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The way that Buffetology advocates is
determine the average ROE that the company has, then determine the average
growth in per share equity and then forecast a per share equity value for the
company in 5 years time and then times that by ROE to get EPS, then times by PE
to get price, then use sadi financial calculator* to assess the return on this
price gives, then plug in 15% from the projected per share equity and ROE
to work out with calculator to the price one should buy at.
Well if you followed that I will be impressed, but
you get the picture, the inherent problem with using this to value companies
like Baycorp is that for example the Equity when from 29.4m to 60.9m from 99 to
the 2000 year and this blows out of the water all average increase in per share
equity calculations and also how sure can on be of a continued average ROE of
high forties and a EPS growth of 20+%. And then when it comes to the final
calculation, how do you pick a PE for Baycorp, it is very difficult, and I must
say impossible for me to do this for BCH as I am not a security analyst ( But I
am reading Graham: Security Analysis). And then they go and place 4.6m share
which is good because they don't have to borrow the money, but they only have
about 80m share and with exercise of options they are starting to dilute the
shares a little.
So I think we are left doing calculations like you
have done Brian with EPS and hoping that the growth will hold up.
Well I didn't mean for MHI to make the list but if
it has been put there thats fine, what do people think of MON as a candidate for
the list, expanding operation, good brands worldwide exposure, currency winner,
but it only has 10 or so percent ROE and sluggish EPS growth, but corbans will
change the terrain a little I think.
Phil
Sent: Sunday, October 08, 2000 4:14
PM
Subject: Re: Re: [sharechat] Re: Buffett
Another consideration which I'll throw into
the pot for a stir is that Buffett, Fisher, Templeton etc all advocate a very
concentrated portfolio. Now this goes against everything they would have
taught you in "Personal Finance 101" and will make all the generic and
conformist financial advisors out there hyperventilate and purse their lips
and say "tut tut" but, I think we want to limit our list to 3 and maybe 4
companies. The more you select the more average you are going to be, ask the
vast majority of fund managers out there, most of whom struggle to be even
average, (we'll save that topic for another day).
Another Buffett quote goes roughly "when every
kid gets out of school they should be given a ticket with 20 clips on it and
every time they make an investment decision you use up one clip." This ensures
that you research your companies thoroughly and limits the number of times you
make an investment decision based on a hot tip the taxi driver gave
you.
Phil: I'm at the same stage as you and while I understand
the logic behind what is being explained, putting it into practice is a little
more difficult. As any investment banker will tell you there are many
different ways to value a company. I would also be very interested in hearing
from anyone who uses this method, i.e. calculates the earnings of a company 5
years out then discounts it back to present value using a discount rate, in
Buffetts case 15%. In other words the figure he ends up with tells him what he
will have to pay for a company to get a 15% compounding return on investment 5
and preferably 10 years down the track. And, this is where the discipline
comes in, once he has identified a company he really likes and calculated what
price he has to pay, will sit and wait until the market, for whatever reason
decides to discount that stock.
I'll put my.....on the table so to speak and
have a go at calculating BCH using this method. I'm pretty sure it's wrong but
I'll never learn if I don't ask. Here goes. Incidentally I've got a financial
calculator which I'd be lost without because I think I missed that particular
lesson at school when the told us about algebra.
BCH had (weighted) EPS this year of close
enough to 21c. Over the past 5 years this figure has been climbing at a rate
of 23% annually. So lets say we are happy with the qualitative aspects of the
company and are confident that the company will continue to perform at 23% for
the next 5 years. The EPS will grow to close to 60c. Now, and this is the bit
I am slightly hazy on Phil, if I discount this figure using 15% as my target,
I end up with a present value of EPS at 30c. Now, do I multiply that by todays
PE which I think is 55. This will give me a price of about $16.50. But I think
that the PE is way to high. So if I use a more realistic figure of 40 I get a
price of $12 or at 30 I get $9. Or the average NZSE PE is about 16 which will
give a price of $4.80.
Now folks at this point I'll sit back and ask
for my work to be assessed. If there is deathly silence at the other end I'll
know it's time to move on but I am sure that there will be someone out there
who can help and I agree with Phil, that if we are going to continue on with
this train of thought we need to get our hands dirty.
Cheers, Brian
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