Sunday, February 27, 2011

BRK.A - Berkshire Hathaway - Intrinsic value

Berkshire's annual report came out recently, and I couldn't resist having a go at putting a value on BRK. The short answer is: it looks like its trading at about 18% discount to intrinsic value.

If only I had bought 20 years ago.

Wednesday, February 23, 2011

Unit Valuation System

The Unit Valuation System (UVS) was developed by Mutual Funds and Unit Trusts, as a means of determining fund performance in an environment where there are frequent cash contributions and withdrawals. The UVS is commonly used by Investment Clubs to apportion ownership between Investment Club members, however it can also be used by individual investors as a time weighted return metric. UVS is now commonly used by Investment Clubs as it enables club members to make flexible monthly contributions (subscriptions) and withdrawals through the process of purchasing and cancelling units.


Tuesday, February 22, 2011

Valuation calculator

ModernGraham has produced an online valuation calculator, together with the methodology. Quite Interesting.

StockChallenge entry

StockChallenge is a monthly share competition, for which I have just submitted my first entry. Wish me luck! You can enter five candidates, and either long or short them. Here are my entries for March:
Long BARC (Barclays) - bank on low PBV
Long CYS (Chrysalis) - VCT on big NAV discount with director purchases. VCT/private equity trusts are trading at big discounts at the moment
Short RCG (RCG Holdings) - company with a lot of director intrigue, puzzling acquisitions, and shareholder dilution. Recently announced a proposition to delist from AIM.
Short YELL (Yell) - Yellow Pages struggling under debt, with no turnaround in operating activities. It's well-liked by Sanjeev Shah of Fidelity Special Situations, though. He's receiving a lot of flak for that pick.
Short PUB (Punch Taverns) - over-endebted pub chain trying to scrape through in an overcrowded market.

The last three companies have very disconcerting share price graphs, and look like messes. Maybe they'll

Damn, I wish I had added HMV as a short now. It, too, is struggling with debt, in structural decline, and will be facing covenant tests in April, which are reckoned to be "tight".

Sunday, February 20, 2011

Joel Greenblatt's Recommended Reading List

In this post, Greeblatt recommends the following books:
  • You Can Be A Stock Market Genius
  • Security Analysis on Wall Street
  • New Finance
  • Value Investing: From Graham to Buffett and Beyond
  • The Essays of Warrent Buffett
  • The Little Book That Still Beats the Market
  • Contrarian Investment Strategies
  • What Works on Wall Stree
  • The Intelligent Investor
Links to others' recommended reading lists are also given.

Saturday, February 19, 2011

The Value Perspective Website

The Value Perspective website contains short but interesting articles by Schroders, the asset managers. I quite like this quote from their post of Good comapnies and good investments:
we focus on two main risks - the risk of overpaying for our investment and the balance sheet risk. These two risks are the major way investors permanently lose money. In the case of utilities, while the businesses themselves are solid, their balance sheets are aren't and large amounts of debt significantly increase the risk for equity holders. ... Additionally, while the income provided by utility company dividends is attractive, high levels of debt have an ability to put this in jeopardy since interest costs and debt repayment will take priority over payments to shareholders.

Wednesday, February 16, 2011

Untangling skill and luck

Thanks to this article, I was able to locate an interesting PDF document about investor skill and luck. Here's a little snippet:
Outcomes from many activities—including sports, business, and investing—are the combination
of skill and luck. Most people recognize that skill and luck play a role in results, yet they have a
poor sense of the relative contribution of each. The ability to properly untangle skill and luck leads
to much better thinking about most day-to-day outcomes, and allows for sharply improved
decision making.

The process of asset allocation in the institutional investment industry is a practical example of
the failure to conceptualize skill and luck. In the aggregate, institutional money tends to flow to
assets that have done well and fails to consider sufficiently the role of luck. One recent study
suggested that this misallocation of resources had cost these portfolios $170 billion from 1985 to
2006. The study’s authors conclude that those institutions “could have saved hundreds of billions
of dollars in assets if they had simply stayed the course” instead of moving money based on a
naive extrapolation of past results.

Monday, February 14, 2011

DPLM.L - director purchases

On 10-Feb-2011, director John Rennocks bought 30k shares at 299.25p, for a value of £90k. Previously, I had reoprted partial sales by directors on the exercise of options in Jan. Diploma supplies a range of products to the healthcare and enivronmental industries. It supplies seals (gaskets, cylinders, etc.) for heavy machinery. It also provides controls (wiring, connectors, and control devices) for a range of applications.

For what it's worth, which probably isn't much, DPLM was enumerated amongst a list of "strong buys" in Nasdm100 best-rated UK stocks by analysts (link)

DPLM is trading at 299.75p, with a market capitalisation of 339m. It has yield of 3.1%, and a PER of 14.9, and an extremely strong balance sheet.

In Dec 2010, it acquired CMI, the leading supplier in Canada of automated endoscope reprocessors, disinfectants and detergents which are used in hospitals and private clinics. CMI's revenues to y/e/ 31 July 2010 were £8.3. It's net assets after the deal completion are estimated to be approximately £2.4m. Its PBT was £0.7m after shareholder bonuses, which will not apply after the acquisition. DPLM paid £14.2m for the acquisition before acquisition costs, and there is a further deferred consideration of a maximum of £1.9m. Bruce Thompson, CEO if DPLM, said "This acquisition provides an excellent oppotunity to build a broader and more substantial business serving the growing GI Endoscopy market across Canada". (link) The acquisition looks far from being a bargain, though, IMHO.

In this interim management statement issued on 12-Jan-2011 for the year ending 30-Sep-2011, the company reported acquisition and currency-adjusted increase in revenues of 17%, but noted that the comparatives were weak. It stated that margins strengthened, largely driven by operational leverage.

A statement of its outlook reveals: "The continuing strength in revenues and operating margins, together with contributions from recent acquisitions, provides confidence that the Group should achieve good progess in 2011".

Analysts estimate 15% earnings growth in 2011, and a further 8% in 2012.

CYS.L - Chrysalis VCT - an asset play

 VCTs (Venture Capital Trusts), private equity and "enterprise" trusts seems to have been having a bad hair day currently. The AIC (Association of Investment Companies) publishes monthly summary stats. The discounts to NAV are quite wide, alhtough that's difficult to discern from their summary stats. They often don't print the discounts. It's difficult to imagine why, seeings as it's a very basic number. Presumably they either think some of those stats are misleading, the dog ate their calculator, or they're just too plain embarassed to print them.

Fortunately, over at Trustnet, the dog hasn't eaten their calculator, or maybe they are just shameless; so it is possible to pull together some stats on the sector. I haven't attempted to compile the discounts of all the companies in the sector - I just picked a few companies at random to give you a flavour of the discounts (shown as negatives) that are available:

Company                 Disc%
Dunedin Enterprise       -35
Graphite                 -33
Northern Investors       -36
Private Equity Investor  -25

Pretty big discounts, huh. I guess we should be grateful for the AIC statistics tables omitting half their statistics - after all, if it was too easy, the pie would be eaten already. In theory, private equity/venture capital should provide above-average returns to investors due to the intensive growth nature of the companies they invest in. That theory does not appear to have panned out particularly well in practice. No doubt the banking mess we experienced a couple of years ago is to blame; and we're quite possibly still not out of the woods yet.

What got me attracted to this sector is that I noticed that in January 2011, directors of GPE.L (Graphite) were buying shares. I didn't make any purchases, though. Then, on Friday, I noticed that directors of CYS.L (Chrysalis VCT) were buying shares. Baddeley and Knight bought 35,000 shares each at 49p - or £17.5k apiece. Clearly they are not betting the farm, but I did notice that the company is buying back shares, too. On 9 Feb, for instance, CYS bought back 138k shares at 49p, costing 67k. In 2010, directors also made some purchases at 60.5p, and 62p - showing that even directors don't get it right all the time.

Anyway, the omens seem quite favourable to me - director buying and company buybacks on a company that is trading well below asset value.

CYS is a tiddler of a company, with assets of £25m and a market cap of £15m. The reason I prefer it over GPE is that the discount is slightly wider, and more invitingly, it is yielding 6% (based on total expected divvies of 3p a share), compared with a miniscule 0.7% for GPE. So you do get paid to wait. You can see their recent annual report here , together with their portfolio. I summarise their balance sheet below (all numbers are in £m):

Equity investments       16.8
Fixed income securities   3.8 (basically gilts)
Long term investments    20.6
Net current assets        4.9 (2.0 is "curr inv")
Net assets               25.6

Their equity investments consists of a portfolio of 29 investments, and accounts for 65% of total assets.

At a share price of 50p, and NAV at 83p ( reported at y/e 31 Oct 2010), the discount is 40%.

DISCLOSURE: Bought CYS earlier today at 50p. I'm quite overweight in financials, and thought it prudent to cut back on my previous holdings in financials to pay for the holdings. I had to decide whether I was going to reduce my holdings in AV. or BARC. I opted to reduce AV., because I thought there was probably less upside to it, and besides, the holding was bigger than BARC. I think AV. and BARC are not without their risks, and I'm planning to reduce my exposure to financials generally. I have spotted a nice financial trust that looks a good bet, so I might reduce and consolidate my holdings of AV. and BARC into the trust that I had in mind. I am hoping that, with CYS, I can repeat my rather successful call on POL.L (Polo Resources), which I now see is getting some mention on Interactive Investor. Too bad (for them, not for me!) that they didn't spot it 6 months ago, when prices were much lower.

Saturday, February 12, 2011

BRK.A - Berkshire hathaway - Tilson estimates intrinsic value

In a shareholder letter dated Feb 2010, T2 Partners LLC, headed by Whitney Tilson and Glenn Tongue estimate the intrinsic value of BRK.A (Berkshire Hathaway) as $160,000. The share price is currently $127,400.

Value investors, of course, need no introduction to Warren Buffet's investment vehicle, Berkshire Hathaway. I am a British investor, and BRK.B shares are the only foreign shares I own directly (my OEICs will have some foreign shares in them, though). I had bought some in August of last year. I now regret not having bought more.

I was going to say that I really wish I had done was invested in 2000, when I began reading articles more extensively about Buffett, and his involvement with NetJets. I see that the share price is up about 84% over a decade, which is actually a bit shy of my own performance over the decade, to my surprise. Still, at least Buffett has the excuse of managing a business worth over $200bn; whereas my assets are, ahem, "more modest" than that.

AZN.L - china

Some encouraging news about AZN in Chinese and emerging markets in this article :
David Brenna, CEO of AZN, said recently that he hopes 25pc of AZN's revenues will come from emerging markets, compared with 13pc least year.  According to the article, "China is also a marketplace where mature medicines such as Losec can still generate sales long after patent expiration, unlike in Western countries, where generic medicines soon erode revenues. Losec, an anti-ulcer drug, saw a 45pc increase in sales in China in the first three months of this year despite losing its patent 10 years ago.  ... One of the biggest opportunities for drug makers in China, however, is the government's $125bn healthcare reform plan, which is set to overhaul the country's health infrastructure, improve healthcare in rural areas and extend healthcare coverage to almost the entire population. ... Yin says that while AstraZeneca is supportive of the government's move to improve healthcare, there are challenges in capitalising on the increased investment, not least the question of how to get basic medicines to the 1bn people who will rely on government funding rather than paying for their own healthcare insurance."

Wednesday, February 9, 2011

Motley Fools 2011 value screen

TMF published an article at the end of 2010, running a mechanical screen. I wont tell you the shares they selected, you can read the article if you're interested, but I will tell you the screens they used.

Screen 1: PE<=9, PBV <= 1, NGR <= 30%, YLD1 >=3.5, EPG1 > 10%. 13 shares were returned.
Screen  2: PE<=12, PBV<=1.5, NGR <= 40%, YLD>= 4%, DC >=1.2; member of FT350. 5 shares were returned.
Screen 3: Widened (screen 2?) to search the FTSE All-Share index. An extra 15 shares were returned.

DC: Dividend cover
NGR: Net gearing
YLD1: Prospective dividend yield
EPG1: Prospective earnings per share growth

Their selections from the previous year's screen was up 42% (exc. divvies, dealing costs, etc.) compared to the market of +28%.

Interesting stuff.

Tilson's value opportunities

In an article in the FT in May 2007, Whitney Tilson highlighted areas of opportunities for value investors. These are:
  1. out-of-favour blue chips
  2. turnarounds
  3. cyclicals at the bottom of the cylce
  4. distressed industries
  5. overlooked small caps
  6. growth companies that slow down
  7. growth at reasonable price
  8. piggybacking on activism
  9. spin-offs
  10. post-bankruptcies
  11. vehicles of investment superstars (e.g. Berkshire hathaway)
  12. free/mispriced asset/option
  13. declining cash cow
  14. poorly understood companies
  15. discounts to the sum of the parts
Read the full article for elaboration.

Tuesday, February 8, 2011

ULVR.L - Debt raised

Just saw this interesting comment over at Interative Investor:
ULVR has raised $1.5bn in the US by issuing two unsecured notes - $0.5bn over 5 yrs at 2.8% and $1bn over 10 yrs @ 4.3%. This does look to be good low cost finance for the company.
I tend to agree that ULVR has got some nice low-cost debt. Might as well raise money whilst it's cheap.

I purchased ULVR earlier this year, being attracted by its reasonable dividend (now yielding nearly 4%), and good returns on equity. I think the debt position is reasonable given its highly defensive nature. I look for interest cover of at least 3, and debt covered 5 times by net income in these types of companies. So ULVR gets a pass. ULVR is currently trading on a PE of 14 - not deep value territory by any means - but it is a good solid company and I'm paying about the market average. I'm not expecting to shoot the lights out with ULVR, but it has a good dividend, and is nice and defensive.

Anaylsts estimate 9% earnings growth for 2011, and another 9% growth in 2012, which seems like quite an acceptable return given the nature of the business and current earnings. It would be nice to buy the company a little cheaper, and in fact it is down in price since I bought it earlier this year, but I am not fearful.

There seem to be murmurrings that input prices will go up, which are probably not in analyst forecasts; so we'll have to see how this plays out. If I have made a mistake on this share, I don't think I have made a major one. My downside on this one is that I think I'll be disappointed, not devestated.

PIC.L - PACE - A growth stock at value prices

Google describes PIC as:
Pace plc, formerly Pace Micro Technology plc, is a United Kingdom-based developer of digital television technologies for the pay television industry. The Company's principal activities are the development, design and distribution of digital receivers and receiver decoders for the reception of digital television and the reception/transmission of interactive services, telephony and high-speed data. It also provides engineering design, support services and software applications and support services to multiple service operators, broadcasters, telecommunications companies and retail markets worldwide. Each of these services may be delivered over satellite, cable, terrestrial and Internet protocol (IP) network transmission systems. In October 2010, the Company acquired 2Wire, Inc. and its subsidiaries. In November 2010, the Company acquired Latens Systems Ltd.
It is currently trading at 206.6p, at a PE of about 9. It has a ROE of 26%. In its final results to y/e 2009, it had positive interest, so it didn't have to worry about interest cover. As another way of looking at debt load: it had net profit of £51m (2009), long term debt of £36m, and positive net current assets. So it had a debt to net profit ratio of 0.7, which is in my books is "excellent"; as I like to see a figure less than 5.

But this is not cigar-butt value company. It has a good growth story to tell.

I originally bought shares on 18 Dec 2009 at 200p per share. A year later, on 31 Dec 2009, they were at 182.7p. A loss of 8.7%. I still hold, because I believed that the company had good prospects. Since then, the good news has kept getting better. As of right now, its share price is 206.5p, an increase of 12.8% since the beginning of the year. It is still in deep value territory, and if you believe the exciting growth story, I think it will deliver an excellent return on your money.

If we rewind to end 2009, management were issuing some very positive trading statements. The market seemed disinclined to believe them. PIC has had a very rocky history, and been a serial disappointer. Although the management were talking of good prospects for their technology, there was a fear that Apple and other rivals would eat their lunch.

Here are some highlights of 2010:

March 2010: Pace acquires Bewan Systems SA €12.5 for million, "... enabling Pace to offer converged gateway and digital TV solutions to payTV customers." If I interpret that correctly, it basically means that the plan is that users will have one box linked to their ISP and what-have-you so that you can watch telly, instead of a whole bunch of stuff that they have now. link

April 2010 statement: "Gross margins are expected to increase, with a focus on operating cost and efficiency generating further improvements in operating margin.  During the period Pace announced several new customer contracts, which included Astro selecting us for Malaysia's first HD service, a new Microsoft Mediaroom-based set-top box and second generation set-top box for BT Vision in the UK and a new range of Freeview HD products in the UK.  We also announced another new partner for Pace Networks, Space TV, to lead the rollout of MultiDweller® across Africa." There was other good news, too, see the link for more details.

June 2010, more good news at the interim stage: "The market demand for pay and subscription TV services continues to grow, and Pace's increasing penetration, technology capability and geographic reach give the Board confidence in Pace's platform for sustainable future growth. " Very good numbers are reported, too. link

Oct 2010: Pace complete acquisition of 2Wire, estimated at £306m. In a statement in July, "Following the completion of the Acquisition, Pace, already the number one global digital set-top box company, would also become the number one provider of telco residential gateway devices in the US and the number three globally. ... This acquisition will strengthen our Americas business, extending Pace's US market coverage with entry into the tier one telco market.  We have built a strong position in the US with cable and satellite operators and 2Wire, with its expertise in the broadband residential gateway market, will enable us to address a full range of US operator requirements.  2Wire's software and gateway expertise will further drive development of our home entertainment convergence strategy.  The transaction introduces deep client relationships with important customers including AT&T and further develops our platform to deliver ongoing sustainable growth." link 

It's amazing to think that with so much positive news, the share price actually managed to end down on the year. Remember, it started the year cheap, and then got cheaper. This brings us on to 2011.

Feb 2011: A Telegraph article reports:
Pace plc has confirmed that it is talking to a satellite operator in India about launching a new digital service there. ... It has been reported that Pace is looking to supply set-top boxes to Tata Sky, an Indian pay-television provider which is a joint venture between Tata Group and Rupert Murdoch’s News Corp. ... If the talks in India open up new markets on the sub-continent it will continue the remarkable expansion that has seen Pace grow tenfold in the past four years to become the world’s number one set-top box supplier. ...  In November it bought Belfast-based specialist pay TV security software company Latens Systems for £28.7 million. That company has offices in India and the United States.
Kudos to the Telegraph for being able to put things much more succinctly that I could. Grrr. A career in journalism is obviously not for me.

We're a little ahead of ourselves, of course. "Talks" isn't a guarantee of anything, of course. Still, the company seems to be firing on all cylinders. If you were ultra cautious, you might want to see what emerges from the talks. Notwithstanding that, the company is doing some really positive things, so even if the talks amount to nothing, this hardly makes PIC a dustbin job.

AZN.L - Price goes up despite bad news

AZN.L released more bad news over the week. Here's the gist:

Fri 4 Feb: "the agency [FDA] has accepted AstraZeneca's resubmission of the ticagrelor NDA [aka Brilinta], categorised it as a Class 2 resubmission to the CRL, and set a new PDUFA date of 20 July 2011." I don't that came as a surpise to anyone.

Mon 7 Feb: AZN buys 750k of its own shares, at 2942pps.  That's about £22m.

Mon 7 Feb: "ASTRAZENECA HALTS PHASE III TRIAL OF ZIBOTENTAN". So basically, it doesn't work.

It was interesting to see that AZN was up 2% today, against the Footsie of 0.7%. Over the last 5 days, AZN is up 3.1%, compared to the Footsie up 1.9%. Perhaps I'm being premature and overoptimistic, but could we be seeing that AZN is an exhausted bear? I could be wrong, of course; in which case, expect me to make more predictions in the hope of improving my hit rate.

XIRR - Excel Internal rate of return for scheduled cash flows

One function that I had dearly wanted was to be able to calculate IRR for cash flows on different days, rather than just in yearly intervals. The good news is that Excel provides this functionality already. According to this page :

Returns the internal rate of return for a schedule of cash flows that is not necessarily periodic. To calculate the internal rate of return for a series of periodic cash flows, use the IRR function.
If this function is not available, and returns the #NAME? error, install and load the Analysis ToolPak add-in.
  1. On the Tools menu, click Add-Ins.
  2. In the Add-Ins available list, select the Analysis ToolPak box, and then click OK.
  3. If necessary, follow the instructions in the setup program.

2010, IPO fundraising up more than 500%

According to and article by the London Stock Exchange Group:
2010, IPO fundraising up more than 500%

    * Number of IPOs more than quadruples
    * Over £10 billion raised in 89 IPOs
    * London remains international market of choice for global business
    * Total fundraising on AIM exceeds £6 billion

Value investing study

 A paper for you to download : "Paper I : Studying different Systematic Value Investing Strategies on the Eurozone stock market (13/06/1999 until 13/06/2009)"

The introduction of the paper states:

As devoted “Value Investors”, it was our intention to back-test existing screening models for Eurozone stocks, as well as models that we had developed.
Being located in Europe ourselves, we were interested in finding out how European stocks react- what would the outcome be- of applying different Value-screening methods to stocks and especially to a portfolio of stocks.

For this project we studied different value-investment strategies that we could implement in our application.

We were especially attracted to existing methods, The Magic Formula by Joel Greenblatt, Joseph Piotroski’s nine point scoring mechanism, Benjamin Graham’s Net Current Asset Value and using our own ERP5.

For this paper we went back 10 years in time and used fundamental constituents familiar to value investors such as Price to Book, Return on Investments, Direction of Earnings, Earnings Yield etc.

We were also curious to learn whether markets were, indeed, as efficient as the theory indicates they are in the modern finance.

“And contradictory in a big way. It’s now very clear that the market makes BIG mistakes in pricing stocks. It doesn’t see through reported accounting numbers. It’s typically overly optimistic about to-be-reported earnings.
It projects that successful firms will continue their success for far too long into the future”
(Haugen; The inefficient Stock Market).

As we proceeded, we also asked ourselves questions such as;
-Should we invest in an index fund rather than in individual stocks?
-Where and how can we find undervalued stocks ?
-What happens to performance if we add more stocks to a “Value” portfolio?
-What happens to performance if we join two “Value” screeners together?

How 10 investment gurus beat the market

An article over at MagicDiligence reviews a book which profiles 10 investment legends: Ben Graham, John Neff, David Dremen, Warren Buffett, Peter Lynch, Ken Fisher, Martin Zweig, james O'Shaughnessy, Joel Greenblatt, and Joseph Piotroski. Brief summaries of their styles are given in the article.

News updates

Here are some updates of shares I have been following.

AZN.L AstraZeneca's run of disappointing drug development results has continued with the early end to a trial of prostate cancer treatment zibotentan.

BWY.L Housebuilder Bellway has been encouraged by the pick up in site visits and reservations in 2011 following the cold snap in December. The group said it sold 2,332 homes in the six months to end-January, an increase of 85 on the corresponding period a year earlier. The average sales price over the period rose to £168,000 from £155,871 a year earlier, largely as a result of selling more traditional two storey homes and fewer flats.

Monday, February 7, 2011

Momentum investing

There's an interesting web page entitled "Is momentum  investing a viable strategy for individual investors?". Short answer: no. The article concluded that pros did quite well using momentum techniques, but that PIs (Private Investors) did not.

This is despite evidence that suggests that momentum investing works, with caveats. Companies with about 3-year relative strength tend to revert to the mean. Companies with 6-12 months relative strength seem like good bets, with momentum being maintained for another year or so.

I can't cite the source, but I was reading that relative strength held up well against growth investing; and it was suggested that growth investors could probably do better by switching to momentum. Momentum investing was found to be negatively correlated with value investing; so value investors could improve their returns by incorporating a momentum component. 6 months relative strength seems like a suitable figure if you're going to hold the shares for a year. Intuitively, this could make sense, as, from a more mechanical viewpoint, it helps you avoid value traps.

Sunday, February 6, 2011

Mining and oil - probably not a bubble

If you look at Stockopedia's website, you can't help but notice the overwhelming number of articles about miners and oil and gas stocks. Everyone is talking about the Chinese demand for oil and commodities (actually, there seems to be some flip-flopping as people try to make up their mind as to whether China will continually fuel the demand for these items, or whether it's about to collapse).

So, it mining and the oil and gas sector in a bubble, or not? After all, BLT.L (BHP Billiton) has seen its share price rise seen its share price massively over the last decade, compared to a flat performance by the Footsie.

In Ken Fisher's book, The Only Three Questions That Count, page 287, took a look at energy stocks in 1980 and compared them to the technology stocks of 1999. He noticed similar patterns. These were at times when the sectors were in their respective euphoric bubble phases. His methodology was more thorough - he looked at the relative number of companies making IPOs, and the values thereof. I don't have that information, so I'm going to use one method he used: relative PBV. I'll add my own statistic: relative PE.

Here's what I found

       PBVr  PEr
Mining 0.95 0.88
O&G    1.25  n/a

O&G stands for Oil & Gas Explorers and Producers ("Oil Equipment - Servies and Distribution" are a different sector that I haven't bothered to analyse). Just to be clear here, PBVr is the PBV of the sector relative to a "market", and PEr is the PE of the sector relative to a "market". Here, the "market" is all the companies on the LSE with market caps over £300m (excluding Investment Trusts, for which I don't have any info).

As interesting statistics in themselves, the market had a PBV of 2.61 (I use the median figure), and a PE of 14.4. The PE seems dead bang in the middle of long-term averages, although I think the PBV may be higher than normal. The PBV for miners (median figure, NOT adjusted by market cap) was 2.49, giving a PBVr of 0.95 (= 2.49/2.61). Notice that on PBVr and PEr measure, miners are actually slightly cheap compared to the market, which in itself is probably at about fair value.

A similar picture emerges for O&G. They are only slightly more expensive than the market. The PE picture is fairly muddy here, because the median PE is -57; most of them are making losses (which, admittedly, seems a little odd given the price of oil these days).

When Fisher did his analysis on 1980 energy stocks, he found a PBVr value of 2.0 for energy compared to the S&P500. The PBV of the energy stocks was 2.6X at the time, compared to 1.3X for the S&P500. Looking at the technology bubble in 1999, he found a PBVr value of 2.5, being based on PBV for tech stocks of 13.9Xm compared to the S&P500 of 5.6X.

So the conclusion would appear to be that we are not currently in a commodity or O&G bubble, as valuations are by no means excessive (and might even be considered slightly cheap) compared to the rest of the market.

I own some BLT.L, BTW. It's on a PBV of 1.77, and a (rolling) PE of 12.6. Its share price is 2520.5p, and I noted in a previous post that directors seem to be buying in. The median yield for the market is 2.17%, and BLT is actually yielding 2.24%, so it's showing above median yield (although only slightly). It has a ROE of 25% for 2010, and projected earning for 2011 are 371.61c (a projected growth of 66%), and for 2012 it's 404.1c (a subsequent 9% increase). It has positive net current assets, and its net current liabilities is $26.5b. Its y/e results for 2010 show net profits of $12.7b; giving it a liabilities to net profits ration of about 2 - a very conservative figure. Its interest cover is over 40 - again affirming that its balance sheet is in good shape. It has been buying back shares. So, I'm quite positive on this company.

Saturday, February 5, 2011

AZN.L - What's going on?

AZN (Atrazeneca) seem a somewhat perplexing company. Trading at a price of 2933p and a PE of 6.7 (!), is it good value, or a value trap? The Market seems to think the latter, as a lot of their drugs will come off patent in the next few years. Over the last 6 months, AZN has seen its share price decline by 10%, compared with an increase of the Footsie by 12%. The market definitely doesn't like AZN. AZN has been buying back its shares, and that still hasn't stopped the rot in its share price.

Here's some recent discussions that have been going at the discussion boards for AZN over at Interactive Investor.

dave wrote:
I think PIs are often a little too optimistic (and perhaps naive) about future revenues for pharma companies. Here are the patent expiries and 2009 revenues for some top AZ drugs that will run off patent in the next five years (taken from their 2009 annual report).

Seroquel 2012 $4.9b
Atacand 2012 $1.4b
Symbicort 2014 $2.3b
Nexium 2015 $5.0b
Synagis 2015 $1.1b
Crestor 2016 $4.5b

That's a total of $19.2b coming off patent in the next five years, and those drugs make up almost 60% of the 2009 sales! They will make some more money from these drugs after they run off patent, but the revenues will drop off rapidly.

So they need some newer drugs to replace them and by all accounts the pipeline doesn't look very strong (Billinta is expected to peak at around $2.5b, if memory serves).

I'm not saying AZN is overpriced, or a sell, or whatever - I think pharma company valuation is incredibly complex. I'm just saying that concluding that AZN is cheap because the PER is lower than a Utility/Oil/Car Manufacturer/etc company is a little too simplistic. Healthcare will become more important in an ageing society, but that doesn't mean that 'payers' will have an appetite for brand new, expensive medicines that have only a marginal benefit over available generic drugs.

As a side point, I see Pfizer announced the closure of their UK R&D site today - one of their four big R&D sites. That's more evidence that the futures for the big pharma companies aren't going to be quite as rosey as previous couple of decades.

LK Hyman had this to say:
"concluding that AZN is cheap because the PER is lower than a Utility/Oil/Car Manufacturer/etc company is a little too simplistic."

AZN looks a bit like an oil company, with the big tabs being analogous to oil fields.

In an oil company you're in trouble if your big fields are declining rapidly and your explorers are failing to find new fields to replace the tired old elephants.

That sounds like AZN from the looks of your off patent numbers, which are pretty terrifying.

Many oil companies engaged in frenzied merger activity to paper over the cracks of their failure to replace their oil reserves.

It must be on the cards that the same thing will happen with Big Pharma, and I'm keeping my fingers crossed that AZN is the acquiree rather than the acquiror, so I'm holding and enjoying those chunky divis.

I'm also holding GSK (about the same weighting as AZN) as I feel that GSK's "explorers" are better than AZN's, and I like their consumer healthcare business, which AZN doesn't have AFAIK.

There was some discussion about what was priced into the market:

GatorHex responded:
"run off patent in the next five years"

i'll worry about it in 4 years

LK Hyman wrote:

"i'll worry about it in 4 years."

You'll regret that if Mr Market worries about it sooner!

Gatorhex responded:
"You'll regret that if Mr Market worries about it sooner!"

Mr Market has already priced it at half it's earnings.

For the record, I own AZN, and I am inclined to think that the news of the impending patent problems is fully priced in by the market. AZN is one of those "Magic Formula" stocks. It enjoys high returns on capital, and is available cheaply. It is also the biggest holding of Invesco Perpetual  Income (and the High Income Fund), run by Neil Woodford. Shrewd decision, or investment blunder?

As a crude measure, revenues for AZN for p/e 2010 were $33b. The patents listed above amount to $19b. That would still leave $14b in revenue. At current prices, this would give a projected PE of 15.8 = 6.7*33/14. I am, of course, assuming that profits would scale according to revenue, which is probably a little over-optimistic. Counter-balancing that is the fact that a PE of 15 is not too out-of-whack, and the company is buying back shares. AZN may be in for a period of lower growth, but I don't think things are too bad provided it doesn't drop the ball. I would like to think that AZN will continue its research and development program, so that new drugs will eventually make themselves into the pipeline.

Don't forget that Brilintia is in the works. The FDA will review it at the end of July 2011, as there is scepticism as to whether the drug actually worked. AFAIK, the drug has been approved for use in Europe, where it is known as Brilique.

The Motley Fool did a write-up on AZ in July 2010.

Index performance

Ovet the last decade, the FT100 returned -4.1%, or about -0.4% pa, having moved from 6256 to 5997. If, instead of investing all your money at the start of the period, you invested equal amounts in the Footsie in yearly intervals, your return would have been 12.9%, equivalent of 1.2% pa. Here is the data I used for the Footsie, taken from Google:

1  Feb 02 2001  6256
2  Jan 04 2002  5323
3  Jan 10 2003  3974
4  Jan 02 2004  4510
5  Jan 14 2005  4820
6  Jan 06 2006  5731
7  Jan 05 2007  6220
8  Jan 11 2008  6206
9  Jan 02 2009  4561
10 Jan 08 2010  5534
11 Feb 04 2011  5997

I assume that you invested equal amounts at time points 1 to 10 inclusive.

The Motley Fool has an interesting article yesterday, The FTSE 250's Big Comebacks , which showed that  the FT250 returned 79.3% during the period 1999-2010, against -14.9% for the FT100. Curious.The article posits a few theories as to why this was so
  • the UK credit-fueled boom was relatively beneficial to FT250 members, which are domestic focussed; as opposed to the FT100, which is more UK-focussed
  • the FT250 contains more growth companies
  • it is easier to liquidate FT100 companies during crises.
I posited my own theory: that the FT250 experienced a rerating on PEs relative to the FT100. This is purely a guess, though, as I don't have access to any relevant statistics.

I turned up some interesting info from Digital Look:
                        FT250 FT100
Div Yield 2.9%  2.7%
Div Cover 2.57  3.54
Op Mrgn  30.4%  27.2%
ROCE     34.2%  34.2%
PE       39.93  34.12

Some of those figures look dubious, though. I don't think the PEs are right, for starters.

Thursday, February 3, 2011

RWD.L - discussion

RWD (Robert Wiseman Dairies) has had some intelligent discussion on Interactive Investor during the last week. 

"yorkists" wrote:
i've been sat here wondering why i bought this recently, drawn to the recovery potential - call that value if you will, well covered yield, particularly the very low debt (faced with a rising rate scenario that will ruin many companies), new distribution centre must mean they're as efficient as it gets in the UK, the fact that food inflation is going to increase costs to dairy farmers and this must at some point enable RWD and others to pass on costs to supermarkets, unlike here in Spain you drink fresh milk so at least that's one thing the Chinese can't send over, this is being priced almost as a play on the oil/derivatives price, but everything goes in cycles, i must admit i cannot see a lot of upside for a while and they don't strike me as an acquisition target, with the low debt and cost of new centre out of the way the yield should be safe, so a good income stoock though, i hope

"sailing high" responded:

Couldn't agree more.
Back in 2007 when the UK dairy industry was last in this position (dramatic rises in costs), the supermarkets held back price rises until situation was desparate, when all at once (and the good old Womens Institute were ultimately responsible for driving forward the issue).
When the bubble burst prices to farmers went up 20% to cover the cost of production. We are in a similar situation now with costs having risen by 20%. Set to climb another 10% in April.
Supermarkets still doing BOGOFS and price wars, processors like Wiseman, Arla and Dairy Crest all trying to put prices up but have no money coming in from their customers, so very limited.
History will repeat itself and the chain will suddenly jump.

Key difference betwen now and then is commoodity market for cheese, butter (especially) and milk powder is very very buoyant. returns from that market outstripping the liquid milk market which is the first time since the 1920's.

Hold on to stock. Dividends with RWD always good and they will come through within next 2 -3 months.

A quick rundown on RWD:
mkt cap: £233m
share price: 330p
Yield: 5.5%
PER: 8
ROE: 21%
ROE10: 17% (median ROE over last 10 years)
dividend cover: 2.14
interest cover: 44
LIAB/NI: 2.7  years =(55.5+40.9)/35.7 : long term liabs + net current liabs over net income

RWD ticks a number of value boxes: it has a good yield, a low PER, high ROE, adequately covered dividend, and low debt. EPS looks a little overinflated, and is forecast to drop 20% in 2011, and a further 19% in 2012. The forecast EPS for 2012 is 29.86, giving it a forward PER for that year of 11 - not too bad, providing the business doesn't decline further from expectations.

If you believe the dividend is sustainable, then RWD looks a good bet. The negatives appear to be that RWD supplies the big supermarkets, which are having a price war on milk. Costs at the farm gate are going up, so RWD seems to be squeezed at both ends. ... the worst situation to be in.

Some recent news:

02-Feb-2011: "69 jobs go in Okehampton with the closure announced last week of Robert Wiseman Dairies. " Source I am not too concerned about this, though, as RWD announced in a recent IMS that "The completion of the third and final phase of capacity at Bridgwater". RWD appear to be increasing their capacity, so the Okehampton thing appears to be to increase efficiency, rather than a scaling back of operations.

01-Feb-2011: "Robert Wiseman Dairies has become the latest milk processor to increase its price for farmer suppliers. From 1 March, it will raise the farmgate price by 1p/litre to 25.72p/litre. A statement said the move was in line with the company’s commitment to address concerns among farmers over the rising cost of milk production." A 1 ppl rise corresponds to an increase of about 4%, which appears to be in line with inflation.

At Tescos pricecheck , I see that Wiseman Fresh N Lo Milk Vff 250ml is selling at 29p. Asda are selling it at 31p. The prices are as at 26 Jan 2011. It will be interesting to see what happens to prices in future.

27-Jan-2011: Some highlights from the IMS:
we continue to anticipate that profits delivered for the year will be consistent with previous guidance. ... The Company's performance over the recent period of severe Winter weather throughout Great Britain has drawn positive feedback from across our customer base  ... we successfully fulfilled increased demand from customers. ... The completion of the third and final phase of capacity at Bridgwater has been beneficial in meeting customer requirements through the difficult weather conditions.  Utilisation of the additional capacity has resulted in throughput peaking in recent weeks, on an annualised basis, in excess of 450 million litres and allowed an easing in volumes processed at other dairies, as well as a reduction in the level of overtime worked. ... Bulk cream prices have been stable in recent weeks with average cream revenues for the year remaining higher than last year.  As previously reported, these additional revenues have been absorbed by increased costs, an increase in the amount paid for raw milk supplies and margin pressures in an intensely competitive market. ... We have ... commenced work on the expansion of our milk reload depot at Market Drayton ... this will assist with the expansion of the Wiseman Milk Group  ... The recent rises in oil related costs are significant.  Current costs for diesel and High Density Polyethylene (used in plastic bottles) are 10% higher than those incurred in September 2010  ... if sustained, have the potential to materially impact costs going forward.  ... We remain confident about our future prospects

15-Jan-2011: Herald Scotland reports: 
Price war is killing industry, warn dairy farmers ... Dairy farmers are now paid just 24.72p for every litre bought by Wiseman, despite production costs running above 27p a litre. ... Mr Smith said the problem was industry-wide, but that Wiseman – founded in East Kilbride and now one of the UK’s largest milk processing firms – risked losing its suppliers if it did not increase its price. ... However, that is unlikely, as the four leading supermarkets are locked in a price war, with milk often sold as a loss leader.