BDX was first mentioned here:http://wp.me/p1PgpH-1c6
Reader: “Should I buy BDX?”
Reply: The penalty for asking this question-the gauntlet: http://www.youtube.com/watch?v=j1BoNgCR8NU
You would be insulted if I told you whom to marry. Why should investing be any different? You have to think for yourself and apply principles through your own skills, interests and the opportunities in front of you today and (perhaps better) tomorrow.
Don’t end up like this (click on 4o second mark): http://www.youtube.com/watch?v=fPV2L2CGWdQ.
The lesson with BDX is that sometimes the stable, slow growth franchises with management that has the proper capital allocation plan might be able to generate above market returns for those with weak stomachs.
This is not an earth shattering insight. Look below at BDX compared to the S&P 500. Note the much lower price movement down in 2009 and up in 2009-2012. the company’s results are much more stable and better than the average company.
Look at page 3 in the BDX annual report, BD_2011ar. BDX’s stock price returned 3.66% compounded annually over a five-year period from 2006 compared to the S&P 500. Will that condition continue? No one can know with 100% certainty, but I am betting my largest risk is boredom.
Note this Morningstar Video on market expectations: http://www.morningstar.com/cover/videoCenter.aspx?id=566021
Don’t fear nor expect too much. But if you can find an investment with a larger discount to your estimate of intrinsic value or, more likely, you require higher returns, then avoid BDX.
Asking ME whether YOU should buy is absurd. What YOU need to do is develop an investment process that will help you search, find, value and size the best portfolio for yourself. No one can do it for you. It’s a lonely but interesting road. Embrace it.
Have a Great Weekend!
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
Please refer to the prior post. A reader generously sent me this analysis of capex from Sanjay Bakshi (Fundoo Professor). Go to his blog (recommended) http://fundooprofessor.wordpress.com/
. The more contributions from readers, the more we will all learn about specific aspects of investing. Thanks!
Capex is given in cash flow statement in the investing section. All capex which is not growth capex must necessarily be maintenance capex. So if you can estimate growth capex, since you know total capex, you can estimate maintenance capex.
Estimating growth capex is sometimes easy because one knows that the company is expanding capacity from x units to y units and its capex plans are known. Even when we don’t know exact capex plans, sometimes to we know how much money is needed in an industry to expand capacity from x to y.
Sometimes we know that almost all the capex is maintenance capex because of competitive pressure. For example what happened in the “Shutdown of textile industry” example, or in the petrol pump example i gave in class. The functional equivalent of these examples are very very common in the business world so one must not take the accountants’ definition of capex as sacrosanct. Accountants don’t like to make estimates. They would rather have something precise even if its wrong. You don’t have to be like them.
When you look at capex numbers you must ask the following questions:
1. Is this expenditure likely to result in a sustainable rise in economic earnings in the future? This is not the same as asking if margins will improve or not – they may improve temporarily but the nature of the business may be such that such gains would be temporary and the cost savings will flow through to the customers instead of the owners. So what may look nice on DCF analysis in an excel model, will not translate into sustainable economic earnings jump. You really need to do this “second step analysis” by asking how much of the benefits of the capex will go to the owners and how much to customers. If the benefits will go to customers, then its NOT Capex for US. For US its and EXPENSE. something we reduce from operating cash flow to arrive at owner earnings.
2. How competitive is this industry? If its extremely competitive or has a lot of foolish competition, then its very likely that capex won’t result in improvement in long-term sustainable earning power. In some businesses, you just can’t be a lot smarter than your dumbest competition. And there is plenty of DUMB competition in some industry. Witness for example, what’s happening in the airline industry in India right now…
3. Is there a lot of inflation? Historical cost accounting and inflation result in under provision of depreciation in accounting books.
4. Are there substantial productivity improvements? Inflationary effects are sometimes offset by productivity improvements. This was discussed in class in detail.
5. Is the plant really old and dilapidated and probably needs replacement? Sometimes there are very old plants chugging along for a long time but ultimately they have to be replaced. The plant may have almost zero value in books because they have already been written off. But they need to be replaced and replacement cost could be a bomb. When you spent that money, should you record it as Capex? Well the accountants will ALWAYS record it as capex. But they key question you have to ask is this: will this money spent improve long term earning power, or only help the company maintain current earning power. If the consequence of the money spent is going to be mere maintenance of earning power, then its NOT CAPEX FOR US. Rather its an EXPENSE.
6. Whats the rate of Obsolescence in this industry? Industries with very high obsolescence rates require frequent capex just to keep up with the competition which keeps on inventing new applications of technology making old technology obsolete. We talked about what happened to Moser Baer and Samtel Color. Well the unfortunate people who invested in those companies learnt the hard way that essentially these companies made NO REAL PROFITS because when you CORRECTLY TREAT the money spent on frequent capex programs of such companies not as CAPEX but and MAINTENANCE CAPEX, you would have figured out that essentially there were NO OWNER EARNINGS. And when there are no owner earnings there is NO VALUE. This is true even though interim value in the market may end up being BILLIONS OF DOLLARS!
A reader asks about calculating capital expenditures and Buffett’s owner’s earnings. I believe only maintenance capex is deducted in determining owner’s earnings not growth capex because maintenance is mandatory while growth capex is discretionary.
This document is 11 pages and it includes other links.
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.