samthefirefly

Let me just say, the discussions here and Kirkland's, in particular, has helped me a lot as I'm trying to learn more about how to value a business and clarify what my personal strategy/investment philosophy is. Thank you all! I think Kirkland as an investment depends on your trust in management's capital allocation. We know the business is solid, financially healthy, and undervalued. Some of the things I like: They've maintained costs Some of the best free cash flow yields in the industry Paying growing dividends High grade mines Lot of exploration/development, significant share buyback Operate in Australia and Canada (great markets), deserves to trade at a premium While there is no doubt that Fosterville (their best mine) will decline over the next couple of years, Detour has a 20-year mine life with average gold production of 659,000 ounces per year. Micassa is estimated to double production over the next three years (Production to total 220,000 – 255,000 ounces in 2021, 295,000 – 325,000 ounces in 2022, and 400,000 – 425,000 ounces in 2023). Forestville will continue generating 425,000 ounces in 2021, moving to a range of 325,000 – 400,000 ounces in 2022 and 2023. At the same time, as Forestville costs go up, the costs at Detour will go down. As stated above, even if we assume there are no drill bit miracles that extend Fosterville mine life, revenues should not decline by any significant amount. At current gold prices (I would argue anywhere above 1500), Kirkland is making a killing and producing cash flow by the buckets. I don't expect gold prices to drop below 1500 any time soon (an assumption I must acknowledge), so Kirkland should continue making a ton of cash flow for the time being. I've liked management's decisions so far, so I have no problem investing in the company.

Anyone looking at Aflac right now? Did some basic preliminary research, this is what I came up with: What I like: - ROE consistently above cost of capital 10-year CAGR ROE is 17%, cost of equity is between 7.8% and 10.7% and WACC is between 6.8% and 8.7% That said, ROE has hung on the lower end (12%) for the past two years, so I would also need to understand the dynamics at play there - High Credit Rating: AM Best confirmed "the Financial Strength Rating of A+ (Superior) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of "aa-" to the life/health insurance units of Aflac. The outlook of the ratings remains stable" - In terms of valuation, stock seems cheap: P/S 1.49 (current), 1.51 five-year average P/E 6.98 (current), 10.47 five-year average P/B 0.96 (current), 1.34 five-year average - Good, healthy fundamentals Average net margin over the past five years has been around 15% Debt/Equity ratio: 0.24 Interest coverage: 17.80 - Healthy, Growing Dividend The company has grown its dividend for the last 38 consecutive years and is increasing its dividend by an average of 9.17%. Currently, 3% yield with a payout ratio below 25% - Good company Seems like a fantastic place to work (which I always enjoy seeing), being listed in "100 Best Companies to Work For", "America's Most Admired Companies", "World's Most Ethical Companies", "Top Companies for Diversity" for like the past 15 years What I Don't Like: - Stagnant premium growth rates: their 10-year CAGR in premium has been 1.2%. I'm all about prudent premium growth, but compared to average GDP growth over the past decade (i.e., 2.25%) and competitor 10-year premium growth (i.e. Manulife 2.2%, Metlife 4.8%, Allstate 2.4%), it does seem low. Don't know enough about the industry dynamics (will have to conduct research), but I need to understand why their premium growth is so low It seems like the business has been stable/doing well, while the price is still down 19% over the past year. I Will have to do more research on the insurance industry, Aflac's slow premium growth rate, decreasing ROE, and their investment portfolio/risk management history. Interesting stuff.

Thank you so much for your help! I can finally sleep again haha

Hey! Thank you so much for your reply. What you're saying and the calculations you present make perfect sense to me and stay in line with the argument about a high IROIC. It also seems to make sense to me that a company can increase profits by $3 by investing $12 at 25%. With that said, do you think the author made a mistake with this statement: "See's Candies has a ROTCE of 25%, so if the business grows three percent, it will require roughly one-quarter of that amount to finance the growth (if one assumes that capital intensity for the marginal business is the same as for the overall business)." If anything, it seems to me that it would require 4x to fulfill the RR you're speaking about (0.12=0.03/0.25) If the business grows 3% with 25% ROTCE it will require (3*100)/25 = 3 * 4 = 12% of funds , not 0.75% of funds. Similarly, if the business grows 3% with 50% ROTCE it will require (3*100)/50 = 3* 2 = 6% of funds. Last, if the business grows 3% with 10% ROTCE it will require (3* 100)/10 = 3*10 = 30% of funds. 10% ROTCE is using 30% of funds 25% ROTCE is using 12% of funds 50% ROTCE is using 6% of funds You can see that higher ROTCE will be better because fewer funds will be used for the same growth and more funds will be available to owners. Hope you can sleep better tonight ;) - Rohit

Hello everybody, I've been reading a book analyzing some of the investments made by Warren Buffett, and there is a section I can't seem to understand regarding return on tangible capital. Hoping one of you brilliant minds can help me see what I'm missing. In the section, the author introduces "return on tangible capital (ROTCE)", computing it as NOPAT/tangible capital. The business at hand has a high ROTCE (25%), which the author says "indicates a very high-quality business able to compound returns at a rate significantly higher than its cost of capital". This makes perfect sense, moving on... The author then discusses how ROTCE is only truly relevant if the company is growing: "This is so because even if a business has a very high ROTCE, if it is not growing, it will not benefit from having to invest less than peers in growth". Again, this makes sense to me. If business A has a 25% ROTCE and business B has a 10% ROTCE and both businesses invest $100 in capital, business A will obtain $25 of profits while B will only gain $10. This is where the issue comes in. The author then explains that to arrive at a certain intrinsic value in the future, the business has to grow earnings at an annual rate of 3%. However, he mentions that a problem arises from the fact that "the aforementioned would be for a business that just grew three percent per annum without needing any costs to achieve this growth. For instance, See's Candies has a ROTCE of 25%, so if the business grows three percent, it will require roughly one-quarter of that amount to finance the growth (if one assumes that capital intensity for the marginal business is the same as for the overall business). Because of the requirement of growth capital, for a business like See's Candies, roughly a four percent growth rate rather than a three percent growth rate is required." This just doesn't make sense to me. We established that a higher ROTCE is preferred when growing because the business will benefit from having to invest less than peers to grow. But based on the last paragraph, if the business grows 3% with a 25% ROTCE, it will require a quarter of the 3% (i.e. 0.75%) to fund that growth. Based on that, for a business that grows 3% with a 50% ROTCE, it will require half of the 3% (i.e. 1.5%) to fund that growth, which is a higher amount. And a business that grows 3% with a 10% ROTCE will require a tenth of the 3% (i.e. 0.3) to achieve the growth, a lower amount. This section seems to imply to me that a lower ROTCE would be better, which I don't understand. I'm not sure if the author made a mistake or I'm missing something (most likely option), so truly hoping someone can help me out here (had trouble sleeping because I was thinking about this LOL)

I think it probably is because of Covestro. Covestro was IPOed in October 2015, and the sale of all the shares Bayer held took some time. That is from 2017. Yup, that's what it is. Thank you so much!

Was looking at the company's financials over the past 10 years and having some issues I'm hoping someone can help me clarify. I'm seeing a mid 20% decline in revenues from 2015 (46,085) into 2016 (34,943). When I go to Bayer's website this is what I'm getting: 2016 annual report states that the year's revenue was 46,769 (which would imply a +1.5% from 2015) 2017 report shows that 2016's revenue was 34,943 (-24% from 2015) I can't find any explanation for it online as it doesn't seem Bayer sold any businesses during that year. I'm sure I'm missing something (and Bayer is not helping by being so vague) so hopefully one of you gems knows what's up

Clearing the issues does benefit shareholders but in an indirect/inefficient manner. If my wife gives me super gonorrhea and offers to pay for all my treatments, I am benefitting from having my treatments paid off. But I would have preferred to benefit from not contracting the disease and instead get gifts/vacations. Stupid analogy aside, you're definitely right though. Beneath the legal issues, leverage, and underfunded plan is a juggernaut of a company with a moat and diversified/dominant business. I guess some of my concerns are: - How long will it take for Bayer to clear these issues and for the market to recognize it? - A return to normality implies that no further hiccups affect the company (bad acquisitions, legal issues, etc). Still need to do more digging to understand the firm's drug pipeline, sources of future growth, and figure out what's the deal with management - Can I find investments in the meantime that will produce better results? Overall, my feeling is still that chances are you make a good return over the next couple of years, but need more time before I pull the trigger.

Less confident since my last post. Bayer definitely owns great businesses, has a moat, generates tons of free cash flow, and is fundamentally undervalued. That said, it seems like capital will be allocated in ways that do not directly benefit shareholders for the next couple of years: - At least 10B to settle the Roundup legal issues - As elliott pointed out, they have to reduce leverage Did some more digging into their statements, and it appears that their pension plan is underfunded by almost 8 billion (have attached pictures) so even less capital for shareholders to benefit from. Much less comfortable starting a position at the moment

Considering the importance of trusting a management team, it's just so difficult to truly assess their quality as an outside small investor. This is one of those cases where I wish I could talk to management or at least have a concrete idea of their values, character, and perspective. In any case, it reminds me of a Pat Dorsey discussion on management "Excellent management can make the difference between a mediocre business and an outstanding one, and poor management can run even a great business into the ground. Look a the raw level of cash compensation to see if it's reasonable. There's not necessarily a strict limit here, though I personally think an $8 million cash bonus is silly no matter how well the company has done. In any case, use your own judgement - if the amount that executives earn makes you cringe, it's probably too much. In general, the larger the firm and the better its financial performance, the more an executive should be paid. But some executives think they have a license to print money just because they manage a huge company, no matter how poor a job they're doing, which is why you need to determine whether their pay is tied to the firm's operational performance." I do agree with you though, in Bayer's case the most pressing issue (specially considering the current valuation) is whether the company it can generate value. Past seems to indicate they can (attaching picture of the average past return), and the economic moat is there. From an analyst report: "The company has a diverse portfolio of patent-protected drugs and a growing number of biologic drugs. The company also has a strong global salesforce that can attract smaller drug firms to partner with Bayer for commercialization efforts, which augment Bayer's internal drug-development efforts. The company's consumer health business benefits from a narrow economic moat, largely because of its strong brand power. Consumers continue to pay a premium for Aspirin and Aleve even though strong generic competition has existed for many years The company also has a wide economic moat in its crop science business. While some of the crop science business is a commodity business with few barriers to entry, other areas, including biosciences, maintain high barriers to entry--rigorous research and development efforts required to participate in this market combined with strong patent protection keep the majority of competitors at bay and support strong pricing power" Ultimately management might not be as relevant given the current price. Ton of upside, very limited downside (in my opinion). Will likely start a position on Monday

"General Dynamics is a long-cycle defense contractor and business jet manufacturer. The firm’s segments include aerospace, combat systems, marine, information technology, and mission systems. The company’s aerospace segment creates Gulfstream business jets. Combat systems mostly produces land-based combat vehicles, such as the M1 Abrams tank. The marine subsegment creates nuclear-powered submarines, among other things. The information technology business primarily serves the government market. The mission systems segment focuses on products that provide command, control, computers, intelligence, surveillance, and reconnaissance capabilities to the military." - 10-Yr Median Returns: ROA 7.7%, ROE 22.4%, ROIC 18.8% - Average cash flow/revenue over the past handful of years is about 7% - Average net margin over the past five years is high single digits - High barriers to entry, secured revenue through long-term contracts. - Considered a dividend aristocrat (current yield is 3%) - Very efficient, Fixed Asset Turnover above 8 and Total Asset Turnover above 0.8 - Quick ratio 0.84, current ratio 1.29, debt/equity 1.01, interest coverage 8.86 The commercial aviation segment is only 25% of GD's business From VSG DD: "The US government is their main customer, but it’s not their only customer. 66% of revenue is derived from the US government, 9% from foreign governments (they produce the British army’s AJAX armored fighting vehicle, for instance), and 25% is from their commercial aviation business (Gulfstream jets). The commercial aviation segment (Gulfstream aerospace – which they purchased in the late ‘90s) is the cyclical part of the business, but it is only 25% of revenue. The cyclicality of that industry isn’t something that can sink the rest of the company. If this was the sole focus of General Dynamics, this would be a terrible business to own due to its cyclicality. With that said, when times are good, it’s a fine business to own with decent profit margins (operating margins were 17.6% in 2018 and 15.6% in 2019). Another nice aspect to this business is that the contracts to build the aircraft are often locked in, so the revenue doesn’t disappear overnight during a recession." Lastly, valuation is cheaper than its historical average (5-year) - P/S 1.12 (current), 1.57 five-year average - P/E 13.43 (current), 16.73 five-year average - P/B 2.89 (current), 4.33 five-year average There is some fascinating info about their stability, moat, and risks. Leaving research from people with more experience than me: ValueStockGeek DD: https://valuestockgeek.com/2020/10/12/general-dynamics-gd/

Leaning on starting a position. Concerned about management compensation: am I reading this wrong, or was management paid 26 million euro in aggregate compensation last year? Over 6 million euro in fixed compensation, not used to seeing management pay over 3-4 million so it is a slight concern *trying to include an image, not sure it'll work

Any update? Read this DD by asymetrical bets (https://asymmetricbets.com/bayer-ag-buy/). Some interesting quotes: "Bayer trades at a meaningful discount to its historical valuation and to the sum of its parts. Bayer’s valuation should recover through the de-risking of the glysophate liability and the recovery of its other business segments. I believe Bayer’s stock is worth EUR 101 versus a price of EUR 58 today. Bayer’s current dividend yield is almost 5% and the dividend is well-covered by FCF" "Sophisticated scientists and regulatory agencies continue to stand by RoundUp – the U.S. and E.U. agencies have both recently reaffirmed their support for glysophate. However, there are a few alternative studies that claim a possible link to cancer, most notably an IARC study from 2015. The IARC rates glysophate as category 2A “probably carcinogenic,” which is the same rating as red meat, very hot beverages, and Cisplatin (a chemotherapy drug). Very hot beverages and chemotherapy drugs, folks." "Even so, if we assume that glysophate-related EBITDA is EUR 3-5bn, Bayer is currently trading at 9-11x ex-glysophate EBITDA, versus its historical average of 9x and peer average of 9.5x. Essentially, the most adverse event is already priced in, with any incremental good news (or incrementally less-bad news) providing upside to the current price. This is the very definition of an asymmetric bet – all of the bad news is already priced in!" I've also attached the latest morningstar report (please inform me if this is not allowed and I will remove it) Overall, the company has clearly been negatively affected by the Monsanto acquisition (in terms of profitability and PR). But that price looks too cheap given their current situation and the overall strenght of their business. I have a hard time seeing a world in which investing at these prices loses you money over the next couple of years. 2039-0P000000QF_20201116_RT-1.pdf

In-depth DD: https://sullimarcapital.group/2020/09/02/qurate-retail-group/ It's an interesting business, and the upside is there. That said, there is a very credible bear case. Considering opening a position

Fully agree, really appreciate the conversation and links provided. JRM and montizzle, thanks for the insight!