Value Investing

jamesmith

I feel bad to myself for the lack of posting recently...partly because of busy work schedule, and partly because I didn't have a good understanding of companies I am looking at. I will try to share as many useful information as possible. By the way, if anyone is interested in becoming a 版主 for Value Investing Club, please let me know. It would be nice have more people posting and sharing views.

I found a very interesting KO 1988 annual report.
One of Buffett's most successful investment is Coca Cola. He started buying at 1988. If we put ourselves in Buffett's position at 1988, we just got KO's 1988 Annual Report: http://www.scribd.com/doc/34149986/KO-1988
Will we make the same decision and buy KO?

nirvanawang

I have been browsing this post for a while. I am still learning value investing. I learned a lot from James' post. This is such a great sub-board.

To contribute my part, I am looking at JOY recently. This is an equipment company selling equipment to coal mining industry. The stock is under pressure recently.

1) the company has higher margin than its peer. 33% vs 26% (CAT) So there are questions whether this is sustainable

2) the company bought a Chinese company IMM. There were doubts about accounting of IMM due to the accounting problem for the Chinese company CAT bought. But that problem is eliminated at the last earning call

3) mostly coal mining is a cycle business. And because of low gas price, the industry is under pressure.

4) The CEO just retired. Stock hasn't respond to it yet. Not sure it's positive or negative. Recent earning shows underground equipment is declining but the surface equipment is increasing. But the successor is vice president of underground mining.

I did the below value calculations:

Use ROE  Assumption a) The company's ROE is in decline recently so let's assume ROE will decline at current rate (this is extremely worst case assumption since ROE won't deteriorate all the way) b) Use 8% discount rate, this is arbitrary. c) the payout ratio will stay at 9.8%; d) in 10 years, the P/E will be the average P/E of last 5 years. This gives company value at around 69.




Any advice about the company is greatly appreciated.

jamesmith

nirvanawang 发表于 2013-3-14 11:47 PM
I have been browsing this post for a while. I am still learning value investing. I learned a lot fro ...

Thanks for sharing! Please feel free to discuss or share thoughts or stocks here.
It is interesting that coal usage is related to Natural gas price. If gas price keeps the up momentum, it would be good for coal.
They also sell equipments for iron ore and copper mining, and mentioned demand seem bottomed out and picking up steam (from management discussion section).  

I don't know much about mining companies, did a quick search on wiki. It seems like
it seems that surface mining is for coal only:  http://en.wikipedia.org/wiki/Surface_mining

and underground mining has hard rock (iron, copper...etc): http://en.wikipedia.org/wiki/Underground_mining_%28hard_rock%29
and soft rock (coal): http://en.wikipedia.org/wiki/Underground_mining_%28soft_rock%29

jamesmith

nirvanawang 发表于 2013-3-14 11:47 PM
I have been browsing this post for a while. I am still learning value investing. I learned a lot fro ...

Sales by region for JOY from 2012 annual report : http://investors.joyglobal.com/financials.cfm

jamesmith

the current price drop for Oracle looks interesting, I am thinking about starting a position in ORCL. Over the years mangement at Oracle has done job consistently improving revenue, earning by making smart acquisitions. They are also repaying investor by dividend  and buybacks. The $10B buyback in one year is very impressive!  
From the earnings transcript: "So over the last 12 months, we have repurchased nearly 350 million shares for a total value of $10.6 billion."
That's roughly $30.30 per share, still below current price.

Coach also looks attractive after a brief look. It has the brand name, 23.46% profit margin for last quarter. 53.18% ROE, 33.63% ROA. Dividend increase over the last five year looks good, low debt to equity.  

I am gonna look into them more before making the move.

befriend

nirvanawang

jamesmith 发表于 2013-3-21 12:15 PM
Sales by region for JOY from 2012 annual report : http://investors.joyglobal.com/financials.cfm

...

james, could you share a little bit what we can learn from this table?



Thanks

jamesmith

nirvanawang 发表于 2013-3-23 12:47 AM
james, could you share a little bit what we can learn from this table?

  

I am just gathering info and learn more about the company. JOY is in a cyclical business, effect by many things.
An excerpt from their previous 10K :  

Our business, in particular our original equipment manufacturing business, is cyclical in nature. The cyclicality of Joy’s and CCC’s original equipment sales is driven primarily by commodity prices, product life cycles, competitive pressures, and other economic factors affecting the mining industry such as company consolidation.

......

Over two-thirds of our revenues come from our coal-mining customers. Many of these customers supply coal as fuel for the production of electricity in the United States and other countries.

......

If a more economical and/or lower greenhouse gas emitting form of electricity generation is discovered or developed or if one of more current alternative sources of energy such as nuclear, solar, natural gas or wind power becomes more widely accepted or cost effective, the demand for our mining equipment could be adversely affected.

source: http://www.wikinvest.com/stock/J ... 0-K/2012/F106224901

1) Large part of JOY's revenue related to COAL and within United States. The EIA website is a extremely useful source of info for energy usage.
We were in a down cycle that's why share prices suffered. Business is weak and JOY management estimated 10% to 20% decrease of customer budgets.


source: http://www.eia.gov/todayinenergy/detail.cfm?id=8450
Large % of Coal is used to generate electricity, this is electricity power source from 2007 to Aug 2012 (newest I can find so far :( wish we have data for 2013, because Natural gas price went up alot)
Natural price went up a lot recently, this will help Coal usage. US exporting Coal to developing countries, this also help. In Earning report, managements discussion, they mentioned things are bottoming out in the US and expected things to get better in later half of 2013.

2) Coal usage also effected by China's growth

http://www.eia.gov/todayinenergy/detail.cfm?id=9751
I think China is not a huge source of revenue for JOY but it is an area of where growth will come from.

3) I am no expert at energy and mining equipment field, but from what I found, I believe JOY has good management compared to its competitors. It is able to cut cost and slim down in down cycles and maintain profitability.

4) In the long long run, coal usage will go down because it is very bad for environment, this might be trouble for JOY.
But in next few years, Coal power generation is not going anywhere. It is still the most cost effective way to generate power.

It is interesting that buying JOY shares is similar to betting Natural gas price going up

开小差

jamesmith 发表于 2013-3-27 01:48 PM
I am just gathering info and learn more about the company. JOY is in a cyclical business, ef ...

james, thx for sharing, this is an interesting thread, i learn alot from this post, i will come by more often,  i have some ANR which is coal stock, and i hesitate how to trade it.

nirvanawang

jamesmith 发表于 2013-3-27 01:48 PM
I am just gathering info and learn more about the company. JOY is in a cyclical business, ef ...

Thanks a lot, James! This is very inspiring!


The EIA data might shed some light on the sales growth of JOY. In the past 5 years, sales grow at 16% despite coal consumption decrease 3-5% every year.

Assume sales grow at 8-10% per year in the next 10 years. The stock looks undervalued. But the question will be: will coal consumption decrease at this rate or it will speed up?

Another factor is: will natural gas price continue dropping?

It seems that the management in this industry all saw the growth of China. I think that's why CAT recklessly bought a chinese equipment company with accounting problems. JOY bought a similar company but it says they won't report that company separately from next quarter. So we won't see what's the China growth affect the whole company. But so far so good.

JOY plan to move some of the manufacturing from Australia to China. So they might be able to keep that profit margin for a while.

I bought some JOY last week for maybe 1-2 year time frame. I am thinking a couple of factor might trig the stock. 1) coal consumption doesn't drop as much as expect; 2) natural gas price increase; 3) JOY keep its profit margin.

Just my 2 cents.

jamesmith

Finally IBM drops...wanted to buy some today...waiting around $190 to start a position...

looking at INT, ORCL, BIDU too...and of course AAPL...

jamesmith

jamesmith 发表于 2013-2-19 05:41 AM
UMAM

Sustainable seafood?

Situation is worse that what I thought. Just read the 10Q from here: http://www.sec.gov/Archives/edga ... /umam12311210-q.htm

Situation has worsen considerably at the end of 2012, and UMAM might have problem continuing operation.
I am glad this position was very small, I don't like holding shares in this situation, the odds are just not good enough to stay the course.

The following is from 10Q (Current Report for December of 2012), main concern is situation might have gotten worse afterwards...

Going Concern

The Company recorded a net loss of $9.4 million for the six months ended December 31, 2012 and does not currently have sufficient available cash, available financing and projected cash flows to fund its operations for the next twelve months, which raises substantial doubt about the Company's ability to continue as a going concern. In addition, at December 31, 2012, $30.0 million was due under a credit facility which the Company did not pay and has not paid as of the date of this report, and an additional $22.0 million in principal and interest payments was due under credit facilities in February and March 2013, of which $10.3 million was repaid in February and March 2013. The Company's debt service obligations in the next twelve months consist of debt principal repayments of $53.3 million to financial institutions and unrelated third parties and approximately $2.4 million in interest payments due on financings from financial institutions and unrelated third parties.

The continuation of the Company is dependent upon its 2012-2013 harvest season, successful completion of additional financing arrangements and/or modification of existing financial arrangements, and/or sale of the Company's treasury stock to third parties. The Company plans to attempt to raise additional funds to finance its operating and capital requirements, including repayment of current financing arrangements and operational expenses, through a combination of equity and debt financings. The Company has previously addressed liquidity needs by issuing debt with commercially unfavorable terms, sometimes with warrants to purchase shares of its common stock. Additional financing may not be available when needed on

commercially reasonable terms, or at all, and there is no assurance that equity or debt financings will be successful in raising sufficient funds to assure the eventual profitability of the Company. In addition, any additional equity financing may involve substantial dilution to the Company's existing stockholders. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue in existence.

jamesmith

jamesmith 发表于 2013-4-22 11:28 AM
Situation is worse that what I thought. Just read the 10Q from here: http://www.sec.gov/Archives/e ...

I took loss and got out at $1.55...

jamesmith

Still holding AAPL long, plans to buy more at a lower price

They are returning $100 billion by end of 2015. $60 billion is share buyback, $40 billion is dividend.
Based on current market cap, they are retiring around 15% of shares outstanding, that means EPS will be increased by 15% on buyback alone.
The problem is clearly falling profit margin, I believe it will stabilize at current rate of 22%, which is still higher than Samsung's 18%.

If Apple's profit margin stabilize around this level, AAPL's value should north of $600...lower margin alone is very bad, but increasing revenue and lower margin together is a different story, and now we have big share buyback at the work.

It is easy to say I am a value investor, but being one in practice is not so easy. Not all investors taking position at odds with the rest of the market.
It is good idea to do a confidence check before taking a position based on your own valuation you found current price under valued. How well do you understand the company's business economics? How confident are you on your assessment of value? Can you find comfort when the market go against you?

Money management is always important:
1) Don't bet your house, no matter how confident you are, don't bet the money you need to live on...
2) Be extremely careful when averaging down, I made this mistake in AAPL by averaging down too early
3) Think about buying the business, not a stock symbol
4) Be patient, it takes time for market to find out the true value, and it often takes some catalyst
5) When it breaks to a new low, it is usually a good choice to get out and wait for it, this is what I should've done on AAPL...I violated by own rule
6) When you have trouble sleeping, sell down to the sleeping point.

jamesmith

jamesmith 发表于 2013-4-24 08:22 AM
Still holding AAPL long, plans to buy more at a lower price

They are returning $100 billion by en ...

Reuters reports that the order book for Apple's bond offerings has now topped $40 billion, meaning that investors have offered bids for more than twice the amount of debt Apple is expected to issue. The oversubscription gives Apple flexibility in finalizing interest rates and amounts to be raised and indicates very strong interest in Apple's offerings.

jamesmith

JPM is a very attractive buy around $39, if it ever gets to this level in a correction, I am ready to buy. Current price of $49.67 is still good, but a bit too high and less attractive compared to other opportunities...
WFC is still attractive at current level, slowly adding.

jamesmith

jamesmith 发表于 2012-9-14 09:42 AM
To value a security, we need a proper discount rate. We can use the risk free rate, long term tr ...

An update on PM. It didn't meet the 8% EPS growth estimate but given the situation of Europe (where most of the revenue is from), this is understandable.
Picking up some shares at lower $80s is not a bad idea, it gives enough margin of safety and dividend is expected to grow in the next earning release.

jamesmith

jamesmith 发表于 2012-9-19 10:53 AM
Let's talk about Yahoo. It is a interesting company with large stakes in Alibaba and Yahoo Japan. In ...

Haha, Yahoo still owns 22.6% of alibaba. With alibaba IPO soon, I remember this valuation I did on Yahoo at 2012-9-19.
YHOO was around $16 at the time, and I said considering YHOO's stake at alibaba and Yahoo Japan! it is fairly valued. Yahoo's core business did better than I originally thought, the main game changer is its alibaba stake, I massively undervalued Yahoo's stake at alibaba at the time. (Yahoo owns 40% of alibaba at 2012). Lesson learned: sometimes it is worth it to pay for growth at good business.

jamesmith

jamesmith 发表于 2012-11-23 10:57 AM
Thanks :)

I understand that Intel is not in the best business. It require high R&D spending  ...

It's now more than two years since our last discussion in 2012. Intel's moat (sustainable business advantage) is safely protected by the very high cost of entry to its business and highest R&D spending in chip making business. Intel Tick-Tock went from Ivy Bridge to Broadwell, (http://en.wikipedia.org/wiki/Intel_Tick-Tock) and Intel's investment in low power mobile cpu has been showing amazing progress. The latest Broadwell chips are very competitive to ARM chips in processing power and battery life, and we will see a lot more Intel powered Android, Chrome OS, Windows mobile devices (tablet, tablet/laptop, ultrabook, smartphone).

Broadwell is fab shrink (improvements in battery life), Skylake will be die shrink (bigger improvements in performance). Intel made the right decision to compete with ARM in mobile, and I think it has a good chance to get good part of the market share from ARM.

jamesmith