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Vigilant management
Undervalued
Summary
Overview
Vigilant management
Undervalued
Summary
be managed by vigilant leaders, have long term prospects, be stable and understandable, and be currently undervalued.
Overview
Vigilant management
Undervalued
Summary
vigilant: keeping careful watch for possible danger or difculties Too much debt possible danger or difculty Debt < 0.5 Equity For every $1 of equity there is no more than $0.50 of debt. Unable to meet short term obligations possible danger or difculty Current assets current ratio = > 1.5 Current liability
Overview
Vigilant management
Undervalued
Summary
Sustained earnings. Wouldnt you like to receive dividends year after year? Taxes. Take a look at tax rates vs. holding periods1 : Ordinary income rate ST gains LT gains 5yr gains 15% 15% 10% 8% 28% 28% 20% 18% 31% 31% 20% 18% 36% 36% 20% 18% 39.6% 39.6% 20% 18% Also note that selling every 5 years reduces the amount reinvested and therefore long-run returns.
1 Source:
www.buffettsbooks.com
Overview
Vigilant management
Undervalued
Summary
This is perhaps one of the most subjective of the rules. I have no metrics. Perhaps R&D as a percent of sales? What makes you believe this company is going to be around 30 years from now?
Overview
Vigilant management
Undervalued
Summary
Indicators of stability
Equity: Steady or growing equity. BVPS Earnings: Steady or steadily growing EPS . Debt: Steady Debt-to-Equity ratio averaging 0.5 or less. The more volatility the more difcult it is to forecast and value.
Overview
Vigilant management
Undervalued
Summary
Understandability
Not understandable to me
Facebook: falsied accounting statements, very likely that no one reading this has spent a dime there, not sure how they are going to make money. XM Radio: with MP3 players, iPods, Pandora, etc., who would pay for XM service?
Understandable to me
Chevron: people drive to work and buy gas. Kraft: people must eat. Cisco: this presentation once converted to ones and zeroes passes through Cisco equipment.
Overview
Vigilant management
Undervalued
Summary
Compute value of BVPS 10 years from now. BV10 = BV0 (1 + g )10 Compute present value of 10 years of dividends. DPStot = Compute intrinsic value IV = BV10 (1 + i )10 + DPStot DPS0 i 1 1 (1 + i )n
Overview
Vigilant management
Undervalued
Summary
Discount rate i
In the previous slide the 10 year treasury was used to establish a maximum price. At that price or above you are better off purchasing a 10 year treasury for the same return with no risk. The discount rate should be commensurate with the companies risk and your required return. Could just use 10% or an industry specic number from my research.
Overview
Vigilant management
Undervalued
Summary
Rule 1 2 3 4
Description Vigilant leadership Long term prospects Stable and understandable Undervalued
Metrics D /E < 0.5, CR > 1.5 ? BVPS , EPS , D /E MV < PV [BV10 ] + PV [Div]
The stock analyst adds value (pun intended) by determining long term growth prospects, growth rates g , and discount rates i . The intrinsic value model presumes book grate will grow at g over the next 10 years, dividends will remain constant, and P/B = 1 10 years from now.
Overview
Vigilant management
Undervalued
Summary
Future enhancements
Incorporate risk .
The resulting E [R ] must have risk associated with it. The model is highly sensitive to g . Perhaps use LOGEST to produce g as well.