Forum Archive Index - November 2003

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Macdunk,

>
>Sorry to contradict you snoopy 
>

Hey, don't apologise, go right ahead :-).   This is one of the things that 
makes this forum interesting.  People with differing views.

>
>but you are missing a few very
>important points In the macdunk strategy. Lets take one of your 
shares
>WRI for Instance.   I will round the numbers slightly to keep the
>mathematics understandable. Todays price = $1.50    PE 10.94  Yld
>11.44.   That Is todays numbers the point you miss Is lets say you
>bought them four years ago at 75c which means that your PE Is half,
>and your yield double relative to what to today's figures show.
>

I take your point.   However, WRI is a little different from AIA.  WRI 
was a real market dog at one point.  AIA has never been that.   WRI is 
on a P/E of 11.  AIA is on a  P/E of 26.   That amounts to a big 
difference in the earnings expectations of each share.  

Nevertheless if you look at the WRI numbers you have provided in 
isolation, they illustrate your point.  It is another way of looking at the 
compounding effect of earnings over time.

One of Warren Buffett's most often repeated quotes is that:

"It is far better to buy a wonderful company at a fair price , than a fair 
company at a wonderful price."

The question I am asking you is not 
"Is AIA a wonderful company?" (the answer to that is 'yes', no doubt 
about it). 
The question is, 
"Is $6.60 a fair price for AIA, given the upside risk and the downside 
risk?"

>          
>In my original post I likened It to buying a house.    I stated that
>It Is better to pay slightly more than what It Is worth today to get
>what you want, because next year the price Is right, and the year
>after you have a bargain.        
>

Yes, except that house prices do not go up evenly every year.  House 
prices could be flat for five years.   In that scenario, having your money 
in a house is a lost opportunity cost.

>
>Lets keep AIA figures confined to
>2003 and do some more sums.    On the 15th of Jan 2003 aia was 
$5.46  
>today they are $6 61 with a PE of 26.66 and a yld of 4.97 but hey If I
>bought In Jan at $5.46 I must recalculate My PE Is lower and my yld
>higher.  My strategy Is to find companies that are Increasing their
>earning potential, and dump the ones that have ended their run.   
>

I think your strategy is fundamentally sound.   However, I see a couple 
of hooks in the execution of it.  Remember when the WRI earnings fell 
thios year, yet the share price still went up?    Well the reverse effect is 
possible too.   AIA earnings might go up, but the share price could fall.

The hook I see in your strategy is that if the AIA share price was $4 or 
$10 at the start of the year your startegy wouldn't change.    Because 
AIA is on a 'growth path' you would buy in regardless of the share 
price.   Regardless of how well the underlying business is actually 
doing, you seem to regard $4, $5.40 or $10 as equally valid entry 
prices as long as an uptrend in business outlook is intact.

Yet it is obvious to me that buying in at $4 would be far less risky than 
buying in at $5.40.  You claim you will be able to 'get out' at any sign of 
trouble.  But in my experience high P/E shares can fall very hard very 
fast.

I suspect that because of all the new airlines coming into Auckland a 
PE of around 26 can be justified for now, given the outlook for the 
coming year.   However, I don't think you have explained why a P/E of 
26 can be justified in FY2005 when the historic average PE for this 
share is 'only' around 20.


>
>You are right In one respect,
>  This share wont grow at 20pc pa forever, but
> for the moment and the next couple of years It will.      
>

That is a statement of faith.  Actual earnings per share have risen 
2.6%, 2.5%, 21.1%, 15.4%, 20.3% and 30% since the company was 
made public.  But these earnings incorporate two rounds of significant 
property valuations.

The only way I can see your prediction coming true is if further 
significant property revaluations happen in the next two years.

An AIA share price of $8 in a years time would mean the company is 
priced to perfection.  I'm not saying it can't happen.   But I would be 
balancing the risk of that against the risk that the share price could 
revert to an historic mean PEof 20.   Such a reversion would see the 
share price fall to around $5 with no change in earnings.   I'm not 
saying that this will happen. I am saying that the potential for gains do 
not outweigh the potential losses in my eyes.

Of couse if my entry price was $5.40 then a share price plunge to $5 
would not faze me too much.    I am sure that most long term holders of 
AIA would be happy to hold at those prices.   But buying in today at 
$6.60 is another matter.

>
>The PE means
>nothing to me or the yield all I look for Is a well run company that
>is Increasing Its profits at a faster than normal rate 
>

A P/E of 26 is not just a number.  A P/E of 26 does mean:
"a well run company that is increasing its profits at a faster than normal 
rate." 

>  
>  All calculations must be done at the buy In price, 
>

I agree.   But there is a significant difference between a buy price of 
$5.40 and $6.60.

SNOOPY

discl: no AIA shares held


--
Message sent by Snoopy 
on Pegasus Mail version 4.02
----------------------------------
"You can tell me I'm wrong twice, 
but that still only makes me wrong once."


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