Tag Archives: Michael Price

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/

Michael Price’s Approach to Investing

Store

Mr. Price recommends the book, There is Always Something to Do by Peter Cundhill

ALWAYS something to do

Peter Cundill, a philanthropist and investor whose work has been praised by the likes of Warren Buffett, found his life changed forever when he discovered the value investment principles of Benjamin Graham and began to put them into action. There’s Always Something to Do tells the story of Cundill’s voyage of discovery, with all its ups and downs, as he developed his immensely successful investment strategies. In the context of recent financial upheavals and ongoing uncertainty, Peter Cundill’s wise and frequently funny reflections are more important than ever. In a seamlessly assembled narrative drawn from interviews, speeches, and exclusive access to the daily journal Cundill kept for forty-five years, Christopher Risso-Gill outlines Cundill’s investment approach and provides accounts of his investments and the analytical process that led to their selection. A book for everyday investors as much as professional investors and investment gurus, There’s Always Something to Do offers a compelling perspective on global financial markets and on how we can avoid their worst pitfalls and grow our hard-earned capital.

John Chew: I enjoyed the book, but there are no great insights for an experienced investor. But the stories of perseverance in the face of company problems/investments are helpful. 

Thanks to sfriedman@santangels.com, (ask to subscribe to his free emails–how can you ask for more!?).

P.S. Mr. Price presents his approach to value investing. Use what can help YOU in YOUR OWN approach. Price practices a form of special situation investing. There are as many ways to invest as people who practice value investing.

Valuation Case Study (ADPI) and Comparison with Fairness Opinions

One trick to hone your valuation skills is to read merger proxies. Thank you Mr. Michael Price.  Investment Bankers will do a valuation for an acquirer in a “Fairness” Opinion.  You will learn more about how Wall Street values companies than through reading the typical brokerage research report.  Investment bankers often lean heavily on multiples of comparable companies in arriving at their valuation. I wonder if the analyst arrives at a conclusion and then works backward.

Insight into other companies within an industry is another reason to read merger proxies.

Try to value American Dental Partners, Inc., ADPI, then compare your work to the investment bankers.

Go here to pick up the case study: http://www.scribd.com/doc/74913098/ADPI-Fairness-Opinion-2011

Good luck.