Investment Philosophy Review For New Visitors And Setting Up My Next Article

Let me first set up my next article for anyone who might be new to the site.  I only take into consideration with my valuations and analysis what I can see now, and pay almost no attention to rumored future possibilities or estimates of revenues and margins.

The only time future possibilities play any role in my articles are in situations where there is a clear catalyst: Activist/value investing firm or individual involved, the company is undergoing some kind of strategic review and is owned and controlled by a few people as in the case with Dole (DOLE) before I bought it, or the company’s management is trying to figure out ways to unlock the companies undervaluation by asset sales or spin off as in the situation with Vivendi (VIVHY.PK) before I bought into them.  Even in the above situations I still only valued the assets and operations as they are presently.

Generally, any other future potential I see in the company plays no part in my valuations or analysis, and is treated as the proverbial icing on top of the cake.

I like as much of a margin of safety as possible as I am a very conservative investor.  I see future possibilities and analyst and company estimates of the future generally as highly and unrealistically optimistic, which makes them wrong a lot and is why I have learned not to pay much attention to them.

Having stated all of that, I have begun my next article which is on Jack in the Box.  I hope to have the article up as soon as possible.

Howard Marks Interview, Laura Templeton, Intrinsic Value, Seth Klarman’s Investment Framework, Vitaliy Katsenelson, and the Value Investing Challenge

Now that I am done with the overview of my portfolio I can get back to the business of researching companies.  Up first though are some links that I think can help us all learn.

Free download of an interview with Howard Marks from Oaktree Capital.

Laura Templeton on How to Retain Conviction When The Market Goes Against You.  This is a three minute video with some very good insights for value investors.

Intrinsic Value: A Range, Not a Precise Figure is a great write up from Greg Speicher’s blog on the dangers of trying to pin down a companies exact valuation.

Seth Klarman’s Investment Framework is something every self respecting value investor should probably read.

Value Investing Challenge links to download the three finalists analysis and valuation articles.  The detail in the articles and how clearly two of them put forth their analysis is absolutely amazing and something I hope to learn from.  Possibly a few companies to do further research on as well.

Helmerich & Payne Analysis is a fantastic valuation and analysis article from Vitaliy Katsenelson at Contrarian Edge.  Again, pay attention to the amount of detail, how he thinks, and his process, absolutely amazing.

Now that I have finished up doing my portfolio overview I am going to dive right back into researching companies.  I will update you when I find something interesting, and I already have a few companies in mind to research.

Main Street Capital Brief Thoughts and Valuations

Main Street Capital (MAIN) is the final company I have not talked about yet that I still own from before doing any type of valuations or anywhere near the amount of research I am doing now.

Main Street Capital is a business development company that provides long term debt and equity capital to lower middle market companies and debt capital to middle market companies.  Main Street seeks to partner with entrepreneurs, business owners, and management teams and generally provides “one-stop” financing within its lower middle market portfolio.  Main Street’s lower middle market companies generally have revenues between $10 million and $150 million.  Main Street’s middle market debt investments are made in businesses that are generally smaller in size than its lower middle market portfolio companies.  Description taken from its website here.

My reasons for originally buying into Main Street were its high margins, and its monthly and growing dividend.  I liked that it had seemed to find a niche in its business operations that made the company highly profitable, enabling it to pay out the dividends.  I also liked that around 90% of its investments in the companies it invests, in is first lien debt, meaning that if these companies do have any problems, that MAIN still has a very good chance of making its money back.  I also liked that only around 2.5% of its portfolio at that time was thought to be problematic.

What I see now are generally the same fantastic things about this company that is now up 50% since I bought into it, again fortunate due to not valuing the company.  My current cost basis is $19.03 per share and the current share price is $29.09 per share.  MAIN has recently been setting new 52 week highs on almost a daily basis.  The company seems to very well run and reports bigger profits on almost a quarterly basis.

Price to Book and Tangible Book Valuations

  • Low estimate is $16.30 per share.
  • Base estimate is $23.81 per share.
  • High estimate is $31.45 per share.

My concerns with MAIN now is that it appears to be overvalued, it has been recommended by Jim Cramer, and even though the company appears to be overvalued it keeps climbing higher and higher on almost a daily basis.

With my low cost basis in relation to current price, I am going to hold MAIN in my portfolio and hope to continue to collect and reinvest the dividends for the time being.  I am going to watch this company very closely as I like its prospects into the future, but if I see any kind of deterioration in the business, I am going to lock in my profits and sell my position.

Main Street Capital could be a very good long term dividend growth stock if it can keep making prudent and profitable investments but I would not recommend buying into the company at this time as I think MAIN is overvalued.  As with the last several companies I talked about, I hope MAIN can keep on its current path and I hope to have my investment compound well into the future.

Intel Brief Thoughts and Valuations

Intel (INTC) is another company I bought before doing any type of valuations.  Intel is one of the first companies whose annual and quarterly reports I actually read, and it was noticeable even then with my limited knowledge to see its massive competitive advantages, huge margins, the free cash flow it creates, etc.  The following are descriptions taken from Morningstar.

Intel holds long-term advantages over smaller rival Advanced Micro Devices AMD in the microprocessor industry. While there have been rising fears that Intel may have trouble competing against emerging processor design firm ARM ARMH, we believe such panic has been blown out of proportion.

Intel is the largest chipmaker in the world. It develops and manufactures microprocessors and platform solutions for the global personal computer market. Intel pioneered the x86 architecture for microprocessors.

Asset Valuations

  • With intangible assets and goodwill: $7.95 per share.
  • Without intangible assets and goodwill: $6.71 per share.

EBIT and Net Cash Valuations

  • Intel has $0.60 in net cash per share.
  • 5X=$19.00 per share.
  • 8X=$28.82 per share.
  • 11X=$38.65 per share.
  • 14X=$48.47 per share.

Revenue and EBIT Valuations

  • 5X=$14.23 per share.
  • 8X=$22.03 per share.
  • 11X=$29.82 per share.
  • 14X=$37.61 per share.

Operating Cash Flow and Free Cash Flow Valuations

  • Low estimate=$12.05 per share.
  • Base estimate=$17.62 per share.
  • High estimate=$23.18 per share.

Price to Book and Tangible Book Valuations

  • Low estimate=$11.51 per share.
  • Base estimate=$16.82 per share.
  • High estimate=$22.14 per share.

Debt Ratios

  • Current assets to current liabilities=2.45.
  • Total debt to equity=14.7%.
  • Total debt to total assets=9.9%.

Intel’s current only competitor in the computer chip area is AMD who has always been a distant second place to INTC.  Also of note is that AMD’s CFO just resigned which is never a good sign.  Intel has also been increasing its business in the server arena where it also has huge competitive advantages and controls a big chuck of the space.

The only area where Intel has been struggling recently has been in the tablet and smart phone arenas, with Intel having to play catch up to Arm Holdings (ARMH) who was first and best in those areas.  Intel appears to be catching up to ARMH in the tablet and smart phone business segments as it currently has its chips in three smart phones, it will also have its chips in the upcoming Motorola Razr I, the Razr I will launch in October in Europe and Latin America, and its first Intel Powered tablets are going to be coming out in November.

Intel’s huge competitive advantages, size, and balance sheet, have enabled it to catch up to ARMH and I think it will soon surpass Arm Holdings in the mobile processor arena and extend its dominance into new profitable business segments.

Knowing what I know about Intel, its huge competitive advantages, gigantic margins, etc, I have decided to use the 11X EBIT and cash valuation, $38.65 per share, as my estimate of intrinsic value, a 40% margin of safety as its current share price is $23.32 per share.

Even if I were to use the 8X EBIT and cash valuation as my estimate of intrinsic value just to be safe, $28.82, that gets us to a 19% margin of safety.  I think the 8X estimate of value is too conservative with Intel’s massive competitive advantages however.

My current cost basis in Intel is $19.90 per share.  Again a bit fortunate to be up anything since I did not do any type of valuations before I originally bought into them.  With all of the above stated I am going to continue to hold Intel for the long term and have my investment compound hopefully years and decades into the future.

I will also look for opportunities when the stock price is at a healthy margin of safety to continue to add shares to my portfolio and for the portfolios that I manage, now looks like it would be a good entry point, and I will update when and if I buy any more stock in INTC.

Philip Morris Brief Thoughts and Valuations

Philip Morris International’s (PM) premium positioning of its strong brands, global scale, and addictive products give the firm a wide economic moat, in our opinion. While some of the company’s more mature markets are experiencing lower cigarette demand, we expect that the company’s Asian operations will continue to be an engine for the firm’s future growth.

Philip Morris International is the world’s second-largest tobacco company, behind only China National Tobacco, and holds 28% of the non-U.S./non-China global market. The firm owns seven of the leading 15 international brands. Marlboro, the company’s flagship brand, accounted for about one third of total volume in 2011. Other key brands include: L&M, Philip Morris, Bond Street, Chesterfield, Parliament, and Lark.

Both of the above descriptions were taken from Morningstar.

Asset Valuation

  • With intangible assets and goodwill $11.73 per share.
  • Without intangible assets and goodwill $8.34 per share.

EBIT and Net Cash Valuation

  • Philip Morris currently has -$7.59 in net cash per share.
  • 5X is $42.07 per share.
  • 8X is $65.97 per share.
  • 11X is $89.86 per share.
  • 14X is $113.76 per share.

Revenue and EBIT Valuation

  • Low estimate is $27.09 per share.
  • Base estimate is $49.29 per share.
  • High estimate is $71.50 per share.

Operating Cash Flow and Free Cash Flow Valuation

  • Low estimate is $76.24 per share.
  • Base estimate is $111.43 per share.
  • High estimate is $146.62 per share.

Debt Ratios

  • Current assets to current liabilities=0.92
  • Total debt to equity is not applicable because PM has negative equity.
  • Total debt to total assets=58%.

As with Vodafone, Philip Morris’ valuations are all over the place.

Philip Morris was spun off from Altria so that it could get away from the massive amount of litigation that is involved in the United States tobacco industry. Foreign countries are increasingly bringing litigation and sanctions upon tobacco companies that operate in their  respective countries such as Australia and Norway, but at this point it does not look to be a massive problem for PM.  It is something to watch for continuing into the future however as the proposed plain packaging could really hurt PM’s results as it would deemphasize the Marlboro brand and packaging.

Knowing what I know about its massive competitive advantages, which are generally the same as those I outlined in my Altria article, its risks, which are also generally the same as Altria’s, I would use the 11X EBIT and cash valuations, $89.86 per share, as my estimate of Philip Morris’ intrinsic value.  Philip Morris is currently selling at $89.48 per share meaning that there is absolutely no margin of safety.  My current cost basis for PM is $69.38 per share, up 27% since I bought in June of 2011.

Again, PM is one of the companies I bought before doing any kind of valuation so I am very fortunate to be up anything at this point. Philip Morris has gigantic competitive advantages, huge margins, creates a lot of free cash flow, pays a very good dividend, and buys back its shares.  My main concerns with PM long term are the same as Altria, a lot of debt, pensions, etc.

With my cost basis being so low I plan to hold onto my PM shares for years and hopefully decades and hope to have my investment compound well into the future.