Graham and Doddsville -- Value Investing In The New Era Message Board

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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era

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To: Axel Gunderson who wrote (736)	9/5/1998 1:19:00 PM
From: Freedom Fighter	Read Replies (1) of 1722

Axel, Is KO overvalued? >>It is easy to argue that KO is overvalued, since even the expectations for its business do not support the stock price. But with a CSCO for example, the expectations would seem to support the price. Not saying that the expectations are reasonable, mind you.<< I would personally never pay the current price for KO. But using the current Free Cash Flow, low interest rates, high return on equity (high FCF) and faster and more "certain growth" that KO is likely to have over the next decade (as opposed to this year or next) as the inputs to the type of model that is used on Wall St. (by Abby and the rest) KO is really not overvalued. When perfection is discounted as permanent, and risk premiums are very low, some truly astonishing values are calculable. That is my problem (and I believe Reynolds also) with those very long term discount models. It has also been my case for why Abby and "the street" can conclude that stocks are undervalued at present. You just have to input perfection into a model that discounts the next 75 years and you get instant undervaluation at almost any price. THis just seems like a very reckless set of assumptions to make if you are a VALUE GUY. On a model that discounts the next 5 or 10 years with some small appropriate risk premium (since none of us can be certain of the future), KO is still an extremely valuable company. I would pay 20x earnings for it and believe I was stealing. I will admit that for some companies like KO (that is likely to be here long after I am gone), it is very useful to go through those FCF model calculations for two reasons. 1. You know what Wall St. is thinking. 2. When you change the inputs, a. interest rates b. risk premium c. growth rate over the next 5-10 years d. FCF level (which comes from Return on Equity) e. long term nominal GDP growth f. etc... you can see how the changes in various assumptions change the value for a company. I have spent years playing with various types of models like that and it was the greatest educational experience of my life as far as investing goes. As far as Cisco goes (I do not know their business), you would have to use a higher risk premium in any type of model. The business risks are much higher than for KO. KO will outlive me for sure. It is possible that Cisco may not make it to 2010. I plan to! Wayne Crimi Value Investor Workshop members.aol.com

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