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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (8869)	11/3/1999 1:57:00 PM
From: Daniel Chisholm	Read Replies (1) \| Respond to of 78618

I know of no "traditional mid size industrial company" that fits your parameters. Nor do I ;-) I really was telling the truth when I said it was hypothetical! ;-) I have however seen various real companies that possess many of its attributes, enough to make me think that I really ought to understand what a "perfect" company "oughta" be worth. Let's say I don't trust what the market is telling me for comparables (though I appreciate the suggestion by twister to at least ask for Mr. Market's opinion). Or if not trusting Mr. Market is too extreme a thought, let's say I would like an independent sanity check. The point of this mental exercise (to me anyhow) is to figure out how to make an absolute valuation judgement in the face of certain facts/characteristics (high ROE, no debt, moderate but "assured" growth). Until and unless you or Jim reveal the inner workings of your models I won't be able to understand "why" you value my hypothetical company at 2-3X book. However I can understand that you do value it at that, so let me see if I understand the implications of your thoughts. James' "fair value" number of 2.8X book means buying the stock at a current P/E of (2.8/17%) = 16.5. If the company grows its per share book value at 8% per year over year above and beyond its cost of capital, then it will take approximately 13.5 years for the today's book value to grow into today's purchase price (charging them for cost of capital). Coincidentally (or not, James?) that is the duration of the US long bond (13ish years), I think James says it would be a "good deal" (i.e., show up on his screen) at 2.1X book. It would take just under 10 years to grow into this rate. Paul says fair value/highest buy price is at slightly under 2X book value. I'll call this 1.8X -- this means Paul wants the company to "grow into" the purchase price within 7.5 years. Paul says that since this hypothetical company is perfectly wart-free in every way, perhaps 3X book is the top buy price (let's call this the "Buffett Limit"). That's about 14.5 years. Does anyone else find these "grow-into" figures to be interesting to ponder? This is the best sort of thinking I could come up with after reading about 2-stage "Buffett discount models" and becoming almost immediately disenchanted with them (I.e., if we assume Coke grows at 15% per year forever then for an 8% discount rate no price is too high -- since this is ridiculous let's assume 15% growth for ten years and then 5% growth (conveniently close to but just under the 8% discount rate) thereafter. That just seemed so artificial, contrived and ad hoc, that it seemed to be an attempt to fit a result into a conclusion). Also, I was shorting an overvalued low-ROE high P/B equity leveraging roll-up type stock with no catalyst in sight, and I was trying to figure out under what conditions they might actually grow into their stock market valuation, should no catalyst appear. - Daniel