A Comparison of Eight Pairs of Companies (MG Book Club Chapter 18)

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2 responses to “A Comparison of Eight Pairs of Companies (MG Book Club Chapter 18)”

1. 

   Richard

   June 27, 2014

   1. What quote from this chapter do you think best summarizes the point Graham is making? “For the most part the companies with better growth records and higher profitability have sold at higher multipliers of current earnings – which is logical enough in general. … The trouble is, rather, that their price contained too much “promise” and not enough actual performance.”

   2. Pick two companies and do a comparison like Graham did here – i.e. look at the financials at some point in the past, and compare what happened to the companies since then. Do you find anything interesting to share with the group? Just sold Stryker (SYK) this week for a handsome profit because its valuation became excessive: P/E 41.85 P/B 3.53 Av 3yr earnings of 3.16 gives a P/E3 = 83.97/3.16 = 26.57.
   Computing the Graham #: P/E3 x P/B = 26.57 x 3.53 = 93.79
   93.79/22.5 = 417% over valued
   using DCF 12.5% growth next 4yrs., 6% growth for another 30yrs., 12% discount rate, FY13 EPS 2.63 and 3yr Av EPS 3.53 gives a value range of 48.87 to 65.59 showing the overvaluation between 172% to 78%
   Lastly, a PEG of 13.1 also indicates excessive over-valuation.

   Purchased Chevron (CVX) with the proceeds: P/E = 12.75, P/B = 1.65, P/E3 = 130.36 /12.62 = 10.33
   computing Graham #: P/E3 x P/B = 10.33 x 1.65 = 17.04
   17.04/22.5 = 0.75% of intrinsic value
   using DCF 3.6% growth rate for 40yrs., 12% discount rate, FY13 EPS 11.09, and 3yr Av EPS 12.62 gives a value range of 133.01 to 151.36 showing a discount of intrinsic value between 2% – 14% basicly fairly valued in an overbought market. But it has sound financials, steady growth, and a good dividend.
   Lastly, a PEG of .90 indicates undervalued.

   3. Pick two companies and make a prediction – i.e. look at the financials and predict where each will be in 5 years. No predictions but the risk of SYK undergoing P/E compression is significantly higher than the risk of CVX under performing in the long run. I bought Stryker around 2009 when it was significantly undervalued, it is a great company and I would buy it again if or when it comes back down to earth.

   4. What did you think of the chapter overall? Informative but a little dull. The common thread seems to be ROE, debt levels and P/E.

   Reply
2. 

   John M.

   July 8, 2014

   1) What quote from this chapter do you think best summarizes the point Graham is making?

   “Most security analysts try to select the issues that will give the best account of themselves in the future, in terms chiefly of market action but considering also the development of earnings. We are frankly skeptical as to whether this can be done with satisfactory results. Our preference for the analyst’s work would be rather that he seek the exceptional or minority cases in which he can form a reasonably confident judgment that the price is well below value. He should be able to do this work with sufficient expertness to produce satisfactory average results over the years.”

   This is a great quote, and it speaks volumes to the idea that nobody knows what the market will do. You can only bet and buy when objective measures say the security is on sale and sell when the measures say it is at a premium. This is simple logic. Snow ball describes Buffet and he quest for financial knowledge, and every other method did not pass his or Grahams test; only this straight forward value method.

   2) Pick two companies and do a comparison like Graham did here – i.e. look at the financials at some point in the past, and compare what happened to the companies since then. Do you find anything interesting to share with the group?

   I will compare Ford (07/08/14 price $17.32)and Toyota (07/08/14 price $121.16). My data comes from Value Line for EPS and Yahoo finance, and I come to different conclusions about Ford as did Ben Clark in his calculations because the data input is different. These two companies are clear leaders in the auto industry. They both stand for quality and value. However, I would bet that Toyota has built a stronger moat, but you must account for the ADR status since Toyota is a Japanese company.

   [EPS]
   Ford: EPS 2014 = $1.30; 2013 = $1.62; 2012 = $1.40; 2011 = $1.93; 2010 = $1.91; 2009 = $0.00; 2008 = -$3.13; 2007 = -$0.19; 2006 = -$1.5; 2005 = $1.25 [[[[[EPSmg=1.53; Value based on MG estimated growth = 0; Value based on 3% growth = 22.00; Value based on no growth 13.00]]]]]

   Toyota: EPS 2014 = $11.6; 2013 = $11.77; 2012 = $7.24; 2011 = $2.20; 2011 = $1.89; 2010 = $1.44; 2009 = $-2.84; 2008 = $12.93; 2007 = $8.68 [[[[[EPSmg=8.87; Value based on MG estimated growth = $341.60; Value based on 3% growth = 128.65; Value based on no growth $75.41]]]]]

   Both companies have adequate size of enterprise.

   Current Ratio: Ford above 2; Toyota at 1

   Stability of Earnings over the last 10 years: Ford faired much worse during the recession than did Toyota as the EPS numbers above show.

   Dividend Record: Ford (div yield 3%) started to pay a dividend again in 2012 while Toyota (div yield 2%) has paid a consistent dividend with no interruption.

   Moderate PE ratio less than 20: Both pass this test. Ford 17.32/1.30= 13.3; Toyota 121.16/11.6=10.4

   Moderate Price to Assets PB less than 2.5: Ford 2013 (17.32 / BV per share 6.69= 2.6) Toyota 2013 (121.16 / BV per share 95.45=1.27) Toyota passes this test and Ford just missed it.

   I find that both of these companies have had a tough time in during the recession because the auto industry was vastly impacted. However, Toyota did a much better job, but their share price has been hit by negative press and the recession making Toyota a great buy compared to Ford. Both companies have a Beta around 1, so they show a strong correlation with the market, and they have done well in the current bull market. Both companies had a very small annual interest expense in relation to cash they carried end of year. Both companies also have senior leaders that have been with their companies for many years, but Toyota leaders have clearly staked their entire careers with Toyota.

   3) Pick two companies and make a prediction – i.e. look at the financials and predict where each will be in 5 years.

   I would not venture to say which company will do better in the next 5 years, but I will say that Toyota is currently priced at a solid discount and worth further consideration for the value investor, and Toyota is a much better buy than Ford. One must take into account that it is a Japanese company, but they have diversified well into the US and other countries. I expect the economic recovery to continue, and the vehicle age is relatively large, so people will be replacing their cars.

   4) What did you think of the chapter overall?

   This is a great chapter because Graham gives you clear examples of the nuts and bolts logic.

   Reply

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