collegeinvestor

Let me know how I can make my analysis more objective. I want to create a system that allows me to know whether or not a company is undervalued. Any help is really appreciated. I’ll start with the quantitative, then move to the numbers. I would like to hear everyone else’s opinion with facts to back their claim as well! Qualitative: Consumer products: If you go into any pharmacy/consumer care store their stuff is plastered all over the store. From band-aid to Tylenol you know these consumer staples are not going anywhere soon. To invert, they only have about 2 billion in cash on the books as of January, 31, 2009. They don’t have the cash to buy any brands. On the pharma side they have a lot of medicines that I luckily have not heard of :( . Anyways the big news is that Berkshire Hathaway sold half of their 48 million-share stake in the company to fuel the BNSF investment. Quantitative: Since 2000 the stock has traded from a p/CF at 22.6 per share and today in 2009 the stock is trading at roughly 10.9 per share. Equity has increased from roughly 18 billion to 50 billion currently. If price follows value what is going on? Has the price followed value or is the market skewed? I am sure there are professionals that focus their whole life on analyzing this one stock. Anyways if you take the enterprise value of the company . The company currently has an enterprise value of roughly 176 billion when you include cash+ equivalents minus notes payable (SR debt) + long-term debt. The company reeled in 14.206 billion in free cash flows / EV (176 billion) to get a yield of roughly 8%! This is pretty ridiculous. In addition the company has increased free cash flows from roughly 5 billion today to 14 billion in 2009. Why is this stock trading so cheaply! If you were to grow this company at say 8 percent a year ( a figure almost half the current ROA) for the next 10 years you would get earnings of roughly 4.40(1.08)^10= 9.50. Lets say the stock market valued this company even lower than it is today with a p/e of 10 you would get a market value of 95.00. This is with an earnings growth rate that is very conservative based on the previous 10 years. If you were to figure out the yield you would get you would have a figure of 4 percent before dividends. If you included dividends of 3 percent for the next 10 years your investment will technically double every 10 years with no work. This is before any inflation (which we know will happen with government spending. So why is this stock trading so cheaply? Or am I missing something.

Thanks for all the help. So in essence, over time if the government prints money they help business owners make money while squishing the lower classes.

I dont understand how inflation leads to higher earnings. If you increase the price of goods then the costs (VC and fixed costs) will still increase as well. In addition, I understand that if you grow earnings then the forward P/e ratio would get smaller but then wouldn't you techincally be a speculation on the growth ? Also, how would an increase in GDP create a margin of safety? I see how if you have an increase in gdp the future value of the earnings will go up in time but arent you guessing that the gpd will go up which involves speculation?

Why would you add back changes in working assets (current liabilities or assets) is this b/c you use cash to either buy the assets or you use cash to pay off the current liabilities? How would this work if you added current liabilties b/c you are not changing cash. Thanks again for all the help.

Wow thats incredible. Was this in small/large cap stocks? Do you mind sharing your biggest winner and loser? Thanks.

Parsad I have been reading your posts for a while. This is a really cool website for me to learn. I went to the annual shareholder meeting in 2008 and it changed my life (BRK). Munger was hilarious. In addition, one of my favorite quotes was when he was saying how if you can learn how to compound 15% for 15 years you will be very rich. He also talked about how he would rather just own 1 stock that could do that--while Warren was a little apprehensive about giving that advice. Thanks for this resource. So in essence if you purchase property with debt you can essentially increase cash flow and fool your investors if the debt expense for the year are less than depreciation. Pretty interesting.

Oh and also I have another question sorry about so many questions. I am looking at casinos stocks because they got smashed and are still down. If you look Las Vegas Sands Corp their depreciation has gone through the roof roughly 5x. Is this directly as a result from their increase in PPE? For instance, Las Vegas sands corp has the following stats: 2006 2009: depreciation 110 million depreciation 586 million total ppe 6 billion total ppe 16 billion

haha first mistake. I knew something was messed up when I saw that so if you take that you get a cash yield of 6.74%. I am guessing there are bonds that yield this figure that are way safer?

Hey I am a new investor and I don't know if anyone else is new here. I thought it would be cool if we had a forum thread on this website where we can figure out the numbers to help others out. I feel like you could read millions of articles and still not be able to invest. I feel like if you dont know how to calculate the numbers sitting on the internet reading the wsj is a waste of time! Its so hard for a nubie to actually understand the numbers! I am going to try to calculate owners earnings and let me know if I am right or wrong: For JNJ in the year 2008 you would take the net income (12 billion 266 million) + depreciation (2 billion 744 million) and subtract (CAPEX) 2 billion 365 million to get owners earnings of 12,645,000,000. As a result if you divide the market cap of of roughly 178 billion/12,645,000 you get an owners earnings yield of 14.83 percent and if things were to stay that way thats how much cash you would generate from that investment. In addition Enterprise value is 178 billion + net debt which is pretty much zero so the enterprise value is roughly the market cap? Am I wrong? thanks for the help. I feel like this could be a good place for nubies to figure out the numbers. Let me know if you want me to delete this topic or if i am totally wrong!