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Strategies & Market Trends : Value Investing
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From: Chid7/16/2012 6:37:18 AM
  Read Replies (2) of 78748
 
Hi
I have been trying to figure out how to value companies such as CMI and other cyclicals which seem to have posted record earnings the last year.

CMI for example shows up with high ROE, a very reasonable ROIC, low trailing P/E, and very low debt/equity ratio. It looks like a good investment except for the fact that the earnings may or may not be sustainable given that it was so high to begin with then throws into question whether any of these figures are sustainable.

So as a general poll, if you find yourself looking at a company with record earnings, what do you typically do?
1) take an average return on invested capital and apply that to arrive at a more approp earnings fig.
2) look at an average net margin and apply it to average revenues to arrive at a more approp earnings fig
3) normalize a record earnings figure using the historical growth rate and apply that growth rate into the future.

Based on simplicity, I presume method 1 is simplest and most likely to be accurate and if the companies value based on method 1 doesn't hit you over the head than it is time to move on to the next company.

I do understand that there will be a fair amount of judgement involved in picking the method used and depends on the specific company but perhaps one more method is more preferred than the others by most people.

If someone has specific input on CMI I would def appreciate it. I am still trying to work through evaluating CMI.

Thanks
Chid
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