Portfolio Update And Links From Old School Value, Charlie Munger, Greenbackd, and PsychCentral

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.

To the links.

Two links from Old School Value; the first one is How The Cash Conversion Cycle Can Help You Pick Winners and Losers.  The second gives you 52 Techniques to Spot Fraud.  Both contain extremely important lessons.

How Reading Lights Up Your Mind is from Psych Central about the effects reading has on your brain, very fascinating.

Charlie Munger on Google’s Moat-It’s Huge…Probably Widest He’s Ever Seen is another great post from Greg Speicher’s blog.

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.

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Valuations and Brief Thoughts About Vodafone

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 done using 2012 10K.

Asset Reproduction Valuation

Assets: Book Value: Reproduction Value:
Current Assets
Cash and Cash Equivalents 7138 7138
Short Term Investments 1323 1323
Accounts Receivable (Net) 3885 3302
Inventories 486 243
Prepaid Expenses 3702 1851
Other Current Assets 3491 1746
Total Current Assets 20025 15603
PP&E Net 18655 9328
Equity and Other Investments 35899 17950
Goodwill 38350 15340
Intangible Assets 21164 8466
Deferred Income Taxes 1970 1000
Other Long Term Assets 3482 1741
Total Assets 139545 69427

Number of shares are 5096

Reproduction Value:

  • 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=

  • 7,138+1,323-24,025=-15,564
  • -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:

  • 5X11,187=55,935+8,461=64,396
  • 8X11,187=89,496+8,461=97,957
  • 11X11,187=123,057+8,461=131,518
  • 14X11,187=156,618+8,461=165,079
  • 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

Numbers:
Revenue: 46417
Multiplied By:
Average 6 year EBIT %: 15.87%
Equals:
Estimated EBIT of: 7366.4
Multiplied By:
Assumed Fair Value Multiple of EBIT: 5X
Equals:
Estimated Fair Enterprise Value of VOD: 36832
Plus:
Cash, Cash Equivalents, and Short Term Investments: 8461
Minus:
Total Debt: 34890
Equals:
Estimated Fair Value of Common Equity: 10336
Divided By:
Number of Shares: 5096
Equals: 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

Numbers:
Book Value: 126431.8
Minus:
Intangibles: 23806
Equals:
Tangible Book Value: 102625.8
Multiplied By:
Industry P/B: 1.7
Equals:
Industry Multiple Implied Fair Value: 174463.8
Multiplied By:
Assumed Multiple as a Percentage of Industry Multiple: 65%
Equals:
Estimated Fair Value of Common Equity: 113401.5
Divided By:
Number of Shares: 5096
Equals: 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 an 125% multiple was $68.49 per share.

FCF and Cash Flow Valuation

Numbers
Operating Cash Flow: 12755
Minus:
Capital Expenditures: 7852
Equals:
Free Cash Flow: 4903
Divided By:
Industry Median FCF Yield: 6.17%
Equals:
Industry FCF Yield Implied Fair Value: 79465
Multiplied By:
Assumed Required FCF Yield As A % of Industry FCF Yield: 65%
Equals:
Estimated Fair Value of Common Equity of VOD: 51652.25
Divided By:
Number of Shares: 5096
Equals: 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.

Vodafone dividend from Verizon, Microsoft buying Activision, and what I am doing now

Vodafone and the possible dividend from Verizon

This is a fantastic article about the potential special dividend Vodafone might be getting from Verizon.  The article talks about the relationship between the two companies, how big the dividend could be, whether it could become a regular thing, and whether there could be a possible Vodafone/Verizon merger or if Verizon could buy out Vodafone’s 45% stake in them.

What if Microsoft Bought Activision Blizzard?

This article talks about some scenarios that could possibly happen in the video game industry if Microsoft were to buy Activision Blizzard.

What I am doing now

I am currently reading Valuation: Measuring and Managing the Value of Companies, one of the free books that Csinvesting put on his site, so it will be a few more days until I will be putting up some more valuations.

I have also been learning and applying some of the different valuation techniques from the Manual of Ideas to some of the stocks I have already written about, and will post some of them after I finish reading Valuation.

I can’t wait to start diving into some more annual reports and finding another company to evaluate, as this book is so far kind of a let down. Valuation is a good book so far, about a quarter of the way through it, but a lot of the stuff I have already learned from Damodaran’s free valuation course, Bruce Greenwald’s books, and from various other books I have read.  So far up to where I have read in the book, it is almost exclusively talking about how to do DCF valuations, which I don’t do, with a little bit of strategy mixed in, and how companies with high ROIC are better investments than lower ROIC companies.

Until next time.

Minority Report, Batman tech, and a few good articles on stocks I have written about

Minority Report and Batman Tech

This first article is kind of scary and the people who developed it must not have watched Minority Report.  Clip is 10 minutes.

There is a new program that cops are using under the name PredPol, that is supposed to predict crime.

Very scary in my opinion due to where it could lead.  It will only be a matter of time until something exactly like what was used in Minority Report is being used.

The article also talks about other tech that cops could be using in the near future.  The one that caught my eye is “A ShotSpotter system uses microphones positioned around a city to detect gunshots and triangulate their location within 40 to 50 feet. A human at ShotSpotter’s headquarters confirms if it’s a gunshot and alerts the police. The system starts at $40,000 for every square mile of coverage.”  Sounds like this from Batman.  The clip is just over a minute long and I think they should heed Fox’s words from the movie.

Stock articles and valuations on stocks I own from others.

The first stock article talks about how Vodafone might be getting another big dividend from Verizon and what Vodafone might do if they get the dividend.

The second stock article goes over three value stocks and talks about their growth characteristics.  One of the stocks he talks about is Dole.  While I generally agree with his assessment that Dole could be worth upwards of $16 if there is some kind of spin off or asset sale, I think he is downplaying the risk from the debt which I talked about in my article on Dole.

He also talks about Forest Oil and NVR.  Both look like opportunities that should be researched.  Here is an amazing analysis on NVR from 2001 that I originally got from csinvesting’s site.  I also recommend reading the comments section here for more on NVR from 2001.  Read his analysis carefully and the discussion in the comments section.  The way he thinks about things, his reasonings for buying, and how he researches are to be learned from.

The third article talks about Fresh Del Monte, Dole, and Chiquita.  In my opinion this is a very good analysis and includes some if the reasons I will look to buy FDP when the stock price drops.  Here is my article comparing the three companies.