Today I am going to value the company I have been researching to see if it warrants further research and a full article, I will update you about what I figure out.
I also sold out of my entire position in Vodafone (VOD). My valuations and brief analysis can be found in this post from last month.
I bought Vodafone before doing valuations of any kind and only minor research and again I paid the price. I bought at too high of a price in my estimate and it would have been very difficult to make money due to my high cost basis. In the link above I also give some other reasons why I was thinking about selling, which are ultimately why I decided to sell my entire portion of the company. I sold my stake in Vodafone up about 2% after commissions.
That brings the cash position in my portfolio up to 17% and for now I am going to hold onto it and will let you know when I redeploy some of the cash I have built up.
Greenbackd on Hunting Endangered Species. The link contains his 15 page strategy paper on “Hunting Endangered Species: Investing in the Market for Corporate Control.” The link also contains links to some of his other papers.
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.
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.
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 chunk of the space.
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 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.
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.
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 to 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.
Recently I decided it was probably time for me to value and analyze each of the companies remaining in my portfolio from before I truly dedicated myself to learning and becoming a “true investor.” I had never valued any of the companies I am going to be writing about in the next several days. I have read at least one annual report and one quarterly report, along with a myriad of other articles about each of the companies in the time since I bought them, and I am going to offer my brief thoughts on each.
I am also going to decide if I should keep, buy, or sell any of the companies after determining if I think any of them are under or overvalued.
Vodafone Valuations and brief thoughts
Vodafone (VOD) valuations done on September 10th, 2012. Valuations in millions of GBP, except per share information, unless otherwise noted. Valuations were done using 2012 10K.
Asset Reproduction Valuation
Cash and Cash Equivalents
Short Term Investments
Accounts Receivable (Net)
Other Current Assets
Total Current Assets
Equity and Other Investments
Deferred Income Taxes
Other Long Term Assets
Number of shares are 5096
With intangible assets and goodwill: 69427/5096=13.62 GBP per share = $21.80 per share.
Without intangible assets and goodwill: 45621/5096=8.95 GBP per share = $14.33 per share.
EBIT and Net Cash Valuation
Cash and cash equivalents are 7,138
Short term investments are 5,096
Total current liabilities are 24,025
Cash and cash equivalents + short-term investments – total current liabilities=
-15,564/5,096=-3.05 GBP per share=-$4.78 in net cash per share.
Vodafone has an EBIT of 11,187.
5X, 8X, 11X, and 14X EBIT + cash and cash equivalents + short-term investments:
5X=64,396/5096=12.64 GBP per share=$19.79 per share.
8X=97,957/5096=19.22 GBP per share=$30.09 per share.
11X=131,518/5096=25.81 GBP per share=$40.41 per share.
14X=165,079/5096=32.39 GBP per share=$50.71 per share.
Revenue and EBIT Valuation
Average 6 year EBIT %:
Estimated EBIT of:
Assumed Fair Value Multiple of EBIT:
Estimated Fair Enterprise Value of VOD:
Cash, Cash Equivalents, and Short Term Investments:
Estimated Fair Value of Common Equity:
Number of Shares:
GBP 2.03 per share=$3.27 per share
The $3.27 per share is my low estimate of value. My base estimate of value using an 8X multiple was $10.16 per share, and my high estimate of value using an 11X multiple was $17.25 per share.
Price to Book and Tangible Book Valuation
Tangible Book Value:
Industry Multiple Implied Fair Value:
Assumed Multiple as a Percentage of Industry Multiple:
Estimated Fair Value of Common Equity:
Number of Shares:
GBP 22.25 per share=$35.62 per share.
The $35.62 per share is my low estimate of value. My base estimate of value using a 95% multiple was $52.05 per share and my high estimate using a 125% multiple was $68.49 per share.
FCF and Cash Flow Valuation
Operating Cash Flow:
Free Cash Flow:
Industry Median FCF Yield:
Industry FCF Yield Implied Fair Value:
Assumed Required FCF Yield As A % of Industry FCF Yield:
Estimated Fair Value of Common Equity of VOD:
Number of Shares:
GBP 10.14 per share=$16.23 per share.
Vodafone’s FCF yield is 5.41%. The companies I used as comparisons are Verizon, China Mobile, and AT&T.
The $16.23 per share is my low estimate of value. My base estimate of value was $23.71 per share and my high estimate was $31.20 per share.
Vodafone’s debt ratios are as follows:
Current assets to current liabilities: 20025/24025=0.83
Total debt to equity: 34957/76935=45%
Total debt to total assets: 34957/139576=25%
Brief Thoughts and Conclusions
Vodafone’s valuations are all over the place from a low of $3.27 a share to a high of $68.49 per share. My cost basis for VOD is $27.37 per share.
After looking at its margins, reading its annual report and all that I have read since buying into Vodafone, I would use either the 8X EBIT and cash valuation, $30.09 per share, or my low estimate of value in the price to book and tangible book valuation, $35.62 per share, as my estimate of intrinsic value. I would probably lean towards the $30.09 estimate of intrinsic value just to be safe, meaning that I think Vodafone is about correctly priced.
Knowing what I know now, I would not have bought into Vodafone when I did, or at this time, as it does not meet my minimum 30% margin of safety. Others reasons I would not buy into it at this time are:
The high debt levels.
Massive amounts of cap ex-needed constantly.
The problems that it has had in India and other countries lately
I do not think that Vodafone is a bad company by any stretch of the imagination, I just bought into them at too high of a price and for the wrong reasons; mainly its dividend.
I really like that it is a truly global company with some very good assets, including being a 45% owner of Verizon.
For now I am going to hold onto Vodafone until there is some kind of clarity from Verizon on its dividend payment strategy towards Vodafone, and/or until I find another company to buy as I think I will have a hard time making money at my currently too high-cost basis in Vodafone, and I will possibly look to sell my stake in VOD when I find another attractive company.
Before I get back into research and finishing up my checklist I wanted to give you some links that I thought held some kind of insight or knowledge that we all could learn from.
Warren Buffett on his Investment in See’s. See’s is one of his favorite all time investments and I think his reasons for investing should be studied by every investor. Article is from Valuewalk, @Valuewalk on Twitter.
The Secret’s of See’s Candies is an extensive profile of the business, why Buffett bought it, why it is such a good business, its new expansion plans, and how Buffett and Munger almost blew the investment.
Visiting Warren Buffett are notes from someone who visited Berkshire Hathaway on a trip from Columbia Business School in 2006. These notes are from an interview and speech that was given while on the trip where Buffett gives some very valuable lessons. The most fascinating thing to me was that Buffett was the following quotes from the article: Emphasis mine.
Question 12: What would you pay for a solid company that is growing earnings at 8-10%/year?
Not many companies will do that. You see a lot of garbage about EBITDA. Depreciation is the worst kind of expense in that it is prepaid. He looks at EBIT/EV. He’ll generally pay 7x for a decent business. For insurance companies, he looks at float and the cost of float.
Looks like that could be a very good starting point for valuations.
Masters of Compounding: Walmart ($WMT) 1968-2012 is an exceptional article from Student of Value on the history of Walmart and what has made it such a fantastic company over time. I would also recommend following @dgenchev on Twitter if you would like to see his future write ups as they have so far all been fantastic.
How an Average Business Can be a Great Investment by Oddball Stocks has some interesting thoughts about average businesses and their investment potential. There is some great back and forth in the comments section as well. I would also recommend reading his two write ups about Hanover Foods that he links to in the article as the analysis he presents is very detailed.