Ask Packer - No Seriously, Ask Him Anything (AHA)!

[yadayada]

Softbank is a little bit off my sweet spot.  It is growing and the valuation appears to reflect that so I have not delved much further than that.

 

Packer

yeah I think the alibaba stake makes this. last years net income was 586 billion on a 8.9 trillion market cap. But Alibaba total value is estimated between 150-200 billion$ (not unreasonable for a high ROIC business that is growing that fast). they own 33%, so taht is 50-66 billion$ or 5-6.7 trillion yen. That would leave their remaining business a multiple of 3.7-6.6 on earnings. I havent really studied it in dept tho.

 

And then there are also synergies with their latest sprint-tmobile merger (if that goes through) that could be significant. This could be several hundred billion yen.

 

Plus added growth of 4G revenue.

[yadayada]

packer im curious, you said you have a 10% stake in GNCMA and it is your 2nd largest holding, what is your largest holding?

[Packer16]

It currently is AIQ.

 

Packer

[argonaut]

Hi Packer,

 

Thanks for your continuing thoughts and ideas. I recall that you exit a stock either when it has appreciated closer to fair value or have something better or the situation changes (e.g. OIBR)...I am curious on intralot (it's now back down and wondering if you sold or are holding?) and GPIV33 thoughts (it's been a quick ride up and yet it's still below FV...)

 

Thanks

[Packer16]

I am holding Intralot as I think it is cheap but I am not as excited as when I bought as they have not shown an ability historically to turn EBITDA into FCF as of yet.  They have a plan we will see how it works out.  I will give them the standard 2 to 3 years to see if the plan will work.  I continue to like GP Investments despite some flawed analysis out in the blogosphere about them.

 

Packer

[plato1976]

Hi, Packer:

 

In some sense even GNCMA cannot convert EBITDA into FCF - there is no guarantee its growth capex will pay off;

AIQ is good in the sense it's really paying off debt and will one day generate huge FCF (hopefully)

 

 

I am holding Intralot as I think it is cheap but I am not as excited as when I bought as they have not shown an ability historically to turn EBITDA into FCF as of yet.  They have a plan we will see how it works out.  I will give them the standard 2 to 3 years to see if the plan will work.  I continue to like GP Investments despite some flawed analysis out in the blogosphere about them.

 

Packer

[Packer16]

You are correct about GNCMA and investments but they have a great track record of increasing cash flow with there investments and they have been disciplined about where not to expand.  Intralot does not have this historical record but it price today shows this.  Currently, most of Intralot's OCF profitabilty is coming from JVs.

 

Packer

[argonaut]

Thanks Packer for the update.

[west]

Packer,

 

What is your typical process for researching an industry?  Do you spend a lot of time reading industry magazines?  Are there any other sources you use to understand an investment better?

 

Thanks.

[Packer16]

I like to look at all the major firms and there relative valuation on an international basis and identify the main drivers of revenue growth and profitability for these firms.  I ask why is this firm more profitable or has more revenue growth than others?  I also look at prices paid for acquired firms in the industry.  I don't read industry magazines but do track news associated with these firms and read in-depth industry and company specific research reports to put the valuations in a frame of reference.

 

Packer

[west]

Packer, I originally brought this question up in the Namura Shipbuilding thread, but I'm thinking it's probably more appropriate here.

 

I've recently been going through Damodaran's material.  He regularly emphasizes the difference between "valuing" a company and "pricing" a company.  For the Japan stocks I've posted, including Namura Shipbuilding, if you value them through a DCF or just by normalizing their earnings and then dividing that number by a relatively high discount rate, they're all really undervalued.  In fact, many have a negative EV, but are still very profitable.

 

However, some of the companies perhaps aren't under-priced based on industry comps.

 

Now Damodaran says that firms that are undervalued will eventually become properly valued.  (He also mentions that the benefit of investing in under-priced firms is their prices have a tendency to revert to what they should be quicker.)

 

To get to the question, wouldn't this "all undervalued companies will be eventually become properly valued" line of thinking require a shift in how the market prices companies eventually, or in what multiples the market uses to price companies?  Does this actually "price multiple shift" happen in reality in a long enough time horizon, or are firm's like Namura Shipbuilding more than likely bound to be under-priced forever, or at least undervalued until some external action like them being acquired happens?

 

Thanks.

 

[Phaceliacapital]

Packer,

 

given your experience in business valuations. What do you believe to be key metrics to value fabless semiconductor companies such as Melexis or Knowles?

[Packer16]

west,

 

I look at cyclical companies different that more steady state companies.  They key with cyclical companies is to estimate a normalized level of free cash flow or earnings then apply a reasonable multiple to the cycle average.  With steady state the multiples have a tighter bound than the more cyclical companies.  Another approach is to use BV if the company is at a cyclical low.

 

Shipping is a cyclical industry so the key to value is normalized level of earnings which in most cases will be different than current history.  Cyclicals can be cheap when the have high multiples based upon  trough earnings and expensive when priced on peak earnings. 

 

I typically will not invest in cyclicals because I am not up on the revenue cycles.  The current exception is in autos.  I think there is pent-up demand which is being played out now and the valuations don't give credit for this continued play-put of the auto replacement cycle.  You need to know where in the cycle you are to accurately analyze cyclicals.

 

If Namura is competitive then the price will reflect the changes its cash flows and book value over time.  A declining company is much more difficult because it is like a melting ice cube and you have to estimate the decline in cash flow/value in the future which can be a challenge.

 

 

Packer

[Packer16]

The fabless semiconductor business is a great business.  These companies are typically priced high.  What you need to find out is what devices are these chips designed into and how long are they typically designed into these devices.  Also how diversified is the customer base.  Typically analog or processing chips have more "lock-in" than digital or memory chips.  In terms of financial metrics, FCF is probably the best as these firms typically have little cap-ex.

 

Packer

[60North Investments]

I thought I'd better ask here first before opening a new thread for a relatively small question as this is, so hope Packer you're able to help (someone else can naturally jump in as well), thanks!

 

Having read Mauboussin's Capital Allocation pdf (http://www.valuewalk.com/wp-content/uploads/2014/08/document-1036635381.pdf), btw a great read, I was left with a minor question regarding the calculation of ROIIC. On page 48 he states the definition of ROIIC as: (year2 NOPAT - year1 NOPAT) / (year1 invested capital - year0 invested capital). Now what I'm wondering is, how do you calculate this on a, say, rolling 3 or 5 year period? If we have FY2014 results and then history as well, what years should one use in all the spots (i.e. 2014 NOPAT - 2012 NOPAT and so on) for the rolling numbers? Might be a silly question but hoping to have this cleared.

[rayfinkle]

I thought I'd better ask here first before opening a new thread for a relatively small question as this is, so hope Packer you're able to help (someone else can naturally jump in as well), thanks!

 

Having read Mauboussin's Capital Allocation pdf (http://www.valuewalk.com/wp-content/uploads/2014/08/document-1036635381.pdf), btw a great read, I was left with a minor question regarding the calculation of ROIIC. On page 48 he states the definition of ROIIC as: (year2 NOPAT - year1 NOPAT) / (year1 invested capital - year0 invested capital). Now what I'm wondering is, how do you calculate this on a, say, rolling 3 or 5 year period? If we have FY2014 results and then history as well, what years should one use in all the spots (i.e. 2014 NOPAT - 2012 NOPAT and so on) for the rolling numbers? Might be a silly question but hoping to have this cleared.

 

the formula gets at incremental return for incremental investment... you can do that over any time period--just be sure to be eyes wide open on whether you need annualized figure or no

[merkhet]

I thought I'd better ask here first before opening a new thread for a relatively small question as this is, so hope Packer you're able to help (someone else can naturally jump in as well), thanks!

 

Having read Mauboussin's Capital Allocation pdf (http://www.valuewalk.com/wp-content/uploads/2014/08/document-1036635381.pdf), btw a great read, I was left with a minor question regarding the calculation of ROIIC. On page 48 he states the definition of ROIIC as: (year2 NOPAT - year1 NOPAT) / (year1 invested capital - year0 invested capital). Now what I'm wondering is, how do you calculate this on a, say, rolling 3 or 5 year period? If we have FY2014 results and then history as well, what years should one use in all the spots (i.e. 2014 NOPAT - 2012 NOPAT and so on) for the rolling numbers? Might be a silly question but hoping to have this cleared.

 

the formula gets at incremental return for incremental investment... you can do that over any time period--just be sure to be eyes wide open on whether you need annualized figure or no

 

You should usually do that over some years and keep context in mind. Some investments don't pay off immediately -- like a gigawatt factory (TSLA) that might take years to get to capacity or building out coax for a cable company.

[60North Investments]

Thanks for the replies merkhet and rayfinkle! I'm afraid I'm still not quite sure whether I'm doing something wrong or is it just the numbers. In the pdf Mr. Mauboussin says that for Wal-Mart he has 1 year ROIIC (for fiscal 2014) of -2%, 2% for rolling 3-year period and 21% for rolling 5-year period. I took the numbers (although I can't for example exactly match his average invested capital of USD 145.8 billion for Wal-Mart in fiscal 2014 (I get 141 billion) or the NOPAT for same year (his 18.8b vs. my 18b), anyone has an idea how he gets those 145.8b and 18.8b?

 

Anyway, here's how I'm trying to do it now. 1 year ROIIC: (FY2014 NOPAT - FY2013 NOPAT) / (FY2013 IC - FY2012 IC). That's exactly like he proposes so I assume that's the correct formula?

 

So is it correct then that to get a 5-year rolling ROIIC I need to calculate first 1 year ROIIC for 5 years, with the last one being in this case = (FY2010 NOPAT - FY2009 NOPAT) / (FY2009 IC - FY2008 IC). Then I have 5 ROIICs and simply calculate the 5-year rolling number as the sum of those 5 ROIICs divided by 5?

 

Without managing to know how Mauboussin exactly calculates his (average) invested capital and NOPAT (this one I especially struggle understanding how it can be so different from what I get..) it's impossible to arrive at his example ROIICs for Wal-Mart and that way see whether I'm doing something wrong. Thus asking for help here.

[Packer16]

This looks like an incremental return on invested capital calculation so you may want to think about how long an investment takes to pay-off for Walmart.  Clearly the shorter periods don'r reflect this so the focus should be on the longer term numbers.  You may want to annualize the numbers to make them comparable so for three years annualize the result as follows:

 

((1+ return)^(1/3))-1

 

Packer

[muscleman]

Are you still bullish about the Korean preferreds after Hyundai's $10 bn bid on a land parcel?

I am worried that corporate governance is a real issue here. ::)

[Packer16]

I still am and you have to put this into context.  Although I don't like what they paid, they had over $6 billion in excess assets cash and investments and if they can get advantageous financing this may not be a bad deal buying real estate in a city center of an EM city.

 

Packer

[simplefocus]

Hi Packer,

 

I'm in the process of moving my account to Fidelity so I could buy some Korean preferred shares. Which ones are you most bullish now?  What are their expected returns?  Thanks.

[Packer16]

My largest positions which I think are all less than 55 cent dollars are posted in the Investment Ideas section. 

 

Packer

[west]

Packer, do you have a resource you recommend that talks about what different industries tend to use for their comp variables?  For example, it's my understanding that companies in the auto parts industry tend to be valued with EV/Sales.  Whereas, say, EV/EBITDA is more common in the broadcast and telecom industry.

 

Thanks!

[matjone]

You've said you stick with smaller stocks because you think there is too much competition in large caps and have said that even smart managers will have a hard time doing better than average with them.  So, say you had to invest in funds - what size would you say is the point where it becomes pretty unlikely that a good manager can outperform?