Intrinsic Val. Share Discussion Threads

[thelongandtheshortandthetall] 14/6/2014 10:43

Hi Guys
Here is a link to a quick fact sheet for Howdens



If you scroll down you will see a graph that shows the growth in revenue and the rise in the number of depots over twenty years.

And here is a snippet from the 2013 annual report.
Chief executive - Matthew Ingle

'A depot breaks even with sales of
around £650,000 per year, so it will
come as no surprise to know that all
our depots are profitable, and some
are very profitable'.

Piedro your numbers don't paint a very good picture I must admit. However when you look at the success they have achieved over twenty years the quality of the business is (IMO) undeniable.
My favourite part is the simplicity of the business and the way they have continued to implement the model with out going off track.
The business is reliant on the housing market and consumer confidence and will make for some upy downy earnings I guess and that is why the CAGRs could be skewed over a 5 or 10 year period.

If anyone is interested in HWDNs here is a link to the 2013 annual report.


Also here is another snippet. I think they will issue a special dividend at some point in the near future.
That is what we are looking for. Businesses that produce excess cash way after all reinvestment in the business has taken place.

'The Board continues to monitor
the cash balances in light of
the Group's future investment
opportunities, expected peak
working capital requirements and
the trading outlook. To the extent
the Group has sustainable levels
of capital in excess of expected
requirements, the Board expects
to return it to shareholders'.

Im not saying HWDNs is perfect but it is sure easier to understand than the BLVN an oil exploration company drilling off the coast of Cameroon.

[sigala] 13/6/2014 19:43

hi tlatsatt and Piedro,

interesting discussion.

I can't offer much more on HWDN than what you have discussed. Its not a share I have done detailed research into as yet. Maybe I will try to have a closer look.

Tlatsatt, I certainly will pass the message on if I have a "lightbulb" moment as you put it, lol!

Actually what I am finding as I keep studying WB is that it is a series of lightbulb moments. It's a case of gradually letting the various points sink in. Whether there will be a huge lightbulb moment at the end I'm not sure!

It feels like a process of getting closer and closer to WB's view. Its a bit like that game we used to play as kids where someone would hide something and then say either hot or cold depending on whether you were getting closer or further away.

I keep trying to go where it is warmer. Even getting part of the way towards WB's understanding is useful I find. It's not like we have to perfect everything before it is useful to us.

What you are writing about ROE and things like the earnings that come from reinvestment already suggests to me that you are thinking along broadly Buffett lines.

Maybe with WB's method it is a bit like peeling back the layers of an onion, gradually we are peeling them back one by one.

I know there are other investment strategies available to study (Joel Greenblatt Ben Graham, ZULU - to name just a few), and maybe I will study them in detail someday. But WB's approach seems to resonate with me, and his results certainly suggest it is powerful when you master it.

I'm keen to keep studying it until I feel I understand it as much as I can. I'm not there yet - needless to say!

I quite like challenges, and at the moment figuring out what WB looks for in his investments is giving me a good brain workout! Hopefully my PF will feel the benefit in the years to come!

regards

[piedro] 13/6/2014 16:23

Re: HWDN

1.- the charts look good in recent years...


[charts from Sharescope]

2.- mathematics
YEAR.......EPS (normal)
2003.... 12.23p
2008.... 09.00p
2013.... 16.12p

CAGR-10yr = 02.8% ... not much of a lt growth share
CAGR-05yr = 12.5% ... perhaps have started a new trend

If I buy at 300p
Return on capital = 16.12 x 100 ÷ 300 = 5.37% pa + 12.5% (if lucky)

Share price estimates
2014 = 300.00 x 5.37% + 12.5% = 300.00 + 16.11 + 02.11 = 318.22p
2015 = 318.22 x 5.37% + 12.5% = 318.22 + 17.09 + 02.14 = 337.45p
etc ...

In conclusion ...
As with most LSE shares there is no long term history of growth thus the risk
My immediate ROC would be 5.37% which is v. poor - ie the share is expensive
Buying at 150p would give me an immediate return of 10.75% + plus the yearly CAGR and that's possibly worth the risk and worth researching the company

That's why I mentioned PFC
Buying now I can still get an 8.9% ROC + a CAGR of 20-30% annual.

AIMHO, BWDIK

[thelongandtheshortandthetall] 13/6/2014 15:00

Hi Piedro

Ive got the Buffettology workbook. That's a good read. lots of simple ten year examples of how Buffett would consider the long term reinvestment of profits etc.

for example
coke earns 33% ROE - then retains 55% of these earnings - then earns 33% on this increased equity - so on and so forth.

If we can find a company that that can 'consistently' earn high returns on an ever increasing equity base then we are in the right place.

I have had a little top up in HWDN today. I would be grateful if you or anyone would run a glance over this company and tell me if I am looking in the right place or not.

-

Sigala

I envy your ability to focus. An natural talent that alludes me. I can see what you are saying about going deeper and deeper into a study of WB and then hoping to shape your view on things from what you learn.
When you have your light bulb moment and the noisy investment blizzard clears to reveal what ever it is?? I'll be keen to know. lol
Only messing about. But I would say that WB does have the ability to look into the barrel of rats I mentioned a while back and choose to climb in or not.

[piedro] 13/6/2014 14:10

I'm not a great fanatic of WB only taking my medicine in small doses, and have only read one book about his ideas ....

'The New Buffettology'

No mention of "Intrinsic Value" as far as I remember, but it does go through the calculations re: return on capital,

Thus I find PFC cheap giving a possibly excellent return on one's investment, whereas ABC is the converse. {cf. discussions on other bb}

[sigala] 12/6/2014 20:45

Tlatsatt,

I think your comments about See's Candies are spot on.

That's very much how I see it too.

What is important to grasp in any of these investments is 'the bigger picture' (to use a cliche). What I mean by that in the case of See's is to see through all the accountancy detail and recognise that it is, as you say an almost perfect money making machine. That's the vital thing to see. All the rest is just detail.

Very little needs to be reinvested in the See's so almost all the profits are available to the owners. And, even better, the business keeps increasing its profits year by year, again from minimal amounts of reinvestment.

I think in investment, perhaps more than any other field I can think of, it's so easy to lose sight of the wood for the trees. But that is where WB is so strong IMHO.

Even the professional money managers seem to get lost in the bewildering variety of information, opinions, theories etc, etc. And they get lost and confused. So when an amazing cash cow like See's comes along they can't even recognise it when they see it. Their heads are so full of information and theories that they end up not being able to see the nose on their face. (I say "they" but I include myself in this as well).

But then someone like WB comes along who can see the actual nature of the business and can easily recognise it for what it is (an amazing cash cow).

So, I always think it's important to maintain this common sense perspective amidst the blizzards of information and theories.

regards

[sigala] 12/6/2014 19:31

Hi tlatsatt,

thanks for the comments - glad you're finding the posts interesting.

Yes - I hope others from the VLG thread will find something interesting here. I guess that's going to be the thing with this new thread - it's probably only going to appeal to those who are particularly interested in WB and his methods.

I feel that I am getting more understanding about WB's methods - there does seem to be a specific system that he uses (he's not using fortune tellers or crystal balls!) and I'm keen to see how close we can get to the nitty gritty of what WB looks for in a business.

But, I'm realising that to gain that understanding, at least for a time one has to be pretty dedicated to studying it. This can seem like too narrow a focus, but it's only from a narrow concentrated focus can you break through to deeper understanding about something.

A lot of the way I have thought about shares and investing has been a bit superficial to be honest. We sort of skate about on the surface, zooming from one opinion to another without ever breaking through to a deeper understanding.

From what I have read of WB he is looking at investment with some deep wisdom he has gained about business. So what he sees, is perhaps not obvious to us and others in the market.

By concentrating for a period just on WB's method then I hope to make my own set of Buffett Goggles.

I enjoy the tone and goodwill of the VLG thread - the contributors there are a credit to ADVFN. I hope the spirit behind this thread will also be apparent.

I get as much out of the free debates as everyone else - we're all learning here - me as much as anyone else. I just though it might be useful to have a place where the free discussions can happen specifically around how WB does what he does.

I value your contributions highly tlatsatt - no need to worry about what you feel you can or can't contribute. Your honesty and humility is a great contribution in itself.

regards

[thelongandtheshortandthetall] 12/6/2014 16:52

Hi Sigala

Great posts by the way.

Trouble with trying to isolate some good WB stuff is there is so much of it.
You could literally fill pages and pages in the header.

I totally agree with you re sees candy.

What an amazing business and as long as they continue to advertise and keep doing what they do how can it go wrong. They paid, I believe $25m dollars for it. Might go check that actually. And have never put more money in. Only used what the business has generated. They have drawn hundreds of millions from it since. That is the perfect money machine example.

We will struggle to remain invested/part owners of companies like that as sooner or later someone comes along and tips over the apple cart.
Can you imagine the average ceo he or she would be trying to expand with huge amounts of gearing, giving out massive special divis when cocoa is cheap then placing more shares when things aren't so good.

Sees is probably where it is because WB and CM are happy to ride the ups and downs instead of permanently chasing the wind.

Talking of chasing the wind and trying to be a hero investor. My small part ownership of GKP is definitely giving the roller coaster ride I deserve lol.

Those poor people in Iraq really cant know what is going on. Considering civilisation virtually started there they are in a right mess now.

-

I am well up concentrating deeper into WB and his methods but it would be a huge shame if the others from VLG didn't get involved and keep posting as you will obviously be leaning further toward this thread as time goes on and that thread may go quiet.
Mainly a shame as I don't have anything offer you that you don't already know esp where WB is concerned but im sure people will gravitate here as time goes on.

Also
We should be aware that WB himself is an example of so many different styles of investing. So often people attribute quotes to WB when in fact they are not his at all. for example Be greedy when others are fearful etc. Is not his and another that springs to mind: buy businesses that and idiot could run because sooner or later an idiot will. that one is from peter lynch.
Im not saying WB claims them as his own. most of the time he states from whom he heard it (probably in person!). My point is that to focus too narrowly on WB is not something WB would do himself. Hope that makes sense.

One thing that I will give absolute credit to WB in helping me is. the circle of competence idea. Wow my circle gets smaller all the time.

[sigala] 11/6/2014 22:47

Hi all,

I've paraphrased a quote from Warren Buffett regarding Intrinsic Value and put it in the thread header. I'm hoping by putting it there it will be useful as a reminder of what we're trying to figure out here.

I've been doing a bit more thinking about what WB is getting at with this idea of Intrinsic Value.

I'm also going through his letters to shareholders to try to find some passages that might throw some light on the subject. I remember a couple of pieces that I read in his letters that I think will be useful, but it is taking a bit of searching to find the quotes again.

regards

[sigala] 09/6/2014 22:26

Now contrast that with the airline business.....

Owning an airline is like owning a giant furnace that keeps requiring more and more money to be shoved in the fire to keep it going.

Airlines are not able to put their prices up as people go elsewhere. So the product is very commoditized. The industry is highly competitive with each operator trying to undercut the others.

And the really bad part about it all, is that vast sums of money must constantly be ploughed into the operation just to keep it going. Its very hard to extract any cash from the business that isn't needed as capex or opex.

Planes are very expensive items that need lots of very expensive maintenance and burn very expensive fuel and are flown by very expensive staff, etc, etc, etc.
The margins can be wafer thin.

Frequently the finances get out of kilter and airlines go bust on a regular basis.

So, the experience of owning an airline is completely different to owning a business like See's Candies. Rather than a fountain flowing out cash, an airline owner must feel like he owns a pit that he keeps throwing money into, never to be seen again.

[sigala] 09/6/2014 22:18

Just to put a bit more detail on intrinsic value.....

Think about WB's company See's Candies.

This company sells high quality chocolates - luxury chocolates really.

They have a very high reputation for quality and people are prepared to pay a high price for their chocolates. They are seen as a special occasion type purchase where people are not bothered about price.

The profit margin at See's Candies is very strong because of the premium price they can command.

The company requires very low levels of capex investment each year, so almost all the profit each year is free to be removed from the business and distributed to the owner.

See's have a strong record of growing their profits year after year. They are able to increase prices without harming sales growth.

Most of See's sales are for cash with the stock made freshly so little is stored. So they have great cash generation and very low working capital requirements

So See's is a wonderful business to own. WB's experience of owning it must feel like owning a fountain that showers money rather than water. Year after year See's distributes almost all its annual profit to him and yet the business keeps growing its sales and profits year after year.

Its a cash machine for him.

[sigala] 09/6/2014 22:03

Hi all,

just returning to this idea of "Intrinsic Value".....I think its helpful to approach things gradually.

The detail of Discounted Cash Flow can get a bit bewildering at first. Maybe if we zoom out again and try and see the bigger picture....

With Intrinsic Value isn't Buffett really talking about a company's ability to make profits that can be distibuted to the owners?

At the heart of it, its as simple as that, I think.

So, think about that for a moment......think of a couple of different companies and then think about their ability to make profits that can be distributed.

If we think like this about the different fortunes of various companies then we are thinking about the intrinsic value of the companies.

OK, we are not able to measure it precisely yet, but at least we can visualise what WB is talking about when he refers to Intrinsic Value.

We can look at calculations and DCF later perhaps, but for now I think its helpful to just get an impression in our minds about what WB is refering to.

regards

[sigala] 08/6/2014 20:06

article about trackers:

[sigala] 08/6/2014 19:59

If memory serves, I think WB is not at all keen on long term government bonds (say 30 year notes) because their yield is not high enough even to counteract the effects of inflation. It's surprising, but when he crunched the numbers on them he saw that by holding them for the full term his investment would be down in real terms.

Needless to say this is not a good investment result at all.

Inflation is always there trying to eat away at our capital, so even an investment that compounds at 2 or 3 % p.a is only standing still in real terms (assuming inflation stays in that range).

Setting a higher goal for ourselves, then we should look at the long term returns of a basic tracker fund. Its said that the total share holder return of the S&P is 11% p.a. over the long term.

Again, if our investing activity cannot exceed the return we would get from a tracker fund, then logically we should just invest in the tracker and save ourselves all the bother of researching shares.

So, our investing activity needs to start making decent returns if there is to be any point to it, financially.

Of course there are other reasons people invest in the stock market, for the interest value, as a hobby etc. And there's nothing wrong worth that if they have the cash to spare.

But if our investing activity is going to make sense from a financial point of view then we need to get to a point where we are at the least beating the long term performance of a low cost tracker fund, I would say.

regards

[sigala] 08/6/2014 18:32

Thanks Loftus 16,

that is a book I really need to read as I've heard its excellent.

Yes, that definition seems to get to the heart of the matter.

What I would like to do is look at a bond and calculate an Intrinsic Value for that as a starting point.

A bond is easier because (hopefully) the future cash flows to the investor are stable and certain. We can easily see what a bond is going to pay us if we invest in it. It's a simple calculation.

We can then compare this stream of guaranteed earnings that will come to us in the future and then work out what value the right to receive those earnings should be priced at in the current moment.

Mainly we are thinking about inflation here aren't we?

We need to ensure that the bond will comfortably pay us more over the years than inflation will take away.

regards

[sigala] 08/6/2014 18:23

WB explains what he means by Intrinsic Value in the shareholder's Owners Manual available as a pdf from berkshirehathaway.com.

The discussion about Intrinsic Value starts on page 4 of the manual and I remember it being very good - I need to re-read it as it was a while ago that I first read it.

regards

[loftus16] 08/6/2014 18:19

An excellent read is a book entitled "The Essays of Warren Buffett: Lessons for Corporate America".

From the book's concept glossary: "Intrinsic Value. A hard-to-calculate but crucial measure of business value equal to the discounted value of the present value of the cash that can be taken out of the business during its remaining life".

[sigala] 08/6/2014 18:11

And thanks for the links - I'll check them out.

regards

[sigala] 08/6/2014 18:10

Hi tlatsatt + eeza,

good to hear from you - thanks for dropping by!

Yes, I named the thread "Intrinsic Value" as this seems to be the concept that is right at the heart of Buffett's investing approach.

I think it is a fairly simple idea in principle, but it is difficult to measure in practice.

It seems to me that what WB is getting at is that a business has a real or intrinsic value, but the market valuation may differ wildly from that true intrinsic value.

For example, the intrinsic value of Berkshire Hathaway was much less than the $19 per share WB bought it for, because it was a struggling business in a dying industry (unfortunately for WB he hadn't grasped that when he bought it). On the other hand the price he paid for the Washington Post was way below it's intrinsic value as became apparent with the earnings it has repaid him with.

Weighing up a company's intrinsic value seems to be basically what investment comes down to, when all's said and done. It's the holy grail really. If we can find a reliable way to at least get a ball park figure for Intrinsic Value then we have something to compare against the market price we are being offered.

WB says that it's not possible to measure intrinsic value precisely, but it is possible to see when the market valuation is way off.

I'll try to write a bit more later

[thelongandtheshortandthetall] 08/6/2014 14:52

Cheers eeza

I'll check them out.

-

I must admit I am struggling to understand it.
If anyone can give me a live example with a company trading today that would be most helpful!

Thanks in advance

[eeza] 08/6/2014 13:33

Here is Wiki's explanation.




And Calculator + explanation.

[thelongandtheshortandthetall] 08/6/2014 11:52

Hi Sigala

Here is a Buffett speech to students from 2001. I highly recommend this video to anyone interested in Buffett and his way of thinking. I have watched it many times. It is filled with reals gems and each time I watch it I learn something new. Sometimes even the best and most obvious advice must be repeated until it finally starts sink in.



As you have called this thread Intrinsic Value I have highlighted the following parts of the speech. I hope you and other find it useful.

At 20.00 Buffett is asked about How he calculates Intrinsic value and at 23.35 he shares his formula. He answers 'discounted present value future cash'.

I for one would love to be able to understand this properly and make the necessary calculations. So if anyone can explain it to me I would be very grateful.

Kind regards

Edit

this is a great video too