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#22
12-11-2005, 11:14 AM
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Re: Some stuff I bought last week
[ QUOTE ]
Since the value of a share of stock is at the very least highly dependent on future earnings why is an analyst that discusses "forward PE" (i.e. future earnings) a moron? [/ QUOTE ] Typically the analyst is doing it to avoid discussion how expensive the stock is today. You are right, it's that stream of future earnings that determine the stocks value. Typically, you can look at the last five years of earnings and come up with a reasonable idea of what normalized earnings and growth are. But in this case I was being unfair to the analyst, as it's growing so fast that it's history is much less pertinant to the evaluation. But remember, it was my "thirty second evaluation.". I was only trying to find red flags for Kane, not spending hours on whether I wanted to invest in it. [ QUOTE ] If prices drop, it may be faced with a big cash crunch, and the stock could get killed. [/ QUOTE ] This could be said about alot of companies and their products. [/ QUOTE ] It can be said about a lot of companies you should avoid. It can't be said about Coke or Pepsi for example, or Walmart, etc. There are companies that have pricing power, and built in competitive advantages. When a company's future earnings are dependant upon commodity prices, that's pretty much a "no buy" for me. I have no ability to predict price futures. In energy, I'm much more interested in owning pipeline companies at the right price, as my perception is whether gas prices go up or down, they still get paid. This company looks like it's dancing on the razor's edge and has no competitive advantage. Great natural gas prices mean great performance. Bad natural gas prices probably hurt it bad. But if I was to own it, I would sure spend the time to model a worst case scenario and as you pointed out, understand what prices are built into the todays price. 
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#23
12-11-2005, 11:26 AM
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Re: Some stuff I bought last week
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You aren't even trying to value an E&P company which are different from other companies you might be looking at. Asset intensity is a measure of the % of capex used to maintain FLAT production, and is mentioned by some analysts, and XTO ranks well there. A quick and dirty way to figure out how much they spend on maintenance capex is to take the 3-year avg (or the last year, but less sampling data) all-in F&D costs (how much it costs to find and develop reserves) and multiply this by their production last year to get a mainentance capex cost. [/ QUOTE ] This was very interesting, and makes perfect sense. I guess my problem analysing this stock was that the thirty second "mental models" I use for evaluations don't extend well to most energy companies. It's probably because I've pretty much excluded them from research the last few years due to the volatility of energy prices. Thanks for giving me some new perspective.
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#25
12-11-2005, 12:12 PM
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Re: Some stuff I bought last week
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IF TLK MXF AA XTO ARF most of these have come from recommendations from people on www.valueforum.com Particularly bullish on TLK (which is up 4% already) and MXF. [/ QUOTE ] Let's see if I can redeem myself for Kane after doing a crappy job on XTO and offer some useful thoughts. First, why MXF? It's a closed end fund that's not rated very high by Morningstar. Like many closed end funds it trades at a discount which could be good/bad depending upon when you get in. It's expense ratio isn't cheap, but isn't horrible. If you want exposure to the mexican market isn't there an index fund available? That way you don't have to deal with discounts, mgmt fees and potentially bad mgmt decisions. Moving on to AA. Before starting, all I know about Alcoa is that aluminum production is energy price dependant. So I would expect their earnings to be down. Looking at their recent results doesn't really support or deny that theory. Current PE is 19.6, but earnings this year are flat. Revenues have been roughly flat for five years, thought they actually declined for two years and have rebounded about 15% the last two. What's their real trend line? Return on equity is blahh (9.4%). According to MSN, free cash flow the last five years is negative, but that's with two super heavy investment years three and five years ago. The last two years total $1.2B, while reported earnings were $2.2B. This is suspicious, either MSN's database has it wrong or poorly interpreted, or their earnings aren't very high quality. So let's look at their 2004 10k to get a feel for the business. Interestly enough, the 10k mentions they own 8 dams and supply 25% of their own power, buying the rest under long term contracts. That seems to help keep their costs in line. They report their sales numbers have been impacted by regular acquisitions and restructurings. If they have spun off or sold some subsidaries that would explain why sales have been treading water. Looking at the cash flow statement, it appears to match up well with profits. I.e. operating cash flow minus capital expenditures is slightly higher than profits in 2002, way higher in 2003, and slightly lower in 2004. So I'd regard their earnings as pretty 'clean'. The balance sheet is okay. Lots of goodwill from acqusitions, lots of AR and inventory, but $457M in cash too. Most of their debt is long term. They have some prefered stock as well. Overall I don't see any big problems with Alcoa, but I also don't see any reason to buy it. It just seems like a big, decent company at a price that's not super cheap or super expensive. I have to go to breakfast, so that's my "two minute" analysis, which is hopefully at least four times better than my thirty second analysis. The next step would normally be to model the growth of their core businesses and review all their acquisitions/restructuring to try to understand what's really happening. It would take some time to do this, it's a big complicated business so you have to invest a good amount of time to understand it. This is one reason as a individual investor I like to stick to small cap companies. It's also a place where a good analyst (as much as I hate to admit it) has value. I would never invest on their recommendation, but I would read their report carefully and use it as a jumping off place. I.e I'd read the annual reports myself to ensure I don't find something that contradicts the analyst's opinion, and then estimate it's value myself so I don't fall victim to any bias the analyst has. I.e. an analyst might find AA a good buy at a 19 PE because he's required to only compare it against other metals companies, but in your broader universe of stocks you might find much better opportunities. The guys at valueforum probably don't have any limitations, but that still doesn't mean their valuation perspectives are necessarily the same as yours.
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#26
12-12-2005, 04:12 AM
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Re: Some stuff I bought last week
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[ QUOTE ] see: JCOM, CUTR, CWTR. [/ QUOTE ] What about LUFK, USAK, SWN and EPEX? LUFK and USAK are up almost 20% since I bought/recommended them. [/ QUOTE ] Man, I wish I bought these. At the time I didnt have enough money. How much do you usually beat the market for anually. Even your DRIV selection, they killed their earnings quarter - but ended up downgrading for 2006. So you were on the right track there also.
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#27
12-12-2005, 04:52 AM
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Re: Some stuff I bought last week
[ QUOTE ]
[ QUOTE ] Secondly, when an analyst starts talking about "forward PE", I immediately regard them as a retarted moran. [/ QUOTE ] Since the value of a share of stock is at the very least highly dependent on future earnings why is an analyst that discusses "forward PE" (i.e. future earnings) a moron? [/ QUOTE ] While this is not that far from the truth, it is still wrong. Stock prices are based on future free cash flows, not future earnings. This may sound trival to some, but it's not. By the way, the analyst is sort of a moron anyway if he valued the firm based on any type of P/E (I haven't read this report and I don't even know what analyst we're talking about, just so we're clear, this is just a general statement). Why a completely flawed metric has become the gold standard for people that know just enough about finance to hurt themselves, I don't know, but I sure get a kick out of it. If anyone's wondering why I call P/E a "completely flawed metric", you should go compare a bunch of companies in similar businesses with varying debt levels. You will almost always "determine" that the higher levered companies are the most undervalued. P/E uses a firm value and compares it to an equity cash flow; that makes companies with excess debt appear deceptively "cheap".
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#29
12-12-2005, 05:21 PM
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Re: Some stuff I bought last week
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If anyone's wondering why I call P/E a "completely flawed metric", you should go compare a bunch of companies in similar businesses with varying debt levels. You will almost always "determine" that the higher levered companies are the most undervalued. P/E uses a firm value and compares it to an equity cash flow; that makes companies with excess debt appear deceptively "cheap". [/ QUOTE ] Well, the best way to value a company is EV/FCF, wouldn't you agree? But if I use those terms here, half the audience won't understand. So I often use PE and market cap when writing about a stock just to be more easily understood. When I'm doing my own analysis, I don't have a screener that understands FCF or EV, so I use PE and market cap to screen with. Then I have to do the dirty work of calculating EV and FCF by hand for anything that looks interesting. But before I get there I'm using PE as a shortcut until I figure out whether FCF is wildly different than E.
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#30
12-12-2005, 06:10 PM
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Re: Some stuff I bought last week
[ QUOTE ]
[ QUOTE ] [ QUOTE ] Secondly, when an analyst starts talking about "forward PE", I immediately regard them as a retarted moran. [/ QUOTE ] Since the value of a share of stock is at the very least highly dependent on future earnings why is an analyst that discusses "forward PE" (i.e. future earnings) a moron? [/ QUOTE ] While this is not that far from the truth, it is still wrong. Stock prices are based on future free cash flows, not future earnings. This may sound trival to some, but it's not. [/ QUOTE ] We can quibble about what "at the very least highly dependent on" vs. "based on" but to me they do mean something different thus I used "at the very least highly dependent on" vs. "based on." You more or less imply that they're synonomous but they're not in my mind. [ QUOTE ] By the way, the analyst is sort of a moron anyway if he valued the firm based on any type of P/E (I haven't read this report and I don't even know what analyst we're talking about, just so we're clear, this is just a general statement). [/ QUOTE ] I don't agree with this at all. Future earning imply something about future free cash flow if that's how you prefer to value equity. [ QUOTE ] Why a completely flawed metric has become the gold standard for people that know just enough about finance to hurt themselves, I don't know, but I sure get a kick out of it. If anyone's wondering why I call P/E a "completely flawed metric", you should go compare a bunch of companies in similar businesses with varying debt levels. You will almost always "determine" that the higher levered companies are the most undervalued. P/E uses a firm value and compares it to an equity cash flow; that makes companies with excess debt appear deceptively "cheap". [/ QUOTE ] What studies back this up out of curiosity? It should be easy to identify such companies and compile data on investment returns.
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