Valuing Property, Plant and Equipment as a Value Investor

[frugalchief]

How does a value investor value "property, plant and equipment" within a company?  Do you take the net, after accumulated depreciation, or base it on the gross value?  Been curious and hadn't read about it before.  Any input is appreciated.

[vinod1]

I have mostly used book value since it is so hard to improve upon.

 

At a high level we know that depreciation may not reflect what is really happening to the asset. Inflation can distort the actual value. A new firm seeking to enter the market would not duplicate the same PPE as newer equipment would have higher productivity. So you need to know quite a bit about the industry production methods to be able to improve upon book value.

 

A rough approach to get around the above is to use price per unit of production times capacity. Example, find the market price of a plant per ton of aluminum produced and use this to find the reproduction value for the aluminum plant. Use comparable companies data.

 

Also if my investment case is going to be dependent upon getting this number with precision, it is probably not worth bothering about.

 

Vinod

[jawn619]

i pretty much assume it's worthless. Discount it to 10% of it's stated value maybe. It's probably not the right thing to do, but better to have a high hurdle and if something is attractive despite all the roadblocks, then it'll jump out at you. I also discount AR by 70% and inventory by 50%. I'm usually doing the discounting when figuring out downside.