Munger’s Mental Models: http://robdkelly.com/blog/models-frameworks/munger-mental-models/
Lesson-on-Elementary-Worldly-Wisdom-Charlie-Munger
Another Great Blog: http://www.frankvoisin.com/ Search.
All things Montier: http://www.eurosharelab.com/james-montier-resource-page. Follow links to his 2002-2011 papers.
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Pop Quiz
Your boss says to put together a conservative portfolio, so naturally you start flipping through the Value-Line which you do religiously each week–glancing at every page of the 250 pages of Value-Line. You come across BDX_VL.
What two or three things do you notice? for a passing grade what ONE (1) metric should jump out at you! What pile would you put it–investigate, ignore, potential short?
Many “hedgies” and Wall Street “Analysts” miss this but YOU won’t.
Please keep replies short, two or three sentences at most. Prize emailed to the best response.
Reply:
I wanted to see whether you picked out:
- The announced $1.5 billion plan to buy back shares or about 10% of the outstanding shares. Couple that observation with the steady buy back/shrinking of shares with increasing dividend payments. Management is serious about return of capital. They get it. At least they are not empire builders.
- The consistent and high ROC of 15% or more over the past 12 years. Note that the business was barely dented in 2008 and 2009. Sales and cash flows rose. This is a stable business in the face of a credit crisis, so demand for their services/products seems inelastic. Good. They probably have pricing power.
- The company has debt-say around $5 billion but in light of its steady cash flows and 0.89 debt-to-equity ratio, the company is well-financed. Not the difference in capitalization structure with another slow growth franchise: CLX_VL! Management knows that the company has excess capital and slow growth ahead of it, so capital is being returned to shareholders.
- This company is a slow, growth decent business with profitable growth. Probably the moat is not due to proprietary patents. My guess–subject to reading a few years of annual reports and MD&A discussions in the 10-K–is that BDX has a powerful distribution network coupled with some customer captivity.
- Nobody addressed why this might be mispriced (assuming that it is)? Note the dotted line that goes up sharply during 2007/2009 then has dropped for the past 3.5 years. The price has gone “nowhere.” Certainly the stock price has “underperformed” the general market. Why?
Value PER share has been rising and management is set to shrink the share count further at these “reasonable” prices. I can’t say that the current price is attractive for you because of your return requirements. Have reasonable expectations, since I doubt BDX will double in price in the next two years. However, I CAN say, based on the numbers that this company is more stable operationally, generates higher returns than most businesses and near term returns will be driven by return of capital over the next few years, so my risk might be lower–than the average company. Yet, the company is priced at or below a market multiple. Now, even if the long bond Treasury was 6% instead of 2.9%, would this be interesting? Yes.
If I can find 20 to 25 of these companies at moderate discounts (15% to 25%), I might be able to preserve my capital over time. These stable companies rarely provide steep discounts to intrinsic value, but you have the benefit of profitable growth over time. The price you pay, ironically, has to be more precise than when buying a micro-cap due to the moderate price discount.
Prizes will be emailed out. Thanks. Excellent responses. Please take my grades with a large dose of salt 🙂
Let me know if you enjoyed your prizes:
Gravity: http://www.youtube.com/watch?NR=1&v=y4znJTziDg4&feature=endscreen
Bad Teacher: http://www.youtube.com/watch?feature=endscreen&v=h6E0Shqba6g&NR=1