Forum Archive Index - October 2000

["Philip Robinson" <robph639@student.otago.ac.nz>]

Brain I have done all the figures for BCH and attempted to forecast equity and then per share equity and multiple by pe etc just as it says in Chapters 36 and 37 of Buffetology and found I had some problems with the forecasting of equity growth against the actual growth in equity when "backtested".

I asked at the time whether anyone was doing the calculations the Buffetology way but no one spoke up. There seems to be a lot of the qualitative stuff being looked at and not much quantitative. Are you trying to forecast from Buffetology?

I have to agree with you about WAM, and I really like MHI, but it seems no one wants to know about the merry jeweller. I have also tried to forecast MHI using the Buffetology way and had good success. MHI has good ROEs and consistent growth. I also have a spreadsheet on MHI too if anyone wants it.

Would be interested to hear your comments on the Buffetology analysis section.

 

Phil

----- Original Message -----

From: Brian Brakenridge

To: sharechat@sharechat.co.nz

Sent: Sunday, October 08, 2000 11:17 AM

Subject: [sharechat] Re: Buffett & NZ Shares

Sorry, I feel a bit like Don Quiotte (sp?) butting into this pertinent debate on the NZ economy.

 

Before I continue, my contributions on this topic are based entirely on what I have gleaned from a significant amount of reading about Buffett et al. and I am eager for those more experienced to correct and enlighten me further.

 

For those folk following the Buffett thread I believe it's important to remember that the lists of criteria are for Buffett, shall we say, the "qualitative" part of the analysis and may make up 50% of the picture. The "quantitative" part, which relies heavily on the former is the real nuts 'n bolts of what Buffetts principles are based on and what prompts him into pushing the buy button.

 

Buffett uses his qualitative analysis to help him predict the future earning potential of a company to the greatest degree of certainty. He then calculates what that earning stream is worth today and whether he can buy that future earning at a discount.

 

So when you are looking at the qualitative analysis, remember what you are looking for in that analysis is what it will individually and collectively tell you about not only the economic stability of the company today but also it's long term fundamentals.

 

With this in mind then we should maybe prioritize the criteria listed in previous postings. For me one of the most valuable indicators is be found very quickly in the wonderful Datex Year Book and in particular the five year financial summary  (take it easy you ramp busters, I don't own shares in this Datex company and I'm not married to the CFO's fifth cousin).

 

I like to look at the "Financial Summary" section for each company and without even touching a calculator cast my eyes over the five year trends for Net Profit, EPS and Return on Equity. Then I quickly pick up the calculator and equate the Net Margin ( net profit / revenue) for each of the periods provided. For you MBA types this is simple stuff, well it has to be 'cos my math ability is very simple. But it does provide an immediate picture of a whole bunch of indicators. For example profit margin tells you how effectively management has been controlling expenditure over a long period.

 

So looking at BCH and SAN for example:

                       

BCH: 99, 98, 97, 96, 95

Net Profit: 13453, 11109, 9013, 7030, 4604

Net Margin(%): 26, 25.7, 25, 22, 17

EPS(c): 17.6, 14.5, 11.8, 9.2, 6.5

ROE(%): 46.3, 39.5, 33, 26.3, 17.6

 

Sanford (SAN):

NP: 53868, 25620, 19019, 25044, 29152

NM: 15, 8, 6, 7, 8 

EPS: 55.2, 24.1, 18.2, 23.5, 28.7

ROE: 15.5, 10.6, 7.6, 10, 13.2

 

Now it may well be that SAN is getting on top of things and that the last two years have shown an improvement but the trends and consistency are so much stronger for BCH.

 

The next step is to look at the other criteria on the list and see how these two companies perform. e.g.. how much capex is required by both companies to keep performing and to stay competitive?

 

Cheers, Brian

 

PS I think WAM is worth considering for the list.