Hi EddyRiquelme -
My reply is in the form of an example of a current value candidate stock I am researching. It does not exactly address your question on calculating the company's intrinsic value but rather what I look at for a "margin of safety" not necessarily as reported by the numbers published in their 10K report report.
GT Advanced Technologies Inc. (GTAT) - Is this a "no brainier" value Buy?
2011 Annual Report
GT Advanced Technologies Web Site
The more I think about the question of "value" and what is the absolute way to measure that, I am coming to the conclusion that one formulaic approach (w/ a binary result: Yes - Undervalued vs No- Not undervalued) just does not happen.
With all of the accounting tricks, scrupulous cheating managements (the Chinese accounting acceptable practices come to mind) and GAAP vs Non-GAAP reporting, just makes me cautious especially when looking for an investment with a "margin of safety".
Now more so than in the 70's or perhaps the 80's, I am skeptical when things look too good to be true. That's why I do not put too much into those absolute balance sheet numbers and/or those one time excellent revenues that were just released.
Maybe this is because I stepped on one too many land mines when I thought the value proposition was too good to be true. Therefore, when looking for a margin of safety, I now look at a lot of the intangibles that are outside the reported numbers in the 10K. These include: (a) does the company do business in China, (b) who are their top 10 customers, (c) how long has the company been in business, (d) do they have 10 years of positive earnings, (e) is the operation diversified, (f) does management have a vested interest in the company and many more items that I roll into my "buy" decision.
Here is an example of a company I have been studying as a possible value buy.
GT Advanced Technologies Inc. (GTAT)
goo.gl
Look at these value components:
goo.gl
This is one of mu favorite: BV up 300% in 3 years! goo.gl
Statistic
Result (Most Recent Available)
Market Cap $465 Million
Revenue/Earnings (TTM) $955.7 Million / $183.4 Million
Cash/Debt $350.9 Million / $75 Million
Trailing P/E 2.8
2012 Earnings-Per-Share Guidance $1.30 to $1.40
Backlog $1.8 Billion
PE is around 3.5, the company has over $3.05/share in cash, $1.8B in back orders, 2nd generation technology ready to deploy that is 15%-20% more efficient . . . all is good.
What's wrong w/ this picture? Top 10 customers all located in China. All revenues reported reflect underling contracts w/ these companies w/ no detail on receivables, returns if not sold (or wanted by larger customers), who eats the potential losses of the finished product when it becomes obsolete from next generation products?, Do those standing orders really have value or could they be a huge future liability if/when manufactured and returned to GTAT because they could not be sold?
W/O seeing the details of those top 10 supplier contracts and if they are enforceable in China, those future revenue streams (and perhaps current revenue streams) are suspect to me. The positive is w/ their next generation technology new orders are coming from Europe (including Germany) and India.
This looks like a no brainier value proposition. Here is what Motley Fools think ( goo.gl ). I am still skeptical especially when management will not use some of that cash to buy back shares.
What's your take?
EKS
P.S. I have been using the Graham number recently to determine fair value. Graham felt that using this approach (be advised that 10 yr positive EPS, use TBV rather than BV and PE<=15 must be used as constraints in doing the calculation) provided a "fair" level of safety in all types of markets. goo.gl |
