Throwback Thursday – Dole Investment Analysis Case Study Part 2

Throwback Thursday – Dole Investment Analysis Case Study Part 2

***

This is the seventh post in our new Throwback Thursday’s Series, where we share with you posts from the past blogs to bring you as much value as possible.

Today, we’re continuing the case study on Dole from articles in 2012 and 2013.

In Part 1, I valued Dole and compared it to its competition.

Today, we’re going to see what my evaluation in Part 1 led to in only 104 days before we get to some of the more important case study aspects on Dole.

I researched and wrote extensively about Dole when I began doing ‘real’ investment research in 2012.

I’m going to be reposting a series of my past research and investment articles on Dole beginning today.

They’re a great case study in doing deep work. Here are some of the things we’ll be looking at in this series…

  • HOW to find the value of potentially hundreds of millions or billions of dollars worth of hidden assets
  • The signs of a company potentially having hidden value
  • Doing deep work to find the value of these and other things people won’t look for
  • Valuations and how and why I’ve done these valuations
  • And more…

I hope you enjoy this series and know we can all learn a lot from doing this.

Oh and please excuse the poor writing style and huge paragraphs. I wrote this in 2012 before I learned how to write.

As always, nothing is changed below from the past article in 2012.

Jason

***

Closed out partial position in Dole up almost 70% in Just 104 days

Dole spiked up more than $2 per share at one point and ended closing today up $1.21 per share or 9.42% on the following news, the quoted text is from The Wall Street Journal Online:

Dole Food Co. Inc. said Wednesday it is in advanced discussions with Japanese trading house Itochu Corp. for the possible sale of its packaged-foods and Asian fresh fruit and vegetable businesses.

The California-based company, said no definitive agreements have been reached, and it continues to be in discussions with several other parties regarding these and other assets.

Dole said it divulged the talks in response to market rumors. Japanese business news provider Nikkei reported that Itochu is poised to purchase the U.S. firm’s businesses for as much as $1.7 billion.

Dole launched a strategic review of its businesses in May after reporting a slump in profits. The company said in July that it was considering a full or partial separation of one or more of its business, including potential spin offs, joint ventures and sales transactions.

Dole’s second-quarter profit fell 21% as the company saw lower fresh-fruit revenue, though sales of fresh vegetables and packaged foods improved.

After the news came out, I sold just under half of the position I bought for a couple people’s money that I manage, cost basis around $8.50 per share sold around $14.50 per share, or up around 66% in just over 100 days since I bought it for them. Here is the link to my first article about Dole that got published on June 13th on Seeking Alpha.

Dole Is Undervalued, Could Be A Winner From Spin-Off Or Asset Sale

I sold about half of the position because most of the margin of safety is gone and I wanted to lock in some profits in case the deal ends up falling through with Itochu.

I kept just over half the position because I valued Dole at the very low end at $18.25 per share and as high as $48.93 per share in June. I also kept about half of the position because if any of the potential deals do go through then Dole will be able to pay off most, if not all of its massive debt which is Dole’s biggest problem at this time. Also, if it is able to pay off most or all of its debt, it could possibly start to grow its operations which could also help the share price.

Sometime in the near future I am going to start working on an updated Dole article and apply the knowledge and techniques I have learned from the original article.

***

From here, things take a bit of an unexpected turn for the worst when it comes to this companies management and going private transaction.

P.S. I put on a FREE webinar last month teaching The 3 Secrets That Have Helped Me Beat Buffett In The Stock Market, so you can possibly do the same. If you’d like to sign up for FREE to view the replay of the webinar, you can do so here.

P.P.S  Make sure to check out the brand new Value Investing Journey Training Vault here to gain access to $10,000 training sessions for as little as $97 a month.

Throwback Thursday – Dole Investment Analysis Case Study Part 1

Throwback Thursday – Dole Investment Analysis Case Study Part 1

***

This is the sixth post in our new Throwback Thursday’s Series, where we share with you posts from the past blogs to bring you as much value as possible.

Today, I’m beginning a series on Dole in these Throwback Thursday posts.

I researched and wrote extensively about Dole when I began doing ‘real’ investment research in 2012.

I’m going to be reposting a series of my past research and investment articles on Dole beginning today.

They’re a great case study in doing deep work.  Here are some of the things we’ll be looking at in this series…

  • HOW to find the value of potentially hundreds of millions or billions of dollars worth of hidden assets
  • The signs of a company potentially having hidden value
  • Doing deep work to find the value of these and other things people won’t look for
  • Valuations and how and why I’ve done these valuations
  • And more

I hope you enjoy this series and know we can all learn a lot from doing this.

Oh and please excuse the poor writing style and huge paragraphs. I wrote this in 2012 before I learned how to write.

As always, nothing is changed below from the past article in 2012.

Jason

***

This article is the fourth and final article in the series detailing the businesses of Dole (DOLE), Chiquita (CQB), and Fresh Del Monte (FDP). If you want to see the valuations and brief descriptions of these companies, please view these articles: DOLE, CQB, and FDP.

In this article, I will go over the margins of all the companies to determine if there are any sustainable competitive advantages. I will decide whether I would buy any of these companies as they currently stand, without the possibility of any kind of merger, spin off, or massive asset sales. I will also look into whether or not a merger between any of the companies would be a good thing.

Before I start with my analysis of the three, I need to go back and look into Dole’s total contractual obligations in comparison to Chiquita’s and Fresh Del Monte’s. At the time I’ve done Dole’s valuations, I wasn’t doing as thorough of research as I am doing now, and did not talk about their total obligations in the original article I wrote.

On page 40 of Dole’s 2011 10K, they list their total obligations and commitments as of December 31, 2011. The total obligations and commitments, including debt, is $4.68 billion, and over the next two years it comes out to $2.661 billion. Their current market cap is $765 million. Not a great ratio, but not terrible like Chiquita’s. The total obligations / market cap ratios for all of the companies are:

  • Dole: 4680/765=6.12
  • Chiquita: 3167/220=14.40
  • Fresh Del Monte: 1992/1310=1.52

Fresh Del Monte has by far the most sustainable ratio in my mind and should have no problems if another crisis hits them individually or the economy as a whole. Dole might be able to make it through another crisis, even if they don’t decide to do some kind of asset sale or spin off like they are looking into right now. Chiquita’s ratio is horrendous and I would be worried about them if I was a shareholder of theirs.

All of these companies have low amounts of cash and cash equivalents on hand, which is another thing to possibly worry about with Dole and Chiquita if something bad were to happen in the economy. In any kind of emergency, they would most likely either default on some of their obligations, have to draw down their credit facilities, or try to take on some more debt if they could, most likely on unfavorable terms.

Now, let us get to the margins of all three and try to determine if any of them have a competitive advantage.

Dole (DOLE) Chiquita (CQB) Fresh Del Monte (FDP)
Gross Margin (Current) 10.5 12.9 8.8
Gross Margin (5 years ago) 9 12.4 10.8
Gross Margin (10 years ago) 16 16.1 16.1
Op Margin (Current) 2.7 -0.3 3
Op Margin (5 years ago) 1.9 0.7 5.2
Op Margin (10 years ago) 6.5 2.2 10.3
Net Margin (Current) 0.75 0.69 2.84
Net Margin (5 years ago) -0.83 -1.05 5.34
Net Margin (10 years ago) 0.83 0.91 9.34
FCF/Sales (Current) -0.58 0.12 2.66
FCF/Sales (5 years ago) N/A -0.08 2.42
FCF/Sales (10 years ago) N/A 2.37 11.86
BV Per Share (Current) $9.30 $17.42 $30.41
BV Per Share (5 years ago) N/A $21.03 $23.65
BV Per Share (10 years ago) N/A $15.80 $13.51
ROIC (Current) 2.16 1.53 5.21
ROIC (5 years ago) -2.12 -2.72 11.66
ROIC (10 years ago) 1.98 1.63 22.56
Insider Ownership (Current) 59.06% 3.33% 35.72%

These companies, for the most part, all have operations in the same segments and the next table will be showing the margins of those comparable operations.

Dole Chiquita Fresh Del Monte
Total Fresh Fruit EBIT 172 N/A N/A
Total Fresh Fruit Revenues 5,024 N/A 2,721
Fresh Fruit EBIT Margin 3.42% N/A N/A
Total Vegetable EBIT 31 N/A N/A
Total Vegetable Revenues 1,002 N/A 523
Vegetable EBIT Margin 3.10% N/A N/A
Packaged Food EBIT 96.5 N/A N/A
Packaged Food Revenues 1,197 N/A 355
Packaged Food EBIT Margin 8.10% N/A N/A
Total Operations EBIT 300 33.7 116
Total Operations Revenues 7,224 3,139 3,590
Total EBIT Margin 4.15% 1.07% 3.23%

In a perfect world Chiquita and Fresh Del Monte would have broken their operations out further like Dole does. Instead they choose to combine their operations reporting data, especially the Operating Margin data, otherwise known as EBIT. So at this point, it is impossible for me to break out the data further than it is in the above table.

Taking the above information, combined with the information in the previous articles, I think that I have enough information to make some judgments on the companies.

As things currently stand, I would NOT buy Chiquita under any circumstance, not even with the possibility of a spin off or asset sale. Their low margins, combined with their huge amount of total obligations, and low cash on hand, scare me too much to invest in them. That is not even taking into account the fact that, in my valuations, I found them to be about fairly valued to slightly undervalued, not nearly enough of a margin of safety for me considering all the risks. I also do not see them being bought out by anyone due to their high amount of total obligations. The only thing going in their favor is that they are selling for less than book value by a good margin, which is currently $17.42 per share, but at this point it looks to be justified.

Fresh Del Monte is interesting. They are selling for less than book value by a good margin, which is currently at $30.41 per share, they generally have the best margins of the three companies, and they also have high insider ownership, which I always love. However, by my estimates they appear to be slightly overvalued at this point, and have low cash on hand. They are also the company out of the three in the best position to make some acquisitions: in my opinion, a merger between Dole and Fresh Del Monte could possibly be a good thing. They have already been buying back a lot of shares and are the only one out of the three to pay a dividend, which are more pluses. At this point, I am not going to buy Fresh Del Monte, but I will wait for an opportunity when they are undervalued and will reassess at that time whether or not I will be a buyer then.

Without the possibility of a spin off or asset sale that I outlined in my original article on Dole, I would not be a buyer into their company right now either.  Pretty much the same problems as Chiquita: high debt / total obligations, low cash, low overall margins. However, they do have high inside ownership, they are selling at a slight discount to book value, and by my valuations are extremely undervalued. I do stick to my original assessment about Dole though, that they are a great spin off opportunity if they decide to do a spin off or asset sale. If they do what I suggested in the original article I think they could unlock value, get rid of a lot of their debt, and become a much more focused and profitable company. Especially if they put a lot of their resources into the packaged fruit portion of the business, as it has the highest margins in Dole’s operating structure. Dole also has the 88,000 acres of land that they could sell some of to pay down debts as well.

I did buy half of a position in Dole based on the spin off thesis in my original article. I am waiting to see if they announce a spin off or asset sale to jump fully into Dole at this point. They are in the spin off portion of my portfolio which I plan to hold for 6 months to several years. I do not consider them a long term buy and hold for decades company.

It also appears to me that none of the companies have any kind of sustainable competitive advantage, with their wildly fluctuating margins over the past 10 years, and no one becoming dominant.

I hope everyone has enjoyed and learned something from the analysis and valuation series on Dole, Chiquita, and Fresh Del Monte, and I look forward to some feedback.

***

P.S  If you want to get every post like this in the future, please subscribe for free here.

P.P.S. I put on a FREE webinar last Thursday teaching The 3 Secrets That Have Helped Me Beat Buffett In The Stock Market, so you can possibly do the same. If you’d like to sign up for FREE to view the replay of the webinar, you can do so here.

The Next GE – Interview #2 With Eric Schleien of The Intelligent Investing Podcast

The Next GE – Interview #2 With Eric Schleien of The Intelligent Investing Podcast

In the first interview I did with Eric Schleien of The Intelligent Investing Podcast in 2016, we talked about more general value investing concepts, mindsets and processes.

In today’s interview, we talk about an investment I made in 2015 that I called ‘The Next GE’.

In the 27 – minute interview linked below, we go over this investment case study style that I recommended in October 2015 exclusively to Press On Research subscribers.

We do this to figure out a couple of things…

  • Why I titled this company’s recommendation issue ‘The Next GE’
  • Why they’re now up 460% as of this writing since I recommended them

Some of the other things we also talk about in the interview are…

  • Valuation
  • How this company compared to its competition
  • Where I found this company
  • How I found this company
  • How you can find extreme value in the small cap OTC and ADR arenas
  • And more

Here is the description of the interview from Eric’s podcast site…

In this interview, Eric Schleien goes through an investment case study Jason Rivera recommended to his subscribers and for the portfolios he manages about a small and obscure company that has almost tripled since 2015.

When he recommended them, he titled the issue The Next GE and in this interview we go over why he thought that.

His podcast has interviews with other great up and coming value investors as well so make sure to listen to them.

You can listen to the interview here if you don’t have iTunes.

Or you can listen here if you do have iTunes.

Make sure to follow Eric on Twitter, and subscribe to his great podcast when listening to either of the above places.

I hope you enjoy and find some great value in the interview.

Oh, and by the way…

If you listen to the interview, you also get a couple of free resources to learn from that I provided exclusively to listeners of this interview.

One I’ve never released before other than to paying subscribers.

I hope you enjoy 🙂 and let me know your thoughts on this company in the comments below once you listen to the interview and download the FREE resources.

P.S. The analysis I did on this – and EVERY company I evaluate – is based on the preliminary analysis template I developed over the last 11 years, and after evaluating thousands of companies. If you’d like a copy of this to do your own preliminary analysis, you can get yours for free here.

P.P.S. I put on a FREE webinar last Thursday teaching The 3 Secrets That Have Helped Me Beat Buffett In The Stock Market, so you can possibly do the same. If you’d like to sign up for FREE to view the replay of the webinar, you can do so here.

Preliminary Analysis Case Study #1 Part 5 – Balance Sheet Strength, Goodwill, Intangible Assets

Preliminary Analysis Case Study #1 Part 5 – Balance Sheet Strength, Goodwill, Intangible Assets

Last week I announced we were going to begin doing a real-world case study on Constellation Brands – Stock Ticker STZ.

Well, after releasing this post, my team reminded me that there was actually a preliminary analysis my client did before this one. So before we get to the STZ case study, we’re doing to take a detour to talk about Canopy Growth Corp –  Stock Ticker WEED.

I didn’t want to skip this one because there’s a lot of context and talk in this discussion that we don’t necessarily go over in the later training sessions because we’ve already talked about them.

This post is a continuation of the last posts in this ongoing case study.  All parts are below:

Below is his unedited preliminary analysis for reference – without any of my comments – for you to get a  look at.

Canopy Growth Corp – WEED

***

WEED – Canopy Growth Corp (Canadian Company)

All numbers are in millions of CAD unless noted otherwise.

  • FY Ends March 31st, 2017
  • 3,404 market cap (medium)
  • N/A dividend yield.
  • P/B TTM = 4.92
  • TTM Operating Margin is -39.2 and has somewhat increased over last 2 years.
    • 5 year average OM is N/A
  • Share count has done increased from 77 to 119 from FY16 to FY17. Current TTM is 149m.  Statement of shareholder’s equity??
  • Book value per share has increased from 1.34 to 1.55 from FY16 to FY17. Current TTM is 3.73.
  • Morningstar ROIC TTM is -6.58 and a little higher than the last 2 FY’s
    • 5 year average Morningstar ROIC is N/A
  • TTM ROE is -6.45 and a little higher than the last 2 FY’s
    • 5 year average ROE is N/A
  • TTM FCF/sales is -151 and we can’t tell any pattern. See con note on FCF
    • 5 year average FCF/sales is N/A
  • CCC: No info on the payable period (assume the product is cheap to grow) but DIO exploded on FY2017 to 5,494 days (FY2016 and 2015 avg is about 650 days). Research online says cannabis takes up to ½ year to grow so I would need much more investigation on why inventory takes so long to turnover.
  • EV=3,312
  • EV/EBIT is -73.6
  • EV/FCF is -37.6
  • EBIT/EV (earnings yield) -1.3%
  • FCF/EV (earnings yield) -2.6%

Cons

  • Young company – only about 3 years old after name change (used to be Tweed)
  • Note only balance sheet on Morningstar has FY2015 so we need to look at 10K for data.  We cannot really tell any direction with a 2/3 year old history
  • SG&A & Other are over 163% of Revenue
  • SG&A roughly decreasing and “Other” is increasing
  • Op Income and Margin are (-) but are generally decreasing over time
  • Outstanding shares are significantly increasing over time
  • FCF is increasingly negative as both op cash flow and CapEx are also both increasingly negative
  • Not much experience with Canadian companies
  • Goodwill and intangible assets exploded on FY2017
  • Regulation laws in Canada and USA
  • They bought a lot of companies in FY2016

Pros

  • Cash exploded in FY2017
  • FY2017 Cash & Equiv – Total Liabilities = $39m
  • Book value/share is generally increasing but only for last 3 years
  • Low Debt (also reflected by the ROE and ROIC being similar numbers)
  • Revenue is increasing over time
  • STZ bought about 10% interest in WEED.  Industry took notice and WEED most likely gained some legitimacy with large companies
  • COGS is only 23% of Revenue (doesn’t take much cost to grow product?)
  • High Working Capital Ratio = 9.8 but this high typically suggests either too much inventory or not investing excess cash…

***

So, after going through the beginnings of this preliminary analysis process in part 1 and 2 last week, and part 3 earlier this week, here is part 4.

In this video, we talk about the balance sheet, goodwill, intangible assets and more.

For some reason, when I talk the audio cuts out so I’ve added narration to the video above for context.

If you have any comments or questions, please post them in the comments section below and I’ll answer them.

I’d also love to see your preliminary analysis as well, so feel free to post these in the comments below.

If you’d like more information about the coaching program this client is in, go to this page.

For reference, he’s in the $ 10,000, year-long program, and this is only after 1 month of coaching, doing nine 1 hour training sessions via Skype.

P.S.  This analysis is based on the preliminary analysis template I developed over a number of years, and after evaluating thousands of companies.  If you’d like a copy of this to do your own preliminary analysis, you can get yours for free here.

P.P.S.  I put on a FREE webinar on Thursday, teaching The 3 Secrets That Have Helped Me Beat Buffett In The Stock Market, so you can possibly do the same.  If you’d like to sign up for FREE to view the replay of the webinar, you can do so here.

Throwback Thursday – Why P/E Is Useless And How To Calculate EV

Throwback Thursday – Why P/E Is Useless And How To Calculate EV

***

This is the second post in our new Throwback Thursday’s Series where we share posts from the blogs past with you to bring you as much value as possible.

I’m reposting this today about P/E because with the stock market STILL reaching all-time highs on an almost daily basis. It helps to know which metrics are important and which are completely useless.

Other than some minor edits and updates, this is the same exact post as originally published in 2015.

Jason

***

Why P/E Is Useless – And How To Calculate EV

Earlier this week, I posted a 12:49 video case study part 1 on Armanino Foods (AMNF)showing how I analyzed the company on a preliminary basis.  What everything meant and why each metric is important.

But I didn’t explain how to calculate EV/EBIT and EV/FCF when I talked about them in the video.  In this post, I will.  But before I do that, I need to show you why the P/E ratio is useless, and why you should never rely on it as a long-term value investor.

Why I Hate The P/E Ratio

Last week, I got a couple of questions from a Press On Research subscriber. The first question was, why I didn’t use P/E when detailing the company I recommended, and the second question was, how the company could be cheap when it had a P/E of 17.

I won’t detail what I said to the subscriber because I would have to reveal the company and industry it’s in.  But below I will show you the reasons I hate the P/E, and why I never use it in my analysis.

P/E Is Turrible

The P/E ratio is two components.  P is price per share and E is earnings per share.

You find price per share by dividing the total market cap of the company by the number of shares the company has. Earnings per share is net income divided by the total number of shares a company has.

You then divide the price per share by the company’s earnings per share over the last year to find its P/E.  The example below is from Investopedia.com.

For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).

Don’t worry you won’t have to calculate this. All financial sites report P/E ratio for you when you look up the stock ticker. Many investors – including me when I started investing – thought this was the best relative valuation to look at.

But it isn’t…

The P/E ratio is a misleading and dangerous metric. it’s one of the worst metrics to rely on as a long-term value investor.

Why?

Because of debt, cash, and manipulation…

Why P/E Is Useless

Below are examples I made up to illustrate why P/E is a useless metric.

Company 1 Company 2
P/E Ratio 10 20

On a P/E basis company one looks better right? But what happens when you add in important things like cash and debt to the equation?

Company 1 Company 2
P/E Ratio 10 20
P/E stays the same under the below scenario.
Cash and Cash equivalents 0 40
Debt 40 0

Which company would you rather buy now? The company with a lot of net debt or the company with a lot of net cash?

But this isn’t the only reason P/E is misleading…

Earnings Are Easy To Manipulate

The E in the P/E equation is earnings like I showed above. Another reason I don’t like P/E is because earnings are easier to manipulate than EBIT, FCF, and owner’s earnings.

One example is a company “smooths” earnings over time to make it look like the company is earning consistent good profits. Rather than lumpy profits that fluctuate a lot.

This is a huge discussion that goes beyond the scope of this post. But if you want to learn how companies manipulate earnings read this from Investopedia. And read the great book Financial Shenanigans.

But these aren’t the only downfalls of using P/E…

The earnings part of P/E is after all costs, taxes, and expenditures. EBIT, FCF, and OE are all after costs and expenditures but before taxes. Another way companies can manipulate earnings is with the tax rate the company states it has to pay.

If you work hard enough you can make the tax rate whatever you want it to be.  Just ask General Electric (GE).

And because EBIT, FCF, and OE is profit a company makes from its operations. These metrics show a much truer picture of how profitable a company’s operations are. And if a company is operating in a healthy way.

So P/E is not only a terrible metric to rely on with any company that has debt and cash. Which is of course all companies. But it’s also easier to manipulate than other metrics. And it doesn’t show how profitable and healthy a company’s operations are.

This is why I use enterprise value (EV) instead…

So How Do You Calculate Enterprise Value?

I calculate enterprise value as…

  • EV = market cap + preferred shares value (if any) + debt – cash and cash equivalents.

My calculation of EV is the same as the picture above but in easier to understand terms.

Why is EV better than P/E?

Which Metric Is Better?

I love enterprise value when evaluating businesses. It shows the true picture of what a company should be valued at if you were going to buy the whole business.

This is how I evaluate all businesses for investment. If I was able to buy the whole company, what price should I pay for it in total? And per share? EV helps us find this number. And when combined with EBIT, FCF, or OE it’s also a better relative valuation to use than P/E.

So instead of using the flawed P/E you should use EV/EBIT, EV/FCF, or EV/OE to find what a company is worth on a relative basis.

EV replaces P in the P/E equation. And operating margin (EBIT), free cash flow (FCF), or Owner’s Earnings (OE) takes the place of E in the equation.

EBIT, FCF, and OE can all replace earnings in the P/E equation. And all three tell you different things when compared against EV.

EV/EBIT shows you what the company is worth compared to its operating profits.  EV/FCF shows you what the company is worth compared to the free cash it generates from operations. And EV/OE shows you what the company is worth compared to the value you could take out of the company if you owned it.

Let’s keep things simple and only worry about EV/EBIT and EV/FCF today though. I will explain how to calculate owner’s earnings when we get to that point in the case study.

Another name for EBIT is operating margin. But it’s also called operating income or operating earnings. You can find this by going to a company’s income statement under the financials tab on Morningstar. FCF is on the cash flow page under the financials tab on Morningstar.

I use EBIT and FCF because they are harder to manipulate. And show what a company earns from its operations in the case of EBIT. Or in the case of FCF – show how much cash the company has left after paying for things to upgrade and improve the business.

So what does this all mean when continuing the example above?

Why I Love EV/EBIT and EV/FCF

If we were to continue the above example, we would just need the company’s market cap.

Company 1 Company 2
Market Cap 100 100
P/E Ratio 10 20
P/E stays the same under the below scenario.
Cash and Cash equivalents 0 40
Debt 40 0
EV = 140 60
  • Company 1 EV = 100 + 40 – 0 = 140
  • Company 2 EV = 100 + 0 – 40 = 60

Which Company Would You Rather Own?

Now that we have found EV for the made up businesses above. Let’s take this further and see which company is the better buy now… At least on a relative valuation basis.

Company 1 Company 2
Market Cap 100 100
P/E Ratio 10 20
P/E stays the same under the below scenario.
Cash and Cash equivalents 0 40
Debt 40 0
EV = 140 60
EBIT = 10 10
FCF = 10 10
Company 2 is a lot cheaper when considering EV
EV/EBIT = 14 6
EV/FCF = 14 6

EV above is the estimated price you would have to pay to own the whole company.

Now that we’ve found EV for both businesses we can bring in EBIT and FCF to find EV/EBIT and EV/FCF.

Now that we’ve replaced the terrible P/E ratio with EV/EBIT and EV/FCF.  We’ve got a better look at what the company truly is worth on a relative and intrinsic basis.

This is how business owners evaluate businesses. And we as long-term value investors should consider ourselves business owners.

Which company looks like the better buy now? And what is your favorite relative valuation metric? Let me know in the comments below.

P.S. In making this post I realized I never took the next step and explained the differences between EV and Total Enterprise Value or TEV. We’ll get to this soon.

P.P.S  I’m putting on a live webinar tonight at 6 PM EST where I’ll be teaching you the 3 Secrets That Helped Me Beat Buffett In The Market so you possibly can too.  If you want to sign up to this webinar for FREE, you can do so here.