frommi Posted May 25, 2016 Share Posted May 25, 2016 I am now around 2 years into building my watchlists and have valuations for around 230 companies (mainly compounders) in my list. Since you guys are so nice and helped me often i thought i share it. I am sure there are still a lot of errors in it, but i am open to fix them. So if someone is interested in my small little project and finds a mistake please answer here or PM me. Growths rates are often just pulled out of the blue sky (historical rates or some kind of gdp growth+fcf reinvestment) and should be an average for the next 5 years. The important column is FRoR 5Y which is the expected annual return for the next 5 years. Since the last time i posted a link to my lists i changed most valuation styles to EV/EBITDA and EV/EBITDA 5-year averages for cyclical stocks. Only banks and insurances are still valued on bookvalue. I realized that EV/EBITDA ratios are much better comparable between stocks in the same industry and should smooth out all the one-time noise on tax rates and so on. Stocks without a dividend: https://docs.google.com/spreadsheets/d/1gM6-1jMWnkfXnlf9ulEcHwGV6GbrWoYR72ZhIVOKYP0/edit?usp=sharing Stocks with growing dividends: https://docs.google.com/spreadsheets/d/1HjdCBGkRsS83oAYMs0MmV_oPkm0nv7PtPnAZLy6DdTk/edit?usp=sharing Most of my work has been on the dividend watchlist, so the quality should be better there. On some stocks like AMZN or FB i was very conservative, so this is probably food for discussion. Average EV/EBITDA ratios are mainly from gurufocus or from comparable companies in the same industry and corrected for debt per share values. This should result in lower rate of returns than possible in reality for heavy indebted companies and slightly favor cash rich companies. As soon as a stock approaches a sub 8% return i start to replace it with something better. I tried a lot of position sizes over the last year but i only feel comfortable with around 4-5% positions. If someone has good ideas for compounders that are missing and easy to understand (i am not really interested in fast changing industries like tech or biotech, even though some are on my list) i am happy to add them to my list. Link to comment Share on other sites More sharing options...
Sionnach Posted May 27, 2016 Share Posted May 27, 2016 Wow thanks for posting this frommi. Its awesome! Definitely a great resource to keep an eye on compounders. Only comment would be that I tend to think of the expected annual return differently. There isn't a right way of course, just different assumptions. In your model it assumes that the multiple will be the same in 5 years as it has been on average over the last 5 years. Which for something like CTSH at 16.6x is a big assumption. It has to have a long runway to sustain its growth in order to generate the expected return and sustain its high-growth multiple (maybe it does). Link to comment Share on other sites More sharing options...
frommi Posted May 27, 2016 Author Share Posted May 27, 2016 Wow thanks for posting this frommi. Its awesome! Definitely a great resource to keep an eye on compounders. Thanks. Only comment would be that I tend to think of the expected annual return differently. There isn't a right way of course, just different assumptions. In your model it assumes that the multiple will be the same in 5 years as it has been on average over the last 5 years. Which for something like CTSH at 16.6x is a big assumption. It has to have a long runway to sustain its growth in order to generate the expected return and sustain its high-growth multiple (maybe it does). Yes i think my approach works probably best with stable companies and growth rates. With some companies where i thought the growth rates will come down i lowered the average a bit. The average EV/EBITDA multiple for CTSH is 15, which is very similar to other faster growers like Visa or Mastercard. 16.6 is the average EBITDA/share multiple when you extract the cash component. Calculated this way, the average multiple in the column is higher for cash rich companies and lower for heavy indebted companies. I know that is not so easy to understand and i am not sure if that the best way to calculate it, but the distortion from reality should not be very high. If someone has a better idea how to calculate the forward rate of return i am open to discuss this. Link to comment Share on other sites More sharing options...
frommi Posted May 27, 2016 Author Share Posted May 27, 2016 To make the point a bit clearer i pulled out the 10 year average EV/EBITDA multiple into a separate column and changed the colum headers for the AVG multiple column, to make clear that these are per share values. I did some quick tests to see how my per share caluclation distort the reality, the result is that for example the real expected rate of return for heavy indebted companies (especially cable companies) like LILA, LBTYA or TDG is around 3-5% higher than in my spreadsheet. (Calculated with ("EBITDA in 5 years"*"avg. EV/EBITDA multiple" - debt)/sharecount ). But as i wrote above i am fine with that because that way favors cash rich companies. But something to keep in mind. Link to comment Share on other sites More sharing options...
frommi Posted May 27, 2016 Author Share Posted May 27, 2016 updated most numbers in the non-dividend watchlist. Link to comment Share on other sites More sharing options...
Guest Schwab711 Posted May 27, 2016 Share Posted May 27, 2016 Thanks for posting this frommi, this is very useful! Maybe OT, but I think the 5-year expected growth rate figures are always funny to see (I assume you pulled it from somewhere). Literally every single company is expected to have positive revenue growth and maybe 50% of them are expected to have >10% growth! I think it is very likely that future revenue growth underperforms the estimates in this spreadsheet, possibly by a substantial amount. Does anyone know of a study testing expected future growth projections vs actual results? I imagine 10%-25% of these companies will ultimately post negative 5y growth rates. In general, I think a lot of (most?) valuations ignore the possibility of negative revenue growth. Maybe 1%-5% of companies truly have >90% odds of 5%+ 5-year revenue growth. This is basically why I prefer to stick with high-quality companies, unless a stable business is exceptionally cheap. I think the importance of earnings volatility is under-weighted, assumptions for revenue growth are generally overly rosy, and most valuations ignore how frequently business quality deteriorates, on average. Link to comment Share on other sites More sharing options...
frommi Posted May 28, 2016 Author Share Posted May 28, 2016 Maybe OT, but I think the 5-year expected growth rate figures are always funny to see (I assume you pulled it from somewhere). Literally every single company is expected to have positive revenue growth and maybe 50% of them are expected to have >10% growth! I think it is very likely that future revenue growth underperforms the estimates in this spreadsheet, possibly by a substantial amount. The expected growth rate is for growth in EBITDA/share, it doesn`t have to be revenue growth alone. It can come from revenue growth, margin expansion, fcf reinvestment*ROIC or favorable M&A. For some companies where i thought the future might look like the past, its the past 10 year growth rate of EBITDA/share. For some its organic growth in past EBITDA + current FCF yield and for some its just a guess. This number is a bit subjectiv which is the part i don`t like in my approach either, but i can live with it. For me it made never sense to just buy the cheapest stocks on an EV/EBITDA or P/E base, so my list is a mix of a cheap EV/EBITDA and a full DCF analysis. Does anyone know of a study testing expected future growth projections vs actual results? I imagine 10%-25% of these companies will ultimately post negative 5y growth rates. In general, I think a lot of (most?) valuations ignore the possibility of negative revenue growth. Maybe 1%-5% of companies truly have >90% odds of 5%+ 5-year revenue growth. Yes i know one, but i don`t have a link to it. Huge and low growth rates mean revert into the opposite direction, but the mean reversion is a slow process.The growth rates for the middle group was mainly constant. I tried to embed that into my spreashsheet in that i lowered the estimates for growth when i thought they where exceptionally high and lifted them when they where very low. For example CTSH has a historical 20% growth rate for EBITDA/share, i only assumed 15% and a lower average multiple. For BBBY i assumed that current margins stay constant and revenue doesn`t grow, so its just reinvestment of fcf and a revaluation to a reasonable EV/EBITDA multiple of 7-8 that makes its return. But its possible that for some companies its totally off and it would be very nice when you could name some companies where the estimates are off, i would love to discuss them and change my list. The reason i posted the list is to improve its quality since i may be biased in my assumptions. This is basically why I prefer to stick with high-quality companies, unless a stable business is exceptionally cheap. I think the importance of earnings volatility is under-weighted, assumptions for revenue growth are generally overly rosy, and most valuations ignore how frequently business quality deteriorates, on average. Ha! My list should only include high quality compounders where value per share grows over time (slow or fast doesn`t matter to me). When you think there are companies on the list that don`t belong there, feel free to name them. Link to comment Share on other sites More sharing options...
Sionnach Posted May 31, 2016 Share Posted May 31, 2016 Thanks for the comments frommi. Just a thought - you may want to consider the estimated return ex-growth. In other words, what's the current cash-on-cash return? It's basically just thinking in terms of Greenwald's EPV. For instance instead of getting interested when the total expected return is 15%, maybe you get interested when cash-on-cash is 8% and the company has enough reinvestment opportunities where it could grow 10%. I view this as more conservative since even if the growth rate were to slow, you still give yourself a margin of safety with a solid return ex-growth. I think it works particularly well with high-quality companies where you can expect that EPV to be sustainable. Link to comment Share on other sites More sharing options...
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