Friday, 18 March 2011

How does the model work on more well known stocks?

Note that I do not invest in these types of companies as I do not believe that they provide sufficient value or protection of purchasing power during this phase in the cycle. Since we face relative global stagflation and that it is hitting us rapidly, I continue to focus on undervalued businesses that operate in both oil and gas as well as gold miners. At this stage, I do not see my viewpoint changing for some years to come.

However, I thought I'd share how my model works on well-known companies.

CocaCola (KO)

Coke has a rising intrinsic value of around 9%pa. If you like an investment which has this sort of growth profile, it is better than cash or bonds. 

It does not scream value to me. Solid cash flow, as is expected. The only concern that I have is the growing use of debt finance in recent years. I'd expect that this is due to the availability of cheap debt, however I'd prefer no debt if it isn't necessary - especially if borrowing rates spike in the near future. I suspect that it has been done as it has been a cheaper form of finance than the issuance of additional shares.

Apple (AAPL)

 As beautiful as it's devices are, Apple as an investment is no less amazing. Growing intrinsic value with each year, a four-fold increase in value since 2008, minimal debt, strong and growing cash flow and earnings.

It is the sort of company that I look for as a value investor. With a 20% margin of safety and a 12%pa required return, Apple looks great.

Unfortunately the sector has too much risk for me on the macro view.

Netflix (NFLX)

While Netflix has had strong increases in value over the past few years, the price has run too hard and too fast and I'd suggest is likely now overpriced to intrinsic value.

The level of debt would concern me greatly as an investor and it appears that they are suffering from a gradual cash flow squeeze. This is potentially quite dangerous for a quickly growing company.

Earnings per share growth looks almost parabolic, and I'd be wary that earnings expectations can be satisfied. This is a company that I'd quickly skip past as an investment opportunity.

Kraft Foods (KFT)

The share price in Kraft hasn't gone anywhere for a long time. I'm not surprised as you can see from the intrinsic value from 2003 until 2009 (please excuse the bug in my chart dates in 2003/04). It looks as though it may have turned a corner and value in picking up.

However, I'm immediately concerned with the unstable cash flow and significant debt levels. Kraft still looks to be somewhat overpriced and in either case, it does not look like value to me.


A solid company, 9% required return, gradually declining cash flow, low return on equity, intrinsic value hasn't gone anywhere for years. 

This is a skip for me.

Johnson & Johnson (JNJ)

A decent margin of safety here at 25%. Johnson & Johnson has been gradually increasing value. Over the recent years things have not been as good - growth has stalled. I'd be concerned with the fact that as shareholder's equity rises, there is little growth in earnings per share. This means that return on incremental capital is probably minimal.

Stable cash flow, reduced shares outstanding, things aren't 'too bad'. No major concerns here except that earnings look to have peaked. Although there is a reasonable margin of safety here, I'm not sure that earnings expectations will be met.

Microsoft Corp (MSFT)

It may be somewhat disliked, unloved, uncertain in it's future technological application, however Microsoft shows great value. Significant growth in underlying value seems to have been overlooked by the market. Growing earnings, good cash flow and little debt, reduction in outstanding shares, this company has been well-managed from a structural point of view.

I'm not going to even think about the future prospects, however Microsoft does fit the bill. A 61% margin of safety provides incentive for investment those investors interested in this area. Again, it doesn't fit my personal investment criteria at present.

1 comment:

  1. Coke is a great brand and an excellent company Great stock selection.