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

To: Paul Senior who wrote (5215)	10/30/1998 9:21:00 AM
From: jeffbas	Read Replies (1) \| Respond to of 78530

Without responding in detail, you will find here that the goodwill charges are so low that their removal does not add much back to earnings. I also prefer tangible assets to goodwill -- most of these TMO companies have little tangible book value.

To: Paul Senior who wrote (5215)	10/30/1998 7:25:00 PM
From: James Clarke	Read Replies (3) \| Respond to of 78530

re: goodwill Paul, you've got it. But maybe this is worth expanding on a little because it is a big deal for many companies. Lets use a real example. When Disney acquired Cap Cities/ABC, they paid $18 billion over book value. I'm not interested in whether they overpaid or not, but it should be obvious that the franchise of ABC is worth more than its book value, signficantly more. Now Disney has an $18 billion asset on its balance sheet called goodwill. It takes a charge to earnings to amortize that goodwill over 40 years, so there is an expense of almost $500 million a year for amortization. Lets think about that. Its a big number, about 23 cents a share. Without that charge, Disney trades at 22x earnings. With the charge, it trades at about 28x. Big number. Now what is it? The way I look at it is this. If Disney had not acquired Cap Cities/ABC, that expense would clearly not exist on Disney's income statement. But it is equally clear that it would not exist on ABC's income statement either. So where did it come from? The only economic rationale is that the asset on the balance sheet (which also would not exist anywhere but for the acquisition) is depreciating in value. Is that reasonable? ABC's franchise may indeed be diminishing in value, but the accounting would be the same even if the FCC outlawed cable television tomorrow. The point is that the charge has nothing to do with economic reality, it is a non-cash expense, and it distorts earnings downward. In this case, I would add it back to earnings and base my P/E analysis on that figure. If you believe this argument, you will be surprised how many companies you find that are much cheaper than they look. Sometimes the market recognizes this, but in my experience I find I can buy real bargains because of this accounting noise which distorts true earning power. Jim

To: Paul Senior who wrote (5215)	11/6/1998 1:47:00 PM
From: Paul Senior	Read Replies (2) \| Respond to of 78530

I got my flu shot but it didn't keep me from catching the greed bug- I am way too anxious to commit funds to capture benefits of the rising market. That's often been a scary time for me. Also, a corollary is that I'm furious with myself for missing easy and quick profit runnups -- Lyondell from 16 to 22, Aetna from 66 to 80, Cooper Vision from way under 20 to over 27, and many others --- daily march upward - almost straight up. Which of course builds on the feeling that it's a heck of a lot better to just buy something than be in cash -- this is the time to be making money. Especially with so many -- maybe almost everything - moving higher. One switch I am noticing is that it seems that with many/most of the stocks I am watching, if the company now announces unexpected bad earnings, the stock doesn't get hammered as it seemed to midyear through early Oct. Some companies even rally -- as was the case with many companies before the June/July market breakdown. Right now, I am finding it hard to step up and find stocks I like at prices I will pay. I am looking at the health care sector because it's out of favor and because there's maybe a fear that with more Dems in Congress, Pres. Clinton will push for and maybe get, healthcare legislation/reform. So far, I've added to my position in SHG (p/bv = .78, psr= .12) and initiated a position in GHV (p/bv = .64, psr = .32). As the population ages, the demand for eldercare services should increase. And somewhere along the line, maybe the prices of these provider companies will too. Today I've gone back and bought more of Mike B's recommended MWY. Seems like insiders are increasing their buying, so I have too. It's a risky company IMO- big profits depend on hits-- and, like the movie biz., that is often random. Plus, there are a lot of these kinds of companies out there. Still, we have a pe of 8 (assuming they can maintain earnings), a large number (several hundred) probably very good technical people, and Sumner Redstone controls the business. This stock has not moved up (from its lows) in the current market-- but it could. I've also started a tiny position in Catellus Development (CDX)this week. They are big property owners and developers in California. Stock's up about a $1 from my buy point. Chose CDX after I noticed good 'ole JOE starting to move. (And it was from 20 to 26 and I missed it yet again!) These real estate companies were mentioned by fund manager Leon Cooperman in Barron's about 2 weeks ago. I've also added Tue. to my position in Schlotzsky's (symbol BUNZ -- I notice it was incorrectly reported by me as BUNS in my first mention of it). Given the price near book, the reasonable-for-this-market pe, the repeating stream of earnings from being a franchisor, the apparent popularity of the food (my subjective and unqualified opinion), and my guess that they can replicate their model, plus there's no on-the-books long term debt-- I think it's worth it to increase my bet on the expectation that the stock will move up from current lows. Paul Senior