24 February 2014

POST INFO.

Industry sector OIL&GAS.

The consolidated statements of accounts among eleven of major global oil and gas integrated companies collectively account for more than 40% of the entire oil and gas integrated sector market capitalization, with a market value of $1.8 trillion at close of 19th of February 2014. These have been collected and selectively reviewed to speculate about the current market value of this industry, with a specific methodology followed - focusing on operating cash flows, capital expenditures (additions to property, plant and equipment, as well as constructions in progress) and free cash flows. Among other evidence resulting from the analysis, it has emerged that the sum of their operating cash flows almost equals the sum in capital expenditures as of 19th of February 2014. This means, that during last twelve months, no extra-value has been generated by these eleven companies (considered as a whole), to be distributed to the shareholders. In other words, all the “cash” produced during the last year has been used to invest into capital expenditures. DIAWONDS ® believes this industry is currently highly overvạlued. You may find the full report (also in english; currently available only for an italian audience; 50€) @ opinioni.consulenteindipendente.com

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17 September 2013

POST INFO

The DIAWONDS^® ' View on Potash Industry @13 Sept.2013  is now available.

(BUNDLE: Uralkaliy OAO, Potash Corporation of Saskatchewan Inc, Mosaic Co, K&S AG, ICL Israel Chemicals Ltd, Arab Potash Company PLC, Agrium Inc, Sociedad Quimica y Minera de Chile SA, Intrepid Potash Inc).

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29 Luglio 2013

APPLE

Is Apple Fairly Valued?

The main approach to looking at this company is by focusing on the free-cash-flow, and a secondary approach is to check the results based on a Peers Evaluation model. The purpose of this two-tiered approach is to try to understand if it makes sense for an investor to buy shares in this company based on its current situation.

This company has experienced an uncommon extraordinary growth over time due to its worldwide success, as almost everyone knows, of some of its products. We are talking about roughly an Operating Cash Flows’ 40% CAGR (compounded annual growth rate) along a 14- year time stream. A shared understandable concern may arise from such amazing growth: could it keep growing in the future? What if it doesn’t? Keeping in mind that rapid growth may be followed by rapid decline.

To reassure you, let’s have a quick overview on some of its figures: $400.6bn of Market Cap, $42.6bn of piled Cash, $169.4bn of ttm revenues, $37.7bl of ttm earnings, $123.3bl of equity and a newly undertaken financial debt of around $17bn that was completely absent from the balance sheet before, which gives a very small debt/equity ratio of just 0.14 along with some good fiscal reliefs.

It has also recently showed to be a shareholder-friendly company that is beginning to pay dividends (with a current healthy dividend yield equal to 2.8%)

So let’s now focus on a free cash flow valuation frame.

Generally speaking (as already mentioned in previously edited articles), the FCF is what remains after deducting what is strictly needed for survival from all the cash produced by an industrial company (as opposed to financial or insurance one) in one year. From the point of view of an investor, this FCF is what really matters, as it's the real added value that may be entirely distributed to the stakeholders without compromising a company's existence. Here it can be defined as net cash provided by operating activities less purchases of property, plant and equipment. This is a clear simplification so it should not be inferred that the entire free cash flow amount is available for discretionary expenditures. FCF is a useful measure of performance that may be used as an indication of the strength of a company and its ability to generate cash. By projecting the FCF to the future and discounting it back (employing the so-called weighted average cost of capital, after having performed some other technical steps), it's possible to reach the fair value of stock compared with its market price.

Turning to AAPL it has generated a total operating cash flow for the last 12 months equal to $52.9bn and capital expenditures totalling $9.7bn, so the total FCF is $43.2bn with the weighted average cost of capital computed at 8.5%. Using adjusted data from the most recent available annual report, the estimated impact of operating leases, outstanding stock options, retirement and postretirement unfunded obligations, are a combined $5.8bn.

A reasonable FCF growth rate for the long term (over ten years) could be estimated at 2.8% which is equal to growth rate projections for the overall world economy.

Given all the above-mentioned assumptions, based on AAPL current share market price ($440.61, closing price on 28 July 2013) it may be inferred from the market a projected FCF growth rate for the short/medium term (up to 10 years) of -6%. This rate is apparently too harsh given that ttm FCFs still seems to be on an upward trend even if they have lowered from the previous quarter (definitely at a lower extent). This leads to the consideration that the company may be undervalued at the current price.

Let’s turn to the Peers Evaluation model. This is a proprietary copyrighted model (PEA© Peers Evaluation Analysis) that is based on some basic assumptions, which makes it rational and useful, even if cannot be taken as a standalone evaluation method. Indeed it isn’t precise, nor specific, but may be useful to gather some important evidence from comparisons. However, a major drawback of this model is that a company may operate in different fields at the same time which makes it difficult to be assigned to a specific bundle.

The main assumption is that if we take a bundle of companies belonging to the same business field on the long run, each single company will tend to reach the same average financial metrics (otherwise they will exit the market). The same assumption must be true also for new entrants. In practice, fundamental ratios from profit and loss, balance sheet, and cash flow statements, as P/S price to sales, P/EBIT price to operating income, P/E price to earnings, P/BV price to book-value, as well as P/FCF price to free cash flow, should lean towards the average bundle value in the long term. A further assumption of the model answers the question: what if? What would be the price of a peer company if its fundamental ratio is the average one? This price is then computed for each ratio and the next step is to find out the average price of the results. This final figure is the one to be compared with the stock price to gain a sense of potential over/under/fair valuation.

Saying that, here is what was computed for the bundle of companies to which AAPL belongs.

*note: capex inclusive of intangibles.

As you can see if AAPL would be the “ideal” company it is undervalued.

To conclude, there is evidence that this company based on a DCF model is undervalued as supported also by a Peers Evaluation model

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I am long AAPL. I have no business relationship with any company whose stock is mentioned in this article. Note.

Copyright DIAWONDS^® 2013.

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5 March 2013

POST MACRO. EQUITY.

Telecom Services sector (wireline and wireless) :  There is still room for growth.

Free cash flow - FCF - is not defined under the U.S. GAAP. Therefore, it should not be considered a substitute for income or cash flow data prepared in accordance with GAAP and furthermore it may not be comparable to similarly titled measures used among different companies. Generally speaking, the FCF is what remains after deducting what is strictly needed for survival from all the cash produced by an industrial company (as opposed to financial or insurance one) in one year. From the point of view of an investor, this FCF is what really matters, as it's the real added value that may be entirely distributed to the stakeholders without compromising a company's existence. Here it can be defined as net cash provided by operating activities less purchases of property, plant and equipment. This is a clear simplification so it should not be inferred that the entire free cash flow amount is available for discretionary expenditures. FCF is a useful measure of performance that may be used as an indication of the strength of a company and its ability to generate cash. By projecting the FCF to the future and discounting it back (employing the so-called weighted average cost of capital, after having performed some other technical steps), it's possible to reach the fair value of stock compared with its market price. However, the big issue is to choose an appropriate FCF future growth rate. This task can be accomplished by looking back into the financial reports of the target company to see how it performed in the past. The fair value of a bundle of peer companies considered as a whole may also be reached to compare the outcome to their market capitalization. With meaningful enough bundles, then an entire economic sector’s over/under or fair-valuation may be inferred.

Based on this methodology, the Telecom service sector (wireline and wireless) on a global scale is, at this stage, relatively undervalued. Let's look at this in more depth.

At the beginning of the year, the global market capitalization of the Telecom Service Sector (wireline and wireless), cleared off ADR (American Depositary Receipts), was around $2.3 trillion.  Summed up, total cap. of the first 10 companies was around $1,037bn or 45% of the total. These ten companies look therefore as a good proxy for the entire worldwide telecom service sector.

Here is the list of the companies:

China Mobile Ltd (CHL) / AT&T Inc (T) / Verizon Communications Inc (VZ) / Vodafone Group PLC (VOD) / America Movil SAB de CV (AMX) / Telefonica SA (TEF) / NTT Docomo Inc (DCM) / Telstra Corp Ltd (TTRAF.PK) / Nippon Telegraph and Telephone Corp (NTT) / Deutsche Telekom AG (DTEGF.PK).

It’s important to note that Nippon Telegraph and Telephone Corp group has 66.66% ownership of the NTT Docomo Inc as of June 29, 2012 (form 20-F, pg.17, 2012-06-29).

The total operating cash flow of these companies for the last 12 months stands at $217.13bn* and capital expenditures totaling $115.79bn**, so the total FCF is $101.34bn with the weighted average cost of capital computed at 8.3% (this is a weighted average by market capitalization of each single company’s w.a.c.c.). Using data (if and where available) from the most recent available annual reports, the estimated impact of operating leases, outstanding stock options, retirement and postretirement unfunded obligations, is a combined $170.05bn.

A reasonable FCF growth rate for the short/medium term (up to 10 years) could be estimated at 1.1% (this is a weighted average by market cap. of each estimated single company’s FCF growth rate for the short/medium term).

While in the long term (over ten years), this rate is estimated at a stable 2.75% which is equal to growth rate projections for the overall world economy.

Given all the above-mentioned assumptions, the final calculation gives a total value of equity for the bundle of companies equal to $1,185.36bn, which is about 14.4% higher than their total market capitalization of $1,035.76bn as of 4 March 2013.

If the cash flow growth rate for the short/medium term (up to 10 years) is placed at no-growth level (around 0%), then the final calculation gives an overall total value of equity equal to the current total market capitalization of the bundle of companies. This is the implied growth rate given by market participants to this bundle of Telco companies considered as a whole and sounds too pessimistic.

We can conclude that the global telecom service sector, considering the bundle of companies as its proxy, seems to be relatively undervalued.

* The ttm operating cash flow of Telefonica SA has been estimated taking into account the announcement to the market (form 6-K) dated 15 February 2013. The ttm operating cash flow of Verizon Communications Inc and AT&T Inc have been reduced by operating cash flow attributable to noncontrolling interests (distributions to NCI).

** The capex of Telefonica SA includes intangibles. The capex of Vodafone Group PLc, America Movil SAB de CV and NTT Docomo Inc have been estimated.

Only DIAWONDS^® is allowed to copy and redistribute by email or post to the web this report. All rights reserved - Copyright DIAWONDS^® 2013.

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30 Novembre 2012

POST MACRO. EQUITY.

IS THE FOOD INDUSTRY* FAIRLY VALUED?

Methodology.

I don't try to forecast the future, I just project the past into the future.

When I have to find out the true value of an industrial stock (therefore other than a financial or insurance one) my primary focus is on the Free Cash Flow that may be defined as Operating Cash Flow minus Capital Expenditures. Roughly Free Cash Flow is what remains after deducting from all the cash produced by a company in a year what is strictly needed to its survival.

The Free Cash Flow is what really matters under the point of view of an investor. It's the real value added that may be entirely distributed to the stakeholders without compromising a company's existence. By projecting the Free Cash Flow to the future and discounting it back with the Weighted Average Cost of Capital (it’s the so called Discounted Cash Flow Model), after having performed some other technical steps, it's possible to reach the fair value of one stock to compare with its market price. The big issue here is to choose an appropriate Free Cash Flow growth rate. To accomplish this task, I use to look back into the financial reports of the targeted Company trying to find out how it performed in the past. The same methodology may be extended to a group of peers, part of the same industrial sector, to find out if there is relative overvaluation, undervaluation or if the group, as a whole, looks fairly valued.

A bundle of peers: ASBFF CPB CAG DANOY GIS HNZ K MDLZ NSRGY UL . Assumptions and results. (Sector: Consumer, Non-cyclical; Industry: Food; *Sub-Industry: Food-Misc/Diversified).

I have estimated the Weighted Average Cost of Capital for each of the over mentioned companies, which are some of the major players in the food processing industry, applying both the Capital asset pricing Model and the Gordon model. I have also estimated reasonable free cash flow growth rates for each company referred to the short-medium and long term. Then I have: computed the trailing twelve moths free cash flow for each of them; looked at the last available amount of unfunded retirement/postretirement obligations; estimated the impact of operating leases and of outstanding stock options (where available).

Here are the results of my assumptions as at the 30th of November 2012:

By comparing the total value of market cap. (515,422) with total market value of Equity (543,448)  we can conclude that the bundle of selected companies considered as a whole is just 5.4% undervalued.

Disclaimer: information contained in this post: is provided for informational purposes only and on the condition that it will not form the basis for any investment decision; is statement of opinion and not statement of fact; is not to be considered as a recommendation to purchase, hold or sell any securities; is subject to change. No responsibility is assumed for any errors or for the consequences of relying or acting on any information provided in my post. Equity securities, especially small and mid-sized company stocks, are subject to greater risks than bonds.

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DISCLAIMER. Purpose of this "blog": advertising and opinions. My "posts" are statement of opinion and not statement of fact and do not constitute an offer to sell financial instruments and services or activities or a solicitation to invest. They are not intended for any person or entity in any jurisdiction or country where access to their content runs counter to prevailing local laws or regulations. No responsibility is assumed for any errors or for the consequences of relying or acting on any information provided in my "posts". *Sending messages constitutes consent to the processing of your personal data for the purposes stated in the privacy policy.