Blind Evaluation #1

[racemize]

There was some positive feedback to the blind valuation idea, so I thought I would go ahead and do one and see if people liked it.  My wife was kind enough to pick one out and cut out the identifying information, so I also don't know who it is and can try it out myself.  In any event, post up your valuation of the company with some reasons for support!  Ideally, don't look at any early responses until you've typed or reasoned it out.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leaving blank space to avoid spoilers.

Mystery_Company_for_Valuation_#1.pdf

[Valuehunter7]

Very quickly, I see recent earnings power running about $5.50/share. I put little stock in forecasts and completely discard those provided by Valueline. Like the consistent (historical) earnings. Troubled by lack of a dividend and that cashflow lags earnings. I would be interested in taking a closer look at about 8x earnings or around $44/share. It is trading at $73.4/share ... and that is about typical for the current market, about as overvalued as I find most US-listed equities.

 

 

[racemize]

Ok, so in the next one, I will be sure to take out the Average P/E line--I was hoping to not give away the market valuation, even in general terms.

 

My thoughts on this one:

1) I like the generally increasing earnings--appear to only have drops on recessions, so they are somewhat subject to general economic trends, which is generally expected.  However, something odd seems to have happened in 2011, cash flow increased, but earnings did not.  On the other hand, looking at free cash flow (cash flow - cap ex from the chart), it actually appeared to increase, so perhaps it was an odd noncash charge in that year.

 

2) Shares outstanding is generally on a downward trend.  We don't know if the prices were good, but I generally like this as a rule.

 

3) There's some big fluctuations on return on equity, with an expected downward trend.  I don't give forecasted earnings/stats much weight unless they are lower.  In this case, I would take them a bit more seriously, going to a 13% ROE in 2015-2017 is not a promising trend, though still acceptable.

 

4) It appears a dividend will be coming for this one, no real thoughts on this, but it will be a change in how earnings are used.

 

5) Margins seem acceptable, though not outstanding.

 

6) They appear to have their biggest quarter near Christmas, so perhaps they are associated with retail.  Supporting this is the leases in the debt structure.

 

7) Speaking of debt, it is a bit higher than I would like as net profits could not clear it out quickly.  Additionally, their is a pension, which I'm not fond of, especially considering the assets being underneath obligation.

 

8.) Given all the above and plugging in some numbers, I'd only be interested in it at less than $65, of course including more research.  Unless it has a large moat, it would probably need to be much less expensive than that.

[racemize]

Very quickly, I see recent earnings power running about $5.50/share. I put little stock in forecasts and completely discard those provided by Valueline. Like the consistent (historical) earnings. Troubled by lack of a dividend and that cashflow lags earnings. I would be interested in taking a closer look at about 8x earnings or around $44/share. It is trading at $73.4/share ... and that is about typical for the current market, about as overvalued as I find most US-listed equities.

 

8x seems like quite a low multiple to use--we wouldn't get great companies at such multiples (now as to whether this is a great company...seems questionable).  What sparks you to use that as your threshold?

 

On cashflow, do you mean it lags in terms of annual growth rates?

[Valuehunter7]

 

8x seems like quite a low multiple to use--we wouldn't get great companies at such multiples (now as to whether this is a great company...seems questionable).  What sparks you to use that as your threshold?

 

On cashflow, do you mean it lags in terms of annual growth rates?

 

I hold a non-consensus view on target PE for the market, and would prefer not to instigate a Macro econ debate. *Ugggh*

 

As for great companies at 8x ... I'm happy to wait.

[racemize]

 

8x seems like quite a low multiple to use--we wouldn't get great companies at such multiples (now as to whether this is a great company...seems questionable).  What sparks you to use that as your threshold?

 

On cashflow, do you mean it lags in terms of annual growth rates?

 

I hold a non-consensus view on target PE for the market, and would prefer not to instigate a Macro econ debate. *Ugggh*

 

As for great companies at 8x ... I'm happy to wait.

 

I guess I'm somewhat confused as to why PE for the market or macro matters for individual stocks.

 

Regarding great companies, when do they ever really trade at 8x?  Has coke gotten that evaluation in the last thirty years?  Maybe in the midst of a crisis, like banks now...

[mpauls]

My fiancé used to throw random company financials at me from the S&P 500 Stock guide while I was doing some menial task.  I love this sort of thing. 

[mpauls]

How about full financials?  Can be standardized, but I'd adjust the units so they are not as stated.  That way no one is tempted to look up the numbers. 

 

[racemize]

How about full financials?  Can be standardized, but I'd adjust the units so they are not as stated.  That way no one is tempted to look up the numbers.

 

I'm not too worried about people looking up anything--they can if they want, the challenge is just for fun any way.  Regarding full financials, I guess you mean out of the 10-Ks?  I'm just doing it this way because I'm used to value line and it can be done fast.

[racemize]

I'll be revealing the answer to this one tomorrow, so please finish your analysis (and post!) if you want to participate in this one.  I'm planning on posting a new one on Friday. 

 

Also, please let me know if you like this even if you have not posted.  If there's only a few of us enjoying it, then there's not much need for me to post it here.

[MrB]

2.5Bn tops especially when don't know what pension assumptions look like

[racemize]

2.5Bn tops especially when don't know what pension assumptions look like

 

I assume you mean 2.5 B for your price, any thoughts on market?

[MrB]

2.5Bn tops especially when don't know what pension assumptions look like

 

I assume you mean 2.5 B for your price, any thoughts on market?

 

Yes. Please clarify your question.

[racemize]

Oh just a guess on what the market price was as well.

[rranjan]

Around 3B if I don't have any other information about this company except what we have in this sheet.

 

 

[LC]

I'll be revealing the answer to this one tomorrow, so please finish your analysis (and post!) if you want to participate in this one.  I'm planning on posting a new one on Friday. 

 

Also, please let me know if you like this even if you have not posted.  If there's only a few of us enjoying it, then there's not much need for me to post it here.

 

I love the idea- I didn't post because I did not feel I could add anything valuable, however I think it is an excellent idea and hope you continue.

[racemize]

Ok, the company was energizer, ENR.

 

Here's the yahoo stock quote:

http://finance.yahoo.com/q?s=ENR%2C+&ql=1

 

It appears they had a disappointing earnings and the price is now down to ~66 dollars a share or 4.5 billion market cap.  Certainly not a steal, but doesn't seem too horrible either, as they have some pretty good brands under their belt. 

 

I'll post another one tomorrow.

[oddballstocks]

So just trying to understand this:

 

If one posts a summary about some company and shoots up metrics saying low P/E, P/B etc the poster is derided because there's no moat, or the competitive advantage sucks or whatever.  The insinuation is the only way to look at a company's financials is in combination with what the business does. 

 

Then we have this thing of yours where you're just posting some numbers.  This could be a cell phone operator in Africa, or Apple, we don't know.  And we're supposed to spit out a value of what we'd pay? 

 

Is the idea to totally divorce what a company does, or the industry it's in from the price?  I can see that maybe, if everyone here looked at this sheet and said "I'd pay $4b" and then it turns out to be a for-profit education company selling for $300m does that change anyone's views?  If you blindly evaluated a for-profit company (example because it's a hated industry) at $4b and it's trading at $300m would you run out and buy shares because you realized you had some bias?

 

The exercise seems like it could be useful in that regard.  I wonder what people would say if they just saw RIMM's financial statements.

 

Is the point of this to determine what a fair value is?  I guess my confusion lies in the fact that a fair value for Mastercard is different from a fair value of Kopp Glass even though they have similar margins.

[Kraven]

So just trying to understand this:

 

If one posts a summary about some company and shoots up metrics saying low P/E, P/B etc the poster is derided because there's no moat, or the competitive advantage sucks or whatever.  The insinuation is the only way to look at a company's financials is in combination with what the business does. 

 

Then we have this thing of yours where you're just posting some numbers.  This could be a cell phone operator in Africa, or Apple, we don't know.  And we're supposed to spit out a value of what we'd pay? 

 

Is the idea to totally divorce what a company does, or the industry it's in from the price?  I can see that maybe, if everyone here looked at this sheet and said "I'd pay $4b" and then it turns out to be a for-profit education company selling for $300m does that change anyone's views?  If you blindly evaluated a for-profit company (example because it's a hated industry) at $4b and it's trading at $300m would you run out and buy shares because you realized you had some bias?

 

The exercise seems like it could be useful in that regard.  I wonder what people would say if they just saw RIMM's financial statements.

 

Is the point of this to determine what a fair value is?  I guess my confusion lies in the fact that a fair value for Mastercard is different from a fair value of Kopp Glass even though they have similar margins.

 

Oddball - extremely good points.  I've got to say the whole idea of blind evaluations is a bad idea and, frankly, bonkers.  Do doctors get together and do blind evaluations?  "Ok, there's a patient and he's got a fever and muscle aches.  What does he have?"  Do lawyers get together and say "Alright, there's a case out there where there's a breach of contract, let's say a rep was breached.  One party is suing the other.  What's the outcome?"  There's got to be some context to all of this.  Garbage in, garbage out.

[NormR]

It's not a bad idea at all.  You'd just not stop there in real life. 

 

The idea is to start by excluding all of the intangibles and coming to a guesstimate of value without being influenced by the intangibles/qualitative.  Then do it again with everything.  As a result, you put a price on the squishy factors.

 

It is also a good idea to avoid looking at stock price to avoid being anchored by it.  At least initially. 

 

So, overall, not a bad idea. IMHO.

 

Added:  Might be a fun interview tool too.  Better than some of the crazy Fermi question stuff that infects tech interviews.

[Valuehunter7]

Fully 1/2 of ENR's assets are comprised of goodwill and intangibles, not sure that was readily culled from the Valueline numbers?

 

So I was curious about the 'blind eval' exercise ... but this example illustrates big limitations. Give the OP  'A' for effort and intent, but for my own purposes don't see utility.

[oddballstocks]

It's not a bad idea at all.  You'd just not stop there in real life. 

 

The idea is to start by excluding all of the intangibles and coming to a guesstimate of value without being influenced by the intangibles/qualitative.  Then do it again with everything.  As a result, you put a price on the squishy factors.

 

It is also a good idea to avoid looking at stock price to avoid being anchored by it.  At least initially. 

 

So, overall, not a bad idea. IMHO.

 

Added:  Might be a fun interview tool too.  Better than some of the crazy Fermi question stuff that infects tech interviews.

 

So if we're just looking off the numbers, excluding certain things how is this any different from some sort of quant based screening?

 

I guess I'm different from most in that I like to look at the price or market cap first.  I'd rather not spend a lot of time evaluating a company only to find out the company has never traded anywhere near what I'd pay.  I guess to build up a watchlist of potential purchases it could be useful.  I've just found there are plenty of stupid cheap companies out there I've never needed a wishlist of stocks I could only buy at market extremes.

[Kraven]

There is certainly no harm in doing blind evaluations.  Hell, it could be a finance geek party game or something.  But if people really believe that this is going to help sharpen investing skills, well that I don't believe.  Going to the putt putt and hitting in the batting cage doesn't get you ready to step up to the plate with a major league pitcher.  Thinking it does I am not sure is really all that helpful, but knock yourself out.

[racemize]

I think I agree with most every post so far.  On the one hand, I thought it was a neat idea so that you wouldn't be influenced by the current market price and would really dive down into the numbers first.  Then, as Norm says, I would redo it qualitatively.  I also think it is interesting to try to figure out what type of company it is based on its numbers and characteristics.  On the other hand, qualitative aspects are so important that the exercise may be meaningless.

 

Mostly, I just thought it was a neat puzzle to work on what the numbers were without having to worry about qualitative aspects.

 

I could also add a brief description of what the company does, so that some qualitative aspects would come in.  Buffett has talked about purchasing a company with numbers and a description before, so perhaps it would make it more meaningful?

 

Additionally, I'll only be picking companies that are pretty well known and probably not ones that would be ruled out immediately (e.g., for profit education type companies).

[leftcoast]

Hasn't Buffett said that he used to do blind valuations for practice/fun when he was younger? He would read several years of a company's financials and then try to guess the stock price without looking at anything else. He's also said many times that he gets most of his information on a company's moat from its financials. He can see in the numbers if a company has a durable competitive advantage or not, often without even knowing what industry it's in.

 

I've got to say the whole idea of blind evaluations is a bad idea and, frankly, bonkers.  Do doctors get together and do blind evaluations?  "Ok, there's a patient and he's got a fever and muscle aches.  What does he have?" 

 

Actually, I think they do exactly that, at least in med school. And we did something very similar in business school. They're called case studies. Students are given a few pages of factual information about a real-world company (often disguised) and a problem or bunch of problems facing a manager in that company. Then they sit around and talk about what decisions that manager should make and why. The most common complaint is of course: "But I don't have enough information to make a decision!" There are a couple of answers to that:

1.) You never get to make decisions based on perfect information. That's life. (The nice thing about investing, of course, is that you can always decide to pass and wait for the next one if you don't feel confident in your analysis. Most other professions don't have a "too hard" pile.)

2.) The process of sorting through the available information, figuring out what's important, piecing it together, and discussing it with peers is still extremely valuable from a learning perspective.

 

http://www.bu.edu/ceit/teaching-resources/in-the-classroom/using-case-studies-to-teach/

 

So I say keep going, racemize.