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

To: Chid who wrote (48788)	7/16/2012 7:44:01 AM
From: Jurgis Bekepuris	Read Replies (1) \| Respond to of 78750

CMI Chid, I think the method depends on the company and on how conservative you want to be. In case of company like CMI that has a long history of positive earnings, I think that 3-5 year average earnings is enough to smooth the expectations, especially since 2009 was quite a bad year. For example, taking annualized q1 2012, 2011, 2010 and 2009 gives about 1.2B average earnings. Now you can decide if this is conservative enough. If not, you can lower it even more... ;) If you look at long term net margins, that would be about 5-6%. Based on 17.8B current sales, you get 900M to 1.07B earnings. A bit lower than first method, but perhaps I was too optimistic there. I have tried using the revenue growth rate adjusted averages, but that usually ends up being quite high estimates. CMI annualized revenue growth rate from 2009 to 2012q1 is about 18%. What would you apply this growth rate to? 2009 earnings? Average earnings of last 4 years? Assuming you get some kind of average earnings, what do you do next? DCF? Some kind of PE or E/EV valuation? Finally, one concern is that CMI FCF is quite a bit lower than earnings, so perhaps we should be looking at their FCF rather than earnings. :)

To: Chid who wrote (48788)	7/17/2012 12:12:56 AM
From: Paul Senior	1 Recommendation Respond to of 78750

For CMI, I've bought recently, and my rationale for buying is that I would be getting a Greenblatt-like stock (high roe and low p/e), a company with low debt:equity ratio, a company that had positive earnings each year in the past ten, and a company that increased stated book value in nine of those past years. And I am attracted to the company's potential, given Cummins strength in diesels and possibilities with nat gas conversions. On several other metrics, I find the company not to be a value stock for me: on p/stated book value and on p/sales, for example. Current profit margin seems unusually high: that does call into question for me the sustainability of those high profits. Regarding valuing cyclical companies, I look at each situation by itself, and I have no typical method or rule that I apply specifically to cyclicals.