Second submission to Whopper Investments valuation and analysis challenege

Coca Cola

 

This challenge is Coca Cola (KO) before Warren Buffett bought in 1989.  Since I have studied KO quite a bit, I know what they ended up doing, and why they made some of the decisions that they did.

Since I have studied Coke quite a bit, I will not go into detail on what I would have done too much.  All that I will say, is that I would have done what they did ended up doing and consolidated, sold off non-core businesses, and concentrated on the core business of selling, distributing, producing, and expanding the market of the Coke syrup and the Coke brand around the world.  With an emphasis on expanding internationally.

I would have treated them in the same way I am treating Vivendi now, which I detailed in my Seeking Alpha article on them.  The major difference between the two companies is that Coke is a producer of some of the major assets, and Vivendi is not.

Valuations:

All numbers are in millions of US dollars, except per share information, unless otherwise noted.

  • 1988 revenue-$8,338
  • Multiplied by:
  • Average 3yr EBIT margin of:16.45%
  • Equals:
  • Estimated EBIT of:1,371.6
  • Multiplied by:
  • Assumed fair value multiple of EBIT: 8X
  • Equals:
  • Estimated fair value EV of KO:10,972.8
  • Plus:
  • Cash and Short term investment of 1,231
  • Minus:
  • Total debt: 2,124
  • Equals:
  • Estimated fair value of common equity: 10,079.8
  • Divided by:
  • Number of shares of 365
  • Equals:
  • A per share price of $27.62

That is the very low estimate of value.  I would only have used this estimate as my base case if we were in some kind of recession or depression.

  • 1988 revenue-$8,338
  • Multiplied by:
  • Average 3yr EBIT margin of:16.45%
  • Equals:
  • Estimated EBIT of:1,371.6
  • Multiplied by:
  • Assumed fair value multiple of EBIT: 11X
  • Equals:
  • Estimated fair value EV of KO:15,087.6
  • Plus:
  • Cash and Short term investment of 1,231
  • Minus:
  • Total debt: 2,124
  • Equals:
  • Estimated fair value of common equity: 14,194.6
  • Divided by:
  • Number of shares of 365
  • Equals:
  • A per share price of $38.89

This is what I would have used as my base case estimate, and the value I think that is probably closest to the actual share price at that time.

  • 1988 revenue-$8,338
  • Multiplied by:
  • Average 3yr EBIT margin of:16.45%
  • Equals:
  • Estimated EBIT of:1,371.6
  • Multiplied by:
  • Assumed fair value multiple of EBIT: 14X
  • Equals:
  • Estimated fair value EV of KO:19,202.4
  • Plus:
  • Cash and Short term investment of 1,231
  • Minus:
  • Total debt: 2,124
  • Equals:
  • Estimated fair value of common equity: 18,309.4
  • Divided by:
  • Number of shares of 365
  • Equals:
  • A per share price of $50.16.

This is what I would probably estimate the intrinsic value to be, probably still a bit too conservative.  I would have wanted at least a 30% margin of safety to that, so I would have bought around $35 per share.

The margins are incredible.  Revenue, EBIT, and gross growth rates are very good.   Best of all, even then they had dominant competitive advantages and positions in the soft drink market.

They had huge opportunities for growth outside of the US.  They had more suppliers and distributors coming online all the time.  They were improving relationships with the local economies.  They had dedicated people willing to go to extremes to sell the product.  More importantly, they had customers who were buying more and more Coke every year.  Meaning they could make more money from each can they sold overseas.

I would have been constantly evaluating my investment thesis and waiting for a buying opportunity.

Selling stocks, emotion, and potential loss of money

Hard to sell stocks?

Does anyone else find it hard to sell stocks that they have researched, valued, and analyzed? Sometimes having spent weeks researching the company.

Normally I have had no problem with my selling decisions thus far.  However, almost all of them were the companies I bought when I first started and wasn’t doing the amount of research I am doing now.

I am finding it hard right now to sell Taseko Mines (TGB), even though I think I have found some other opportunities to put more money into.  All I think about when trying to decide whether to sell or not is the potential it has if the New Prosperity Mine is approved in November and how that could enable me to make my money back.

I hate losing money and at this point, I am down about 50% on this investment.  Remember I bought this before I started the valuation and research that I am doing now, and bought when it was way overvalued.

I know that this is considered speculation, and something I don’t really do now, but I would feel like a complete jackass if I sold now, only for the stock to go up a lot, which would lead to me making my money back.  That is if and when the Prosperity Mine is approved.

I guess the lesson of the day is that this is what I get for buying companies that are overvalued and that at the time I had not researched or valued properly.

Anyone who has any advice out there, it would be much appreciated if you could share that with me in this predicament.

Whopper Investments analysis of Dairy Queen (DQ), and a course from a CFA

Whopper Investments analysis of Dairy Queen

I suggest everyone go over to whopperinvestments.com to see the analysis he did of DQ before Warren Buffett bought it.  The first link is WI’s reader’s analysis and valuations.  The second link is Whopper’s analysis and valuation.

I especially think we should learn from Whopper’s, Red’s, and ABVs’ analysis and valuations as those are the best in my opinion.  Pay attention to how they think about DQ, and the reasons they gave for why DQ was such a great business to buy.

Course from a CFA and author

I have to admit I have not checked this guy out yet so I cannot vouch for the quality of either this course he is offering or the book he wrote.  However, I thought I would put this up here in case anyone wanted to take his course.  The information about the course and the link is here.

Please let me know what you think of the course and the book if anyone decides to look into them.

Moats, Vivendi having trouble selling ATVI, and tips from Leon Cooperman

Moats

Finding companies that are undervalued and have a moat, or competitive advantage, is a winning combination for value investors.  Determining if a company has a moat can be difficult, and finding a company that has a long term competitive advantage can be even harder.  Here is an article from morningstar.com that talks about moats, and gives you some examples so that we can learn how to spot them.

See highlights bellow:

What is an economic moat, and how does one determine whether a company’s moat is wide?
Jeremy Lopez, CFA, is an analyst with Morningstar.com.

Mohammad A.

At Morningstar, the concept of economic moats is a cornerstone of our stock-investment philosophy. Successful long-term investing involves more than just identifying solid businesses, or finding businesses that are growing rapidly, or buying cheap stocks. We believe that successful investing also involves evaluating whether a business will stand the test of time.

Castles and Moats
The concept of an economic moat can be traced back to legendary investor Warren Buffett, whose annual Berkshire shareholder letters over the years contain many references to him looking to invest in businesses with “economic castles protected by unbreachable ‘moats.'”

Moats are important to investors because any time a company develops a useful product or service, it isn’t long before other firms try to capitalize on that opportunity by producing a similar–if not better–product. Basic economic theory says that in a perfectly competitive market, rivals will eventually eat up any excess profits earned by a successful business. In other words, competition makes it difficult for most firms to generate strong growth and margins over an extended period of time.

Vivendi having problems finding buyers for Activison Blizzard

I have thought for a while now that Vivendi would have difficulty finding a buyer for Activision Blizzard, this article only confirms my suspicions.  So far it looks like Microsoft and Disney have said no to buying ATVI.  If they cannot find a buyer, then they will either sell the shares on the open market or do some kind of spin off of ATVI.

Leon Cooperman

Leon Cooperman, who founded Omega Advisors investment fund in 1991, and who is now worth $2 billion, gives his tips on how to succeed in business, and how to become a better investment advisor.

I hope you enjoy.

Shifting gears, Dole news, and my valuations on L.B. Foster

Shifting Gears

Recently I have been concentrating pretty heavily on trying to find, assess, and value new companies that I could invest in.  I am now going to be shifting gears for a bit to expand my knowledge.

The Manual of Ideas that I posted about a few days ago, and the 32 free books from csinvesting are amazing,  I am most of the way through the MoI free publication and the information in it is incredible.

I am going to be studying specifically from the MoI publication the valuation techniques that they go over, try to learn them, revalue some of the companies I have already valued, and incorporate some of them into my valuation techniques.

When I feel comfortable with the new techniques I will post some of the new valuations here, and see if that changes my assumptions on some of the stocks I have already talked about.

After I finish up with the MoI, I am going to start one of the free books that I downloaded yesterday from csinvesting’s site, so it will probably be a little while before I look for a new company to evaluate.

In the meantime I will still be posting any news I find on companies I own, my random thoughts, and any new, good information I find from websites and blogs.

Dole News

The first article talks about the best and worst boards in the country, Dole came out as one of the worst.  The main reason being that Dole, being majority owned by one person, is not a very transparent company.

The second article is another article, from another analyst, saying that if Dole decides to do some kind of asset sale or spin off they could be worth $16 a share, and talks about how the packaged fruit business has amazing margins. I have specifically talked about all of this in my article here.  So why am I posting this?  Because stated in the article from Dole CEO David DeLorenzo “Our goal would be to accomplish something by the end of this year. We have come across some opportunities that, if we are able to execute, would be good for both the packaged foods business and the commodities business.” That is new news.  Emphasis is mine.

For those who are interested in the company, which I am, it looks like we have the rest of this year to accumulate shares before they announce anything on the spin off or asset sale front.

Latest article posted 

My latest article, on L.B. Foster, has been posted to Seeking Alpha and can be viewed here, for those who want to follow the discussion in the comments section.