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Strategies & Market Trends : Value Investing

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To: Jurgis Bekepuris who wrote (51172)

4/17/2013 6:51:07 AM

From: Chid

Read Replies (1) of 78751

Sorry it took me a little while to come back on this.

Just to simplify things I assumed that depreciation will account for the capital spending to help sustain and grow earnings. But you're right I should be looking at FCF. The difference between the 2 is lucky for me minmal as seen in the following table for the last

	2008	2009	2010	2011	2012	Average
Net Income	425.1	600	791.3	989.5	1037	768.58
Dep	175.6	184.2	183.8	183.9	194.7	184.44
Capital Spending	215.9	153.7	183.5	243.4	354.7	230.24
FCF	384.8	630.5	791.6	930	877	722.78
Equity	3000.5	3652.9	3931.7	3922.5	4079.7
ROE	14.2%	16.4%	20.1%	25.2%	25.4%	20.3%
FCFROE	12.8%	17.3%	20.1%	23.7%	21.5%	19.1%

The FCFROE is 19.1% vs 20.3%. The difference between Dep and Capital Spend is on average $46mil.
You raised a good point about the their acquisitions and I am going to have hope that they won't be stupid to make an acquisition that doesn't dilute their returns on equity so I am hoping they are at least going to make 10% on this.

So to me I expect that their FCFROE will be at least 15% and assuming all goes to buyback shares at 3x P/B or acquisitions earning more than 10% so the overall growth will be >=5%. Using current earnings of $4.56 EPS that will result in $5.81 in 5 years. at 15x P/E that will value the stock at $87. My purchase price of 58 and change gets to me about 8% returns which in current market conditions is pretty good.
Lots of things can go wrong but by calculations growth rate can be way less and/or the P/E ratio does not rerate. If either happens this is dead money and I should be looking for something else.
I think my margin safety is already built in using a reduced FCFROE but you might disagree. How would you look at margin of safety for this?

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