ap1234 Posted June 9, 2015 Share Posted June 9, 2015 Netnet, I should have been clearer in my previous post. I referenced the discussion from the 2013 President’s Letter as it provides important clues on how to think about the drivers of CSU’s intrinsic value. I was trying to caution Gio that 20% FCF/share growth over the next 10 years is not a simple feat. That said, I wouldn’t necessarily rely on Mark’s value of the business either. He is an incredible investor with a phenomenal track record. But he has historically undervalued his own business. At various points in CSU's history, you could have asked him about the value of his own business and he would have suggested there wasn’t sufficient margin of safety to invest. Link to comment Share on other sites More sharing options...
giofranchi Posted June 10, 2015 Share Posted June 10, 2015 Gio, I used a similar model as yours, but I assumed a 50% multiple contraction, which makes the return below my hurdle. (Ironically, I also was reading a study on the poor performance of glamor stocks versus cheap value stocks. We know the ending--a basket of cheap value beats glamor, but you always hope to find the younger Buffett with a sustainable business model.) Well, I don’t know what’s your definition of a “glamorous stock”… But mine certainly doesn’t apply to a company which didn’t even have a thread on this board until a couple days ago! ;) And my valuation was wrong, like abyli justly pointed out: today’s FCF multiple is 21x, and if you assume a 50% contraction in that multiple, you are implying the fair valuation for a business which grows FCF at a CAGR of 15%-20% to be a multiple of 10x FCF… Which obviously makes no sense. From a philosophical point of view: you might be right that it could be financially more rewarding to constantly change your portfolio of businesses from stocks that are no longer cheap to stocks that have become cheap, and so on over and over again. But I find deeply satisfying my everyday job of managing a couple of businesses (hopefully more in the future!), and don’t have the time nor the inclination to constantly scan thousands of stocks in search of the cheapest… Therefore, I have only one option left to invest my firm’s free cash: to look for a great entrepreneur, in a good business, which I could buy at a fair price. And then let him/her do what he/she does best. This imo has nothing to do with the “vain” hope of finding the next Buffett! Cheers, Gio Link to comment Share on other sites More sharing options...
giofranchi Posted June 10, 2015 Share Posted June 10, 2015 I was trying to caution Gio that 20% FCF/share growth over the next 10 years is not a simple feat. ap1234, I have got the message, thank you! ;) But you haven’t answered my question: do you think with a CAGR of 15% in FCF CSU might turn out to be a good investment still 10 years from now? And do you think a 5% annual organic growth + a 10% annual growth from acquisitions could be achieved? Also, do you have an idea of how large is CSU’s market for new acquisitions? I find THIS single piece of information much more useful than any scenario I might try to conceive by myself: for instance, when I get to know that an $80 billion market cap company like VRX has a market for new acquisitions made up by $6.5 trillion of private + public companies, well that gives me comfort they are not running out of options anytime soon! So, how do CSU and its market for new acquisitions compare? Cheers, Gio Link to comment Share on other sites More sharing options...
giofranchi Posted June 10, 2015 Share Posted June 10, 2015 The multiple is still high relative to the historical multiple but not as bad as I thought. I get to a multiple of 21x FCF. Which multiple of FCF do you think might represent FV for a company that grows FCF at a CAGR of 15%-20%? Gio Link to comment Share on other sites More sharing options...
giofranchi Posted June 10, 2015 Share Posted June 10, 2015 Assuming US$16-19 FCF, discount rate of 15%, you need about 20% growth for 10 years to justify current price US$ price. FWIW. Of course to use a discount rate of 15% means you’ll get a return of 15% compounded annual. I invest wherever I see the “possibility” to get such a return, hoping that, if something goes wrong, I could still get a “minimum return” of 9%-10% compounded annual. It is not the “possibility” but the “minimum return” which I use as discount rate in a DCF analysis. Gio Link to comment Share on other sites More sharing options...
giofranchi Posted June 10, 2015 Share Posted June 10, 2015 Also, do you have an idea of how large is CSU’s market for new acquisitions? I find THIS single piece of information much more useful than any scenario I might try to conceive by myself: for instance, when I get to know that an $80 billion market cap company like VRX has a market for new acquisitions made up by $6.5 trillion of private + public companies, well that gives me comfort they are not running out of options anytime soon! So, how do CSU and its market for new acquisitions compare? Liberty, any idea? Thank you! Gio Link to comment Share on other sites More sharing options...
DCG Posted June 10, 2015 Share Posted June 10, 2015 I have a hard time valuing this company anywhere close to $10B. For comparison, a work for a software company with comparable sales and net income, with a pretty strong moat, that is currently valued at $2B. Link to comment Share on other sites More sharing options...
giofranchi Posted June 10, 2015 Share Posted June 10, 2015 I have a hard time valuing this company anywhere close to $10B. For comparison, a work for a software company with comparable sales and net income, with a pretty strong moat, that is currently valued at $2B. Mmm... In my valuation I suppose a FCF annual growth of 15%-20%, made by the sum of 5% organic growth and 10%-15% growth from acquisitions. If your company grows 5% organically, thanks to the strong moat you believe it has, it might still be far from the growth I suppose CSU could sustain for the next 10 years. Gio Link to comment Share on other sites More sharing options...
Liberty Posted June 10, 2015 Author Share Posted June 10, 2015 I have a hard time valuing this company anywhere close to $10B. For comparison, a work for a software company with comparable sales and net income, with a pretty strong moat, that is currently valued at $2B. Maybe there's a deal to be made :) http://www.csisoftware.com/about-us/being-acquired/ Link to comment Share on other sites More sharing options...
ragu Posted June 10, 2015 Share Posted June 10, 2015 But he has historically undervalued his own business. [...] ap1234, I am not sure the evidence supports it. Sure, the tone in the letters suggest caution re. the stock. However, I expect that comes from a desire (oft-stated too) to keep his current shareholder base mostly intact i.e. the price is at a level that potentially allows for continuing attractive returns. I can see your case if he'd actually issued stock for acquisitions at some point, but seeing as he hasn't... FWIW, I do think Mr. Market is not pricing in the risk of a big acquisition running into trouble. Given the lack of historical precedence here with respect to transactions of size, I am not sure this is warranted. I will pass on price, even if the rest of the pieces look as if they are well in place. Best, Ragu Link to comment Share on other sites More sharing options...
Liberty Posted June 10, 2015 Author Share Posted June 10, 2015 But he has historically undervalued his own business. [...] ap1234, I am not sure the evidence supports it. Sure, the tone in the letters suggest caution re. the stock. However, I expect that comes from a desire (oft-stated too) to keep his current shareholder base mostly intact i.e. the price is at a level that potentially allows for continuing attractive returns. I can see your case if he'd actually issued stock for acquisitions at some point, but seeing as he hasn't... FWIW, I do think Mr. Market is not pricing in the risk of a big acquisition running into trouble. Given the lack of historical precedence here with respect to transactions of size, I am not sure this is warranted. I will pass on price, even if the rest of the pieces look as if they are well in place. Best, Ragu Leonard doesn't believe in issuing stock or doing buybacks, he says that this gives an advantage to insiders and he finds it somewhat immoral. That's why his managers don't get stock options, but instead they have to buy stock in the open market with a % of their compensation and they can't sell it for a certain number of years. He also doesn't want his stock to become too pricey because his managers own a lot of it, and he doesn't want them to cash out and retire, so he tends to talk his stock down when he can. Link to comment Share on other sites More sharing options...
giofranchi Posted June 10, 2015 Share Posted June 10, 2015 FWIW, I do think Mr. Market is not pricing in the risk of a big acquisition running into trouble. Given the lack of historical precedence here with respect to transactions of size, I am not sure this is warranted. I agree. If a big acquisition runs into trouble, they won’t achieve a 15% CAGR in FCF. Though, I would say that platform companies like VRX, TDG, and CSU are very focused on just one industry (pharmaceutical, aerospace, software), and they therefore stay very much within their so-called circle of competence. This of course imo lowers the risk of a major mistake. Cheers, Gio Link to comment Share on other sites More sharing options...
Jurgis Posted June 10, 2015 Share Posted June 10, 2015 Assuming US$16-19 FCF, discount rate of 15%, you need about 20% growth for 10 years to justify current price US$ price. FWIW. If you use 10% discount rate, you need about 12-14% growth for 10 years to justify current price. Link to comment Share on other sites More sharing options...
KCLarkin Posted June 10, 2015 Share Posted June 10, 2015 The multiple is still high relative to the historical multiple but not as bad as I thought. I get to a multiple of 21x FCF. Which multiple of FCF do you think might represent FV for a company that grows FCF at a CAGR of 15%-20%? Gio Gio, I use a slightly different methodology: 2014 Cash EPS (Net Income + Amortization) = 13.04 Assume 25% EPS growth 2015 Cash EPS = 16.31 2015 PE = 26 FCF / Cash EPS has fluctuated above and below 1, so over time they will converge. Last year, FCF was 1.19x Cash EPS. It is not unreasonable to assume that Cash EPS will rise to meet FCF. Also, my growth forecast may be too low. So I think it is probably in a range of 20-25x 2015E. 20x is certainly reasonable for a compounding machine, assuming the moat is durable. However, there are two factors that cause some short term valuation risk: - CSU has historically traded at much lower multiples (even in the single digits) - Open Text, which is a reasonable comp, has typically traded at 15x Over 10 years, you will certainly do well. Over 5 years, there is some valuation risk. The nice thing about CSU is that if industry multiples do contract, they will be able to make acquisitions with even higher ROI. Link to comment Share on other sites More sharing options...
magno111 Posted June 10, 2015 Share Posted June 10, 2015 The multiple is still high relative to the historical multiple but not as bad as I thought. I get to a multiple of 21x FCF. Which multiple of FCF do you think might represent FV for a company that grows FCF at a CAGR of 15%-20%? Gio Gio, I use a slightly different methodology: 2014 Cash EPS (Net Income + Amortization) = 13.04 Assume 25% EPS growth 2015 Cash EPS = 16.31 2015 PE = 26 FCF / Cash EPS has fluctuated above and below 1, so over time they will converge. Last year, FCF was 1.19x Cash EPS. It is not unreasonable to assume that Cash EPS will rise to meet FCF. Also, my growth forecast may be too low. So I think it is probably in a range of 20-25x 2015E. 20x is certainly reasonable for a compounding machine, assuming the moat is durable. However, there are two factors that cause some short term valuation risk: - CSU has historically traded at much lower multiples (even in the single digits) - Open Text, which is a reasonable comp, has typically traded at 15x Over 10 years, you will certainly do well. Over 5 years, there is some valuation risk. The nice thing about CSU is that if industry multiples do contract, they will be able to make acquisitions with even higher ROI. Remember they report in USD but it is traded on CAD. IF they hit 17$USD in 2015 that is equal to 21$CAD cash EPS Link to comment Share on other sites More sharing options...
KCLarkin Posted June 10, 2015 Share Posted June 10, 2015 True but I am using USD for the price. Link to comment Share on other sites More sharing options...
giofranchi Posted June 11, 2015 Share Posted June 11, 2015 20x is certainly reasonable for a compounding machine, assuming the moat is durable. However, there are two factors that cause some short term valuation risk: - CSU has historically traded at much lower multiples (even in the single digits) - Open Text, which is a reasonable comp, has typically traded at 15x I agree. And that’s why I am opening a position, leaving much room to average down (like I almost always do!). Cheers, Gio Link to comment Share on other sites More sharing options...
giofranchi Posted June 11, 2015 Share Posted June 11, 2015 Also, do you have an idea of how large is CSU’s market for new acquisitions? I find THIS single piece of information much more useful than any scenario I might try to conceive by myself: for instance, when I get to know that an $80 billion market cap company like VRX has a market for new acquisitions made up by $6.5 trillion of private + public companies, well that gives me comfort they are not running out of options anytime soon! So, how do CSU and its market for new acquisitions compare? Liberty, any idea? Thank you! Gio Liberty, you are unusualy quiet about the future prospects of this company... Cheers, Gio Link to comment Share on other sites More sharing options...
Liberty Posted June 11, 2015 Author Share Posted June 11, 2015 Also, do you have an idea of how large is CSU’s market for new acquisitions? I find THIS single piece of information much more useful than any scenario I might try to conceive by myself: for instance, when I get to know that an $80 billion market cap company like VRX has a market for new acquisitions made up by $6.5 trillion of private + public companies, well that gives me comfort they are not running out of options anytime soon! So, how do CSU and its market for new acquisitions compare? Liberty, any idea? Thank you! Gio Liberty, you are unusualy quiet about the future prospects of this company... Cheers, Gio http://www.valuewalk.com/wp-content/uploads/2013/05/Charlie-Munger.jpg I have nothing to add. Link to comment Share on other sites More sharing options...
giofranchi Posted June 11, 2015 Share Posted June 11, 2015 Ahahahah!!!! ;) Gio Link to comment Share on other sites More sharing options...
netnet Posted June 11, 2015 Share Posted June 11, 2015 http://www.valuewalk.com/wp-content/uploads/2013/05/Charlie-Munger.jpg I have nothing to add. ;D +1 Link to comment Share on other sites More sharing options...
FiveSigma Posted June 11, 2015 Share Posted June 11, 2015 Liberty is silently counting his CSU shares and smiling. Link to comment Share on other sites More sharing options...
Liberty Posted June 12, 2015 Author Share Posted June 12, 2015 Liberty is silently counting his CSU shares and smiling. I don't want to give the impression that I've been in since the IPO or anything... But so far I'm satisfied with the investment, and I'm glad I made it a big position. Tomorrow could be different... Link to comment Share on other sites More sharing options...
loganc Posted June 12, 2015 Share Posted June 12, 2015 Liberty is silently counting his CSU shares and smiling. I don't want to give the impression that I've been in since the IPO or anything... But so far I'm satisfied with the investment, and I'm glad I made it a big position. Tomorrow could be different... I wonder if you could provide thoughts about the impact of Leonard ostensibly stepping back from the business to some extent. He made mention of this on a recent call. I am not sure if you commented about it earlier in the thread. Link to comment Share on other sites More sharing options...
giofranchi Posted June 12, 2015 Share Posted June 12, 2015 I wonder if you could provide thoughts about the impact of Leonard ostensibly stepping back from the business to some extent. He made mention of this on a recent call. I am not sure if you commented about it earlier in the thread. All I have heard him saying is he would like to “spend more time with his family”… Given the fact his job imo requires more stability, rationality, and self-control, than very long hours at the office, I’d dare to suggest such a development could even be beneficial to CSU future business results! ;) Cheers, Gio Link to comment Share on other sites More sharing options...
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