Value Investing

jamesmith

水明善 发表于 2012-9-13 11:13 AM
I like this post very much. Thank LZ for his great efforts!

Based on my very very rough estimate  ...

hmm...ok...there's few more things I want to talk about this company, including its debt. But I don't want you to miss it if you really want to buy below $90...The company I am talking about is PM, it's currently trading at $89.02

水明善

jamesmith 发表于 2012-9-13 12:53 PM
hmm...ok...there's few more things I want to talk about this company, including its debt. But I do ...

hehe, well, I may buy@78, but $90 is the upper limit for me:-)

水明善

it's your turn to explain your valuation about this stock, this post can be the 1st serious value based investing serials in HT.

jamesmith

水明善 发表于 2012-9-13 12:00 PM
it's your turn to explain your valuation about this stock, this post can be the 1st serious value ba ...

The company is Phillip Morris (PM). Its debt to equity worried me at first, after looking it tells a different story. Shareholder equity changed from 16.013 Billion in year 2007 to 551 million in 2011. And we know Asset - Liability = shareholder equity.

Its Total asset didn't changed much from 31777 Million in end of 2007 to 35488 Million in end of 2011. The increase is due to cash increase and some increase in properties, plants and equipment, Philip Morris doesn't need much asset to run its business.

So the change of Shareholder equity must be from its liabilities. Total debt went from 6069 million in 2007 to 18545 million in 2011. (current quarter June, 2012 went up to 20802 million).

What the heck is PM doing with all these debt?
PM repurchased 418.8 million shares outstanding from 2007 to June 2012. PM's share price went from low of $32.04 to $90.15 as of yesterday. If we assign an average purchasing price of $57, that would cost PM about 23871.6 million dollars. Remember each share pays a $3.4 dividend and dividend is growing each year. With current price 90.15, yield is 3.77%. Here's the kicker, PM issued 5 year and 30 year bonds in March 2012 with 1.625% and 4.5% yields. PM is doing something very clever with its debt, it is also repackaging old debts with higher yield to new ones with lower yield each year (more detail here: http://seekingalpha.com/article/ ... a-debtor-s-paradise).

PM is doing something clever with debt, but can PM pay them back?
In end of 2011, PM's net income is 8879 million, even if PM's income doesn't increase a bit, it can pay off its debt in less than 2 and a half years. Remember net income is after interest payment and income tax. With (2011) 10529 million free cash flow, even after dividend payment, PM would have more than enough to pay it's debt.

jamesmith

One thing I hate about PM is its product, tobacco. I have relatives that smokes, I know how hard it is to stop. Often it takes a doctor warning them with life threatening reasons for them to stop smoking. PM is a spin-off from Altria.
PM does not operate in the US and it does business everywhere else. All of its brands are best sellers worldwide: Its brands are Dji Sam Soe 234, L&M, Longbeach, Marlboro, ST Dupont Paris, U Mild, Philip Morris, Red and White, Basic, Bond Street, Chesterfield, Parliament, Lark, Merit, Morven Gold, Muratti, Skjold, Multifilter, Virginia Slims, and Benson & Hedges (with British American Tobacco, Gallaher Group, and Japan Tobacco).
Price of cigarette differ place to place (depends heavily on tax), but surely the company has pricing power to fight inflation, many smoker are willing to pay more for better quality. While number of smokers are decreasing in developed world, smoking is still the cool thing in many emerging countries.
PM has strong franchise, addictive product, and pricing power against inflation.

jamesmith

水明善 发表于 2012-9-13 12:00 PM
it's your turn to explain your valuation about this stock, this post can be the 1st serious value ba ...

To value a security, we need a proper discount rate. We can use the risk free rate, long term treasury yield (>10yr) is currently 2.5%. That is historical low, which won't last forever, a more reasonable discount rate is 7%.



If we assume 8% growth for earnings and EPS, and assume 65% payout for dividend for next 5 years, we get this table.
estimated 2017 EPS $7.7, if PM can sustain P/E of 17.7, price will be $136.29. If P/E goes down to 14, price will be aroud $107.8.
Net income will be 14089.86 million, with 7% discount rate, that gives us 201.2837 Billion. Current market cap is 151.04 Billion, 25% difference.
If we purchase at $90, we start with 3.78% dividend, and at 2017, we get 5.56% dividend.


While I think current price is not bad, I was hoping it can go down to mid, or low $80s with recent down trend...But then the big spike after Fed announcement -_-!
With just 25% margin of safety from analysis, current level is going to be tough for price appreciation. However investor keep getting returns from dividend and share buyback.

水明善

Great illustration!
I have 2 questions, thank you for your coaching:
How do you assume 7% discount? Current 30yr bond rate is not sustainable, is 7% a historical data?
The second question is about net income, I don’t understand this sentence: “Net income will be 14089.86 million, with 7% discount rate, that gives us 201.2837 Billion.” Sorry for my stupidity. If 14089.86million is the future income, and converted to the present value (PV), it should be lower, so you must have different explanation.
Again, thanks.

jamesmith

水明善 发表于 2012-9-14 10:07 AM
Great illustration!
I have 2 questions, thank you for your coaching:
How do you assume 7% discoun ...

No question is stupid...I am also learning along when I post. We are all classmates here :)
It is a very rough estimate for value. Usually it use free cash flow, (FCF = net earning + depreciation - cash required to operate), PM's free cash flow is a little higher than earning. but let's use net earning for now.
FCF in future / (k - g). k is discount rate, g is growth rate. I am assigning a discount rate of 15% and growth rate of 8%, thus I get 7%.
Of course the higher discount rate we use, the safer. There is no golden rule, we have to use our best estimate.

There are many way we can value a company. Here's another attempt, this valuation shows that PM is fairly valued currently.
We can get treasury rate here: http://www.treasury.gov/resource ... iew.aspx?data=yield
5 year treasury yield is 0.65%, that is extremely low...(what a great time to borrow money.), 10yr rate: 1.75%, 30yr rate is 2.95%
assume risk free rate for 2017: 5% (FED said low rate till 2015, assume by 2017, 30yr rate will be 5%)
risk premium: 10% (There's always risk, company might do bad, manager can make mistake, economy can do bad...assign risk premium according to how risky the company is)
Total discount rate: 15%




These valuing methods can only give us a rough idea, but as Ben Graham said: We don't need to know the exact weight of a person to know he is fat.
It is as important to look at quality management and the "moat" of the company.

水明善

jamesmith 发表于 2012-9-14 12:58 PM
No question is stupid...I am also learning along when I post. We are all classmates here :)
It  ...

Thank you so much for your patient explanation and professional efforts!

I understand how 7% comes now, but I still don't get the number of "terminal value", how do you get this number of $201283.71?

Again, thanks for your further illustration.

Best

jamesmith

水明善 发表于 2012-9-14 12:41 PM
Thank you so much for your patient explanation and professional efforts!

I understand how 7% co ...

i got it by using 2017 estimated earning / (discount rate - growth rate) which is 14089.86 / (15% - 8%).

水明善

jamesmith 发表于 2012-9-14 01:51 PM
i got it by using 2017 estimated earning / (discount rate - growth rate) which is 14089.86 / (15%  ...

Thank you. Got it! The concept of terminal value is much more direct for me.

So, let's wait PM to go down to around $80, then, if the overall picture is not too bad, we may start loading:-)

jamesmith

水明善 发表于 2012-9-14 12:41 PM
Thank you so much for your patient explanation and professional efforts!

I understand how 7% co ...

This thread is created to be a gathering place for value investors to discuss ideas :)
I would like to know how you came up with $75 to $90 valuation, it is very close to this year's movement of PM

水明善

jamesmith 发表于 2012-9-14 02:16 PM
This thread is created to be a gathering place for value investors to discuss ideas :)
I would li ...

$78-90, a very very rough estimate:

since I have no ROE data (I didn't know the name of the company), I just use EPS growth to estimate, 14% growth rate, EPS 2017 is $9.34, PE range is assumed between 12-14 (growth rate of 8% is not so impressive), so the price is between $112-130,consideringa about the dividend factor of $14 for 5 years, the actual price is between $126-144, if I expect a compound growth rate of 10%, the buy price is between $78-90.  For me, 10% growth rate is a bottom line. Therefore, I said no more than $90, I may buy@78.

lite1067

Warren Buffet was the world's best value investor... his overall performance in the past decade is not that great.

jamesmith

lite1067 发表于 2012-9-14 11:15 PM
Warren Buffet was the world's best value investor... his overall performance in the past decade is n ...

Buffett's problem is that he's soooo big now.
30, 40 years ago, if he found a 20 million investing idea, it would be a big hit and represent a high return in his performance
now 20 million is nothing consider his size, heck even 100 million won't effect his return much...
He's limited to ideas that work with huge size, which doesn't come around very often

jamesmith

水明善 发表于 2012-9-14 01:41 PM
$78-90, a very very rough estimate:

since I have no ROE data (I didn't know the name of the com ...

Thanks for sharing, your analysis result of $75 to $90 is so close to PM's movement this year
Let's wait for a good price to load up :)

当时惘然

不喜欢它，除了是因为烟草的缘故，
还有其他的原因，比如说PEG就太差... ...

jamesmith

Fed Announcement changes from August 1st to September 13th

水明善

jamesmith 发表于 2012-9-15 08:15 PM
Thanks for sharing, your analysis result of $75 to $90 is so close to PM's movement this year
Let ...

Thank you.  Do enjoy this discussion.

jamesmith

Let's talk about Yahoo. It is a interesting company with large stakes in Alibaba and Yahoo Japan. In order to find value of Yahoo, we have to look at all three: core Yahoo, Alibaba, Yahoo Japan.

Yahoo's Q2, 2012 Earning: http://files.shareholder.com/dow ... ngsPresentation.pdf

Yahoo has 40% stake at Alibaba. Alibaba is one of the best tech company in China. It is like the combination of EBay and Amazon and more. It is the largest player of B2B, C2C (similar to EBay) and B2C (similar to Amazon) in China. According to research, Alibaba has 49% of B2B market, 90% of C2C market through Taobao Marketplace and 50% of B2C market through Taobao Mall and it is the second biggest company in online advertisement behind Baidu.
(resource: http://www.time.com/time/world/article/0,8599,2098451,00.html)
Alibaba is a wonderful company and I would like to own it directly. Yahoo provides an indirect way to have a stake at Alibaba. As it moves near its IPO, it's value should quickly approach Bidu ($39.18B) and Tencent ($466.9B HKD, roughly $60.2B USD). In Yahoo's Q2 ER, it valued Alibaba at 35 Billion, therefore Yahoo's 40% is $14 Billion USD, that is $11.72 per share. In my opinion, this is undervalued, as Alibaba approach IPO, it should be valued higher. That is why Yahoo only agreed to sell 20% back to Alibaba before the IPO. If Alibaba's valuation moved up to $40 Billion ($40B is somewhat conservative IMO), that is $16 Billion for Yahoo's 40% and $13.4 per share.
Let's add 39.2% corporate tax to the scene and Yahoo selling half of the stake:
Valued at $35B, Yahoo's stake is worth $11.72 per share, half of the stake is $5.86, that is $3.56288 per share after tax. With remaining half intact, $3.56288 + $5.86 = $9.42288
Valued at $40B, yahoo's stake is $13.4 per share,half of the stake is $6.7, or $4.0736 after tax. $4.0736 + $6.7 = $10.7736
If we value it as Yahoo completely sold 40%:
Valued at $35B, $11.72 per share or $7.12576 after tax
Valued at $40B, $13.4 per share or $8.1472 after tax

Yahoo has 35% of Yahoo Japan. This one is easy to value because Yahoo Japan is a public company, ticker: YAHOY or 4689 in Japan. According to Yahoo's Q2, 2012 ER, they value the 35% of YAHOY at $6.534B. Recently, YAHOY's price went up and has market cap of $21.39B now, this puts Yahoo's 35% at $7.4865B or $6.27 per share. Of course, if Yahoo do decide to sell its 35% stake, it has to pay Corporate tax. Let's assume 39.2% Corporate tax: that gives us $3.81 per share after tax.

The last piece of the valuation is core Yahoo. From Q2, 2012 Earnings, Yahoo has $1.91B in cash, that is $1.61 per share. Let's take the worst case scenario and value core Yahoo at $0: (Alibaba stake)$7.125 + (Yahoo Japan stake)3.81 + (cash)1.61 = $12.545 per share.
Yahoo Japan

Yahoo Japan

Alibaba Group

Alibaba Group

If we look at 2011's Annual report, Yahoo made $1,048.83 million, $107.2 million is from Alibaba, and $388 million is from Yahoo Japan. That gives us $553.63 million net income from core Yahoo's business. Applying a 15% discount, that gives us $3690.867 million, or $3.091 per share. This gives us $12.545 + $3.091 = $15.636.
Applying 12% discount gives us $4613.583 million or $3.86 per share. $12.545 + $3.86 = $16.405
In either case, yahoo is fairly valued now.
The problem with Yahoo is that it is very hard to estimate its future earning, because technology company's earning can change dramatically in a short period. I don't know much about its current CEO Marissa Mayer, and she's only 37 years old.
As a short term play, Yahoo is cashing out 20% of its stake in Alibaba, that gives it $4.3 billion after tax and overhead costs. It plan to use $3.65 billion on share buyback.
As a long term play...don't get in...turning a company around is extremely hard and we still have no hint if Marissa Mayer can do it.