> I see this thread mostly has news items about big companies posted lately.
True.
AT&T, Boeing, GM, and IBM are the component stocks of GADR's Model Dow Value Portfolio. I have written a number of extended articles about all of these companies. And, I no doubt will do so sometime in early 1999, to summarize their performance in 1998. At other times, posting selected press releases is a way to keep readers abreast of news about these companies, without my having to do any real work.
> Where are the analyses from "Graham and Doddsville"?
A few months ago, I wrote a Graham-like analysis of GM's 1997 special charges against earnings (see: Message 5489170 )
> I would like to see the experts here give different examples on how to analyze a stock as suggested by the
> title of this thread ...
Oh?
> ... say on BVF? :) Does this one fit your value standard?
I am somewhat uncomfortable shooting from the hip about stocks that I'm barely acquainted with -- I have enough trouble getting it right about companies I follow all the time.
Back in mid-August, in the wake of Cendant's post-scandal price collapse, you asked what I thought of the stock. My suspicion at the time was that the reason for their CUC subsidiary's cooking the books in the first place was the company's unfavorable long-term fundamentals. But I hesitated to express what was really just an "articulable suspicion" -- rather than a "preponderance of the evidence". As Axel has (correctly) pointed out elsewhere, that sort of thing can get me into trouble. On the other hand, how do I justify dropping everything else to do someone else's due diligence?
As it turns out, I later read in the WSJ that there were at least two ongoing problems with Cendant's business model: 1) Anyone can get into the business of selling discount cards to consumers. And once anyone did, Cendant's profits were drained by increased marketing expenses -- not only to expand its customer base in the face of growing competition, but to replace existing customers in a business with a high defection rate. Hence, the motivation to make up fictitious profits. 2) The hoped for synergies between the customer list of the discount card company and the services subsidiaries, like travel and hotel accommodations, have not been as profitable as planned.
Value Line has a contrary opinion. VL feels that Cendant's many franchise-type brand names provide it with an annuity-like earnings stream that will increase at 15% annually. I remain skeptical. I'm not much of a consumer, myself. So, I don't know about Cendant's brand names from personal experience. Unlike Graham, who was only interested in the numbers, but like Buffett and Lynch, I have to have some feel for the underlying business to recommend a stock.
When you first asked about Cendant, it was selling at close to 18. It continued to slide down to around 10, before fighting its way back up to over 14. In the general Market decline of October, it swooned to 6 in the midst of panic selling. It has since rebounded back above 18 -- about where it was when you first asked about it. For all I know, Buffett was quietly buying up shares of this supposedly annuity-like company when its P/E was down around 6. And that's the bottom line -- I just don't know enough about Cendant to be comfortable investing in it. And, if I'm not comfortable with a company, I don't invest in it. I have enough trouble with the ones that I am comfortable with -- like Boeing.
Now, let's turn to the stock you're asking about this time: Biovail.
I'll make some general remarks about what the historical Graham might have thought about this company as an investment. And, I'll throw in a few of my own. Then I'll make you a proposition to see how serious you are about becoming a citizen of Graham and Doddsville.
Biovail is a small pharmaceutical company with some excellent numbers, at least on the surface, which is as far as I've delved. See: stocksheet.com
also: quicken.com
and: morningstar.net
First, we'll briefly cover the reasons that the historical Graham would not have gone near this stock -- or at least not recommended it to the "intelligent investor":
1. Biovail is hi-tech. On this issue, Graham, Buffett, and Lynch are unanimous. Too much competition; too rapid obsolescence; too much wishful thinking; too high p/e's.
2. Biovail is located in Canada. Graham thought little of foreign bonds. He would scarce have thought better of foreign stocks, even if they had been widely available to U.S. investors in his day. A few years ago, when asked to comment about investing in emerging markets, Buffett remarked that if he couldn't make money in a $6 trillion equity market, he couldn't make it anywhere. It is sobering to consider that just a few years later, the U.S. equity Market is priced in the neighborhood of $11 trillion.
3. It's too new -- 4-1/2 years old.
4. It's too small -- about $100 million in annualized revenues.
5. It's too expensive, with its p/e over 21. Graham said the intelligent investor should never pay more than 20 times earnings for a stock. To the objection that this would eliminate the purchase of growth stocks, Graham replied that eliminating growth stocks from consideration was, in fact, a virtue.
Now, let's say that this really is a new era. That we won't forever be bound to asset-rich companies that don't earn decent margins, or that make, say, soda pop, candy, coffee and doughnuts, or razor blades.
Pharmaceutical companies have their virtues, particularly if they have long patents on drugs in great demand. 21 or 22 isn't that high an earnings multiple to pay, if a company really delivers high double-digit long-term earnings growth. Let's ignore Graham's and Buffett's cautions that we avoid a stock like this, but retain, to the extent possible under the circumstances, the insights they've provided ferreting out virtues that Mr. Market does not yet fully appreciate.
Okay. Now here're my questions for you:
1. Where are the 10-k's on this company? I found a number of the quarterly filings, but not the annuals. Maybe the annual a foreign company files is called something other than "10-k" (the quarterlies aren't called 10-q's); if so, what are they called?
2. What industry is Biovail in? The SEC filings say its in the generic drug industry. That's a tough business to earn a decent margin in. On the other hand, its filings also say its in the business of oral delivery systems. And, it has certain cross-licensing agreements with some larger companies. What, exactly, is Biovail's value-added as a pharmaceutical company?
3. What does the competitive landscape look like? How hard would it be for a competitor to duplicate, or even improve upon, what Biovail is doing?
4. What is the regulatory environment? Canada has socialized medicine. Does this cap Biovail's unit prices in its home market? How much of its revenues come from foreign markets, particularly the U.S.? |
