unable to grow, often free cash-flow can’t be redeployed at the same high returns. Capital might need to be returned to shareholders but how much and in what way?

Thinking about what management will do with excess cash is important for your valuation work. Should the excess cash on the balance sheet be discounted heavily because management tends to make poor choices (Greenblatt) or will management buy-in shares, causing the per share value to rise (Duff & Phelps valuation case study)?  You will be given a corporate insider view on these issues.

Share repurchase programs should be an integral part of a company’s capital allocation process, one in which management weighs reinvestment opportunities not only against the alternative of cash dividends but also both of those alternatives against a third alternative, the buyback of common stock. Management has several capital allocation alternatives:

Business Needs: Working capital, Capital expenditures, and Mergers & acquisitions

Return Capital to Shareholders: Dividends, Share buybacks, and Debt repayment

You will gain many insights from your reading.

Supplementary materials from a reader:


Dividends from an investor’s perspective:

Henry Singleton and Teledyne: A Study in Excellent Capital Allocation

Warren Buffett probably borrowed much from Dr. Henry Singleton while building Berkshire Hathaway from a money losing textile producer to a multi-billion dollar conglomerate.

The article below is an excellent study in what a great capital allocator can accomplish.  I find it ironic that courses in corporate finance at business schools neglect this study.


After ruminating on the above article, think about what you might use in your investing.

Munsingwear CS Solution

Readers were given a case study on Munsingwear here:


Do the work and write out your analysis, then go here for the solution:


The history of Munsingwear can be glanced at here: