Monthly Archives: November, 2012

GameStop-Corp-GME

GameStop’s Corp (GME) Favorable Return on Equity

November 29th, 2012 Posted by Company Research Report No Comment yet

GameStop Corp (GME).

Gamestop Corp Balance Sheet

Financial Liquidity

Liquidity measures help us to ascertain the ability of a certain company to pay operating expenses and other short-term or current liabilitiesLiquidity measures are calculated using current assets and liabilities. The reason behind this is because current liabilities are debts that must be paid or obligations that must be fulfilled within 1 year. And also, they are paid out of current assets which are received as cash or otherwise used within 1 year.

On an extra note, low liquidity measure would indicate either one company is having financial problems or is poorly managed; hence, a fairly high liquidity ratio is good. However, it shouldn’t be too high, because excess funds incur an opportunity cost and can probably be invested for a higher return. And current ratio gives an investor a better idea of how much safety a company has in paying its current liabilities regardless of the size of the company.

GameStop Corp. showed a good current ratio. As opposite, the quick ratio declined and a bit low percentage and net working capital also depicted a lower but still sufficient amount which would be essentially the cash needed to run the business. 

GameStop Corp. had a good current ratio, meaning they have more current assets than current liabilities. However, growth dipped down by -18 percent in 2009, and following years by 10, -3.9, and 0.8 with an average of 1.26 times. Its quick ratio went the same as current ratio, but without the value of inventory and prepaid expenses in the numerator. This showed a down and up trend with a growth ratio of -43 percent, 44, -25 and 0. The net working capital ratio or the result of working capital against total asset displayed a positive low amount of working capital and has a growth ratio of -57 percent, 67, -20, and -12.5.

Efficiency

When it comes to GameStop Corp. had a high receivable turnover ratio meaning a fast turnover in receivable collections or receivables quickly turn to cash which was favorable for the company to use and invest cash in their operations.  A decreasing and lower inventory turnover rate may point to overstocking, obsolescence, or deficiencies in the product line or marketing effort. However, in some instances, a low rate may be appropriate, such as where higher inventory levels occur in anticipation of rapidly rising prices or expected market shortages.

Their accounts payable turnover played around 6 to 7 times a year. This means a higher ratio is more favorable as payables are being paid more quickly. Nelly told me that the higher the fixed asset turnover ratio, the better because a high ratio indicates the business has less money tied up in fixed assets for each unit of currency of sales revenue. With GameStop Corp., they had a declining ratio during 2010 and 2011 may indicate that the business is over-invested in the plant, equipment, or other fixed assets. The good news was, the company recovered to increase at 1.7 percent in 2012.

Let’s have a look at the table below.

The receivable turnover ratio measures the number of times receivables are collected during the period. Wherein GME showed a down and uptrend with a growth ratio of -8.1 percent, -3.2, 4.7, 0.5 and average of 149.91 times.

The inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. This showed a decreasing trend with a growth ratio of -2.65 percent, -10.34, -3.85,  -4.33 and an average of 6.42 times.

Accounts payable turnover ratio is a short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. It is calculated by taking the total purchases made from suppliers and dividing it by the average accounts payable amount during the same period. GME depicted an up and down trend with a growth ratio of 2.2 percent, -4.34, 5.45, 7.6 and an average of 6.95 times.

Fixed-asset turnover is the ratio of sales (on the profit and loss account) to the value of fixed assets (on the balance sheet). It indicates how well the business is using its fixed assets to generate sales. Just like accounts payable turnover ratio, it also showed an up and down trend with a growth ratio of 13.3 percent, -3.49, -1.25, 1.7 and an average of 15.84 times.

Cash Conversion Cycle

Cash conversion cycle validates the effectiveness of the company’s resources in generating cash.

Receivable conversion period measures the number of days it takes a company to collect its credit accounts from its customers. This show a growth ratio of 9 percent, 3, -4.6, -0.40 with an average of 2.49 days for GameStop Corp. 

The days’ sales in inventory or inventory conversion period tell the business owner how many days, on average, it takes to sell inventory. GME had a growth ratio of 2.7 percent, 11.6, 3.9, and 4.6 with an average of 57.27 days. The usual rule is that the lower,  the better since it is better to have inventory that sells quickly than to have it sit on the shelves.

While payable conversion period measures how the company pays its suppliers in relation to the sales volume being transacted. This showed a down and uptrend for the last five years with a growth ratio of -2.1 percent, 4.5, -5.2, -7 and an average of 52.61 days to pay its suppliers.

Cash conversion period decreased by -0.65 days during 2008 but it subsequently increased yearly, with a growth  ratio of 3.4 percent, 1.81, 0.86, 0.59 and an average of 7.14 days.

Leverage

I remember Nelly said “The lower the percentage, the less leverage a company is using and the stronger its equity position.” Or if we put in layman’s term, it goes as, the higher the ratio, the more risk that company is considered to have taken on.

GameStop Corp

The debt ratio compares a company’s total debt to its total assets, which is used to gain a general idea as to the amount of leverage being used by a company. This depicted a decreasing trend with a growth ratio of -4 percent, -8, -4.4, -14 and average of 45 percent.

  • The debt-to-equity ratio is a measure of the relationship between the capital contributed by creditors and the capital contributed by shareholders. This also showed a decreasing trend with a growth ratio of -5.8 percent, -15.5, -8.5, and -21.3 with an average  of 83 percent.
  • The solvency ratio measures the size of a company’s after-tax income, excluding non-cash depreciation expenses, as compared to the firm’s total debt obligations. It provides a measurement of how likely a company will be to continue meeting its debt obligations. This showed a favorable solvency ratio which has an increasing trend with a growth ratio of 23 percent, 19.8, 91, and 100 with an average of 107 percent.

Major Control of the Company based on Total Asset

  • Current liabilities to total assets identify how much will be claimed by the creditor against total assets. This showed an up and down trend for the last five years with an average of 34 percent.
  • Long-term debt to total assets, on the other hand, is to make out how much claim has the banks or the bond holder against its total assets.  This show a decreasing trend with an average of 8 percent.
  • Then, stockholders equity to total assets is to know how much the owner can claim in its total assets which showed an increasing trend with a growth ratio of 4 percent, 7.8, 3.6, and 10.5 with an average of 55 percent for five years.

Based in GameStop Corp total five years of operation the majority in control of their total asset are their stockholders at 55 percent than their creditors of 34 and last to their bank/bondholder at 8 percent average.

Plant, Property & Equipment

  • Gross plant, property, and equipment is the gross total of fixed assets cost, this shows a trend that was increasing yearly for the last five years. It has a growth ratio of 16.8 percent, 14.8, 13.9, and 5.8 with an average of 1,236 million dollars for five years.
  • Accumulated depreciation is to reduce the carrying value of an asset to reflect the loss of value due to wear,  tear, and usage.  Wherein it shows a yearly growth trend with an average of 669.8 million dollars which is 54 percent of the average cost of plant, property, and equipment.
  • The net plant, property, and equipment is the result after deducting the accumulated depreciation from gross PPE, this showed a gradual increase yearly with a dip down in 2012 of -6.7 percent.  It has an average of 566.2 million dollars which is 45.8 percent of the average cost.
  • Looking into its fixed assets is to if they still have a useful life in their business operations.  Therefore, based on the above data, the remaining book value of PPE was 45.8 percent, using the percentage method of depreciation; this means it has 2.29 useful years remaining.

Gamestop Corp Income Statement

An income statement allows a business as well as the investors themselves, to understand if the company is operating efficiently and successfully.

Profitability

The graph below will show us how the trend goes for GameStop Corp.

  • Their net margins or the after tax profit a company generated for each dollar of sales showed an up and down trend with a growth ratio of 11.3 percent, -7.96, 3.6, -17.4 and trailing twelve months of 3.55 percent.
  • Their asset turnover which measures the effectiveness of the company to convert its assets into revenues likewise depicted an up and down trend with a growth ratio of 6.53 percent, -9.43, -1.56, 2.12 and a trailing twelve months of 2.09 percent.
  • The return on assets, this tells us how much profit the company generated for each dollar of total assets. This showed up and down trend with a growth ratio of 18.7 percent, -17.06, 2.13, -15.7 and trailing twelve months of 7.43 percent.
  • The company’s financial leverage this measures the financial structure ratio of the company base on total assets against total stockholders equity. This showed a decreasing trend with growth ratios of -3.44 percent, -7.14, -3.85, -9.14 and trailing twelve months of 1.48 percent.
  • Their return on equity the company could return such profit percent for every dollar of equity. This depicted an up and down trend with growth ratios of 7.46 percent, -21.5, -3.32, -21.1 and trailing twelve months of 11.16.
  • Their return on invested capital, this is the financial measure that quantifies how well a company generates cash flow relative to the capital it has invested in its business. Same as return on equity it has an up and down trend with a growth ratio of 21.8 percent, -16.8, 3.03, -14.9 and trailing twelve months of 10.68.

GameStop Corp’s profitability indicates that in 2009 it has a good performance compared to 2008 and their subsequent years. A low net margin means lower net income earned from each dollar of revenues. Net profit margins vary by industry, but all else being equal, the higher a company’s profit margin compared to its competitors, the better. Its asset turnover ratio tends to be inversely related to their net profit margin, wherein the higher the net profit margin the lower the asset turnover. The investors can compare companies using this to determine which one is a more attractive business. And this means they earn more from revenue than converting assets to revenue.

Their return on assets depicted a fluctuating earnings for every dollar of total assets due to up and down trend in net income and total assets growth ratio yearly was an up and down trend.

In terms of their returns using the DuPont Model wherein an equity multiplier is used to measure their financial leverage allowing investors to see what portion of the return on equity was the result of debt. In the case of GameStop Corporation financial leverage was decreasing thus this indicates no difficulty in paying interest and principal while obtaining more funding. While their return on equity show a high favorable decreasing trend thus the bulk of the return comes from profit margins and sales. Likewise, the return on invested capital was fluctuating and cash flow earned from invested capital also plays unsteadily.

Income

This show how much money in million dollars GameStop Corporation has brought in for their last five years.

  • Their revenue means how much money a company has generated in terms of “sales”, representing the amount of money a company brings in for selling its goods and services. This showed an increasing trend with a growth ratio of 24.1 percent, 3.08, 4.35, 0.81 and an average of 8,800.41 million dollars.
  • Gross profit shows how much markup a company receives on goods and services it sells after deducting its cost of revenue wherein it also depicts a decreasing trend. The same with revenue, GameStop Corp in an increasing trend with a growth ratio of 25.1 percent, 7.24, 4.22, 5.59 and an average of 2,347.12 million dollars.
  • Operating profit is the best indicator of a company’s true performance in their operations. For this is the result after deducting all the expenses incurred in their operations, wherein it shows an up and down trend with a growth ratio of 37.6 percent, -6.09, 3.94, -13.4 and an average of 603.77 million dollars.
  • Income before taxes refers to the gross taxable income of the company before deducting the income taxes. This showed a fluctuating trend with a growth ratio of 43.7 percent, -7.16, 5.58, -11.6, and an average of 566.80 million dollars.
  • Net income is what’s left over for a company after all expenses have been accounted for. Likewise, this depicted an up and down trend with a growth ratio of 38.2 percent, -5.28, 8.14, -16.6 and an average of 362.35 million dollars.

Earnings for the year 2008 was good producing a 24.1 percent growth but succeeding years it went down to only 3.08, 4.35 and 0.81 which mean sales or revenue was not doing well anymore. And after deducting the cost of revenue averaging 73.3 percent, its gross profit leftover would be around 26.7 percent.  This indicates that huge amount of revenue goes to the cost of revenue, represent the direct costs associated with the goods and services the company provides. Its operating profit after deducting their operating expenses accounts only 6.86 percent of revenue and income before taxes of 6.44 percent. Therefore their net income has only a merger share of around 4.1 percent, too small to pass our grade in scaling standards.

Expenses

This show how much GameStop Corp. had spent (in million dollars) with their in operations and others for the last five years.

  • The cost of revenue was the amount the company paid for the goods that were sold during the year. This showed an increasing trend and a slight decrease in 2012 with a growth ratio of 23.8 percent, 1.64, 4.4, and -0.93.
  • Operating expense was the expenses incurred in conducting their regular operations of the business. This depicted an increasing trend for the last five years with a growth ratio of 18.3 percent, 15.2, 4.24, and 12.03.
  • Provision for income tax was the amount allocated for their payment of income taxes. This likewise showed an increasing trend with a growth ratio of 23.4 percent, 3.88, 4.28 and 1.74.
  • Total expenses amount averages 8,404.74 million dollars or 95.5 percent of revenue. Wherein cost of revenue is 73.3 percent, operating expenses of 19.8, and provision for income taxes of 2.4 from average total revenue of 8,800.41 million dollars.

Modified Income Statement

Nelly presented to us a graph below which further indicates the flow of their revenues, total expenses and net income in their yearly and average data. This was done, to visualize the whole picture of their business operations.

The table shows that total expenses show an increasing trend in revenue and net income slight in an upward and downward trend.

Margins

  • Their gross margin indicates the percentage of revenue dollars available for expenses and profit after the cost of merchandise is deducted from revenues. And this averages 26.6 percent.
  • Operating margin is the operating income expressed as a percentage of sales or revenue after deducting the operating expenses from gross profit. Which have an average of 6.9 percent?
  • Earnings before income and tax (EBIT) margin is calculated through EBIT divided by net revenue. This showed an average of 6.4 percent for GameStop Corp.
  • And the net margin is the net income expressed as a percentage of sales or revenue after deducting provision for income tax from income before tax. And it has a 4.1 percent average only.

GameStop Corp displayed a lower gross profit margin of 26.6 percent. This means a huge percentage goes to their cost of revenue. It had also an unfavorable operating margin with 6.9 percent ratio and lastly, a net margin of less than 10 percent. To cut this short, their operations were in bad shape to have margins below scaling standards.

Cash Flow Statement

Cash flow statement helps us determine if GameStop Corp. has available cash for their operation or if they have a good free cash flow and excess funds to refinance operations for business expansion.

Cash from Operating Activities

Cash flow from operating activities comes from their net income adding back depreciation/depletion, deferred income taxes, non-cash items and changes in working capital to get the net cash provided by operations. This showed a growth ratio of 11.2 percent, 9.09, -8.22, 5.67 and it has an average of 580.67 million dollars. It means that the company had sufficient operating cash flow. 

Cash from Investing Activities

Cash flow from investing activities comes from their purchase of fixed assets, acquisition of business,  and other investing activities to get the net cash used in investing activities. This showed an acquisition of business amounting -630.71 million dollars in 2009 but prior and succeeding years trend was increasing except in 2012 it abruptly declined 16 percent, with average of -325.29 million dollars.

Cash from Financing Activities

Cash flow from financing activities comes from other financing cash flow, issuance of stock in 2008 and 2009. This was used to the retirement of stocks from 2010, 2011 and 2012, and retirement of debt to get net cash provided by or used for financing activities. Cash from financing activities showed that they were active in paying off their obligations as well as the retirement of stocks the last three years.

Net Change in Cash

GameStop Corporation has a good net cash beginning and ending balances which were sufficient after the transaction has been completed and all charges and deductions related to the transaction have been subtracted. This was used to double check the result of cash from operations, investing and financing, the net change in cash. Investors can use net cash to help determine whether a company’s stock offers an attractive investment opportunity and to assess whether they have enough cash to make investments in future expansions.

Foreign exchange effects are the gain or loss on foreign investments due to changes in the relative value of assets denominated in a currency other than the principal currency with which a company normally conducts business. A rising domestic currency means foreign investments will result in lower returns when converted back to the domestic currency. The opposite is true for a declining domestic currency. This means a net change in cash had been increasing or decrease due to the effect of foreign exchange.

Free Cash Flow

To get if the company have free cash flow to be used in operations and expansions, we deduct from operating cash flow amount their capital expenditures resulting to free cash flow.  showed that GameStop Corporation had sufficient free cash flow after deducting its capital expenditure. It had also a growth ratio of 14.9 percent and 31.2 from 2008 to 2010, with a slight dip of 18.07 percent in 2011 and recovered an increase of 16.76 percent in 2012. As a whole, they have an average of five years amounting to 403.63 million dollars indicating the company’s financial health.

Cash Flow Efficiency Ratio

Cash flow analysis uses ratios that focus on cash flow and how solvent, liquid, and viable the company is. Here are the most important cash flow ratios:

Operating cash flow to sales ratio measures how much cash generated from its revenue for the period and gives investors an idea of the company’s ability to turn sales into cash. This showed an up and down trend with a growth ratio of -10.2 percent, 13.8, -12.1, 4.8 with an average of 6.6 percent. The greater the amount of operating cash flow, the better. There is no standard guideline for operating cash flow/sales ratio, but obviously, the ability to generate consistent and/or improving percentage comparisons are positive investment qualities.

Operating cash flow ratio measures how much cash left after considering short debt by using the result of operating cash flow from operations over current liabilities.  This has a growth ratio of -10.4 percent, 10.7, -13.1, 13 depicting an up and down trend with an average of 36.94. This showed a good liquidity in terms of using cash flow as opposed to income which is sometimes a better gauge.

Free cash ratio helps us conclude if the company will grow in the future. Through the result of operating cash flow, less dividend paid less capital expenditure over operating cash flow despite an up and down trend it still showed sufficiently the company have free cash flow.

Capital expenditure ratio measures company sustainability in maintaining their assets. This can be done by using the result of operating cash flow over capital expenditure for the period.  GameStop had an upward trend except for 2011 wherein it slightly decreased to 2.99 but recover in 2012 to 3.78 with an average of 3.28. So, the company has the financial ability to invest in itself through capital expenditures (CAPEX), then it is thought that the company will grow.

Total debt ratio measures company efficiency and it is the result of operating cash flow over total liabilities. A growth ratio of -3.87 percent, 16.27, -5.47, 26.83 and an average of 28.11.

Current coverage ratio measures how much cash available after paying all its current debt. It is determined through cash flow from operating less dividend over current liabilities. The same result goes with operating cash flow ratio because for they did not have any dividend payments.

Written by Nelly
Edited by Cris

GameStop-Corp-GME

GameStop Corporation (GME) World’s Largest Video Game Retailer

November 28th, 2012 Posted by Company Research Report No Comment yet

GameStop Corp. (GME) is an American video game, consumer electronics, and wireless services retailer. The company is headquartered in Grapevine, Texas, United States, a suburb of Dallas, and operates 7,267 retail stores throughout the United States, Canada, Australia, New Zealand, and Europe. Wikipedia

Who started GameStop Corp and why?

GameStop Corp.

GameStop has a lineage that includes several retailing names now relegated to the historical graveyard. It was originated as Babbage’s Inc., the first software retailer store in Dallas Texas which was named after Charles Babbage, the 19th-century British mathematician.

GameStop Corp.

James B. McCurry

Babbage’s Inc. was initiated by two Harvard Business School classmates, James B. McCurry, and Gary M. Kusin. They established a chain of software stores, subsidize on the burgeoning computer and home video industries with an expectation of increasing consumer interest in computer equipment and games. After several changes of names, it became GameStop Inc. in 1999.

For the awareness of everyone, Computer and software stores comprise establishments primarily engaged in retailing new computers, computer peripherals, and prepackaged computer software without retailing other consumer-type electronic products or office equipment, office furniture and office supplies; or retailing these new products in combination with repair and support services.

What is the background of the company? Its history and development?

timeline

What is the nature of  GameStop Corp. business?

nature

Additional bits of information from Meriam and Janice. Retail software is computer software sold to end consumers, usually under restricted licenses. It is also called full retail, the term used to describe a full version of a software package that is sold at online or brick-and-mortar stores.

GameStop is an American video game and entertainment software retailer, located in Grapevine Texas United States. It is one of the biggest U.S players in retail sector specializing in video game and PC amusement software. In line with this, GME is the largest retailer of new and used games, hardware, entertainment software, and accessories.

The company operates approximately 1,750 retail stores located in 49 states under the GameStop Brand. Moreover, the retail network and family of brands include 6,628 company-operated stores in 15 countries worldwide and online at www.GameStop.com. It has a list of subsidiaries such as GameStop, Inc., GameStop.com, Inc., Marketing Control Services, Inc.; Sunrise Publications, Inc., Babbage’s Etc. LLC; and Gamesworld Group Limited.

Who is running GameStop Corp. company and their background?

The company is the world’s largest multichannel video game retailer. It is under the supervision of the executive officers, namely, Mr. J. Paul Raines and Mr. Robert A. Lloyd.

GameStop Corp.J. Paul Raines is the chief Executive officer of GameStop Corp., since June 2010, and upon joining the company, he served as the chief operating officer from September 2008 to June 2010. Prior to GameStop, he served various management positions for eight years with The Home Depot (“Home Depot”) and spent four years in global sourcing for L.L. Bean, and ten years with Kurt Salmon Associates in the consumer products group. He is a member of the board of directors of Advance Auto Parts, Inc. (“Advance Auto Parts”), and serves the Finance Committee and compensation Committee as chairperson.

Mr. Raines has extensive experience in the strategic, operational and merchandising aspects of retail businesses, and broad international experience in Europe and Asia. He shares to the board the insights he gained from his experience and expertise in the areas of retail strategy, store operations, customer service, merchandising, manufacturing, marketing, loss prevention, real estate, supply chain and global sourcing. Paul provides the company an additional unique perspective into corporate management and board dynamics at another specialty retail public company.

GameStop Corp.Robert A. Lloyd, on the other hand, is the executive vice President and chief financial officer since June 2010. He served as company’s Chief Accounting officer wherein he held the position from October 2005 to February 2010. Prior to that, he was the vice president – finance of GameStop or its predecessor companies from October 2000 and was the controller of GameStop’s predecessor companies from December 1996 to October 2000. Mr. Lloyd held several financial management positions as a controller or chief financial officer, primarily in the telecommunications industry. He also serves positions in the public accounting firm of Ernst & Young. Robert is a certified public accountant.

Global sourcing is a way of sourcing from the global market for goods and services across geopolitical boundaries? It is procurement method in which a business seeks to find the most cost effective location to manufacture a product even if the location is in a foreign country. 

I also learned from Janice that the method includes low-cost skilled labor, low-cost raw material and other economic factors like tax breaks and low trade tariffs.

Who is directing the company; How are the committees structured?

GameStop comprises of three committees, the audit, compensation and nominating and corporate governance. The board is headed by chairman of the board, as well directors of which are independent.

Meet Ms. Stephanie M. Shern, the director, and chair of the audit committee. She has been serving the position since 2002. She was the vice chair and global director of Retail and Consumer Products for Ernst & Young LLP (“Ernst & Young”), and a member of Ernst & Young’s Management Committee from 1995 to 2001. Ms. Shern is a CPA and has extensive financial experience. She is a member of the American Institute of CPAs and the New York State Society of CPAs, and a member of Pennsylvania State University’s Smeal College Accounting Advisory Board and a founding member of Tapestry Network’s Lead Director Network. Stephanie inputs to the board vast leadership, financial, international, marketing/consumer industry and retail experience from her nearly 40-year finance career focused significantly on retail and consumer industries in both the United States and abroad.

Mr. Gerald R. Szczepanski, on the other hand, is an independent director and has been serving as a director for the company and its predecessor companies since 2002. He is the chairman of the compensation committee and a member of the audit committee. Mr. Szczepanski was the co-founder and chairman and chief executive officer of Gadzooks, Inc., a publicly traded specialty retailer of casual clothing and accessories for teenagers from 1994 to 2005. Gerald shares to the board over his 35 years of experience in the retail business and has extensive leadership experience of a public company in the specialty retail industry.

Then there’s their non-executive director and chairman of the nominating and corporate governance committee in the name of Mr. Jerome L. Davis. He has been the director of the company since October 2005. He is the current vice president of Food and Retail for Waste Management, Inc. (“Waste Management”), a leading provider of integrated environmental solutions in North America. Mr. Davis is currently serving as a  director and a member of the compensation committee and the nominating and corporate governance committee of Apogee Enterprises, Inc. (“Apogee”), since 2004, and for five years, he chaired the finance and enterprise risks committee of the company. Mr. Davis gives the board his 30 years of experience in Fortune 500 companies and has extensive expertise and insight in multiple areas including marketing and sales, strategy development.

Bankruptcy is a legal status of an insolvent person, firm or corporation, one who cannot repay the debts they owe to creditors. Bankruptcy is imposed by a court order, often initiated by the debtor, this is in most jurisdictions. I learned from Janice that in the United States the term bankruptcy is applied more broadly to formal insolvency proceedings.

How do they make money?

Working under a video game software company is no joke. Wondering where they get their revenues from? Janice has the answers for that.

The company’s sales and profits are primarily driven by the physical stores or from the company’s operating segments: United States, Canada, Australia and Europe.

GameStop records revenue from the sales of their digital products which generally allow consumers to download software or play games on the internet wherein they get a commission. They also sell new and used video game hardware, physical and digital video game software, accessories, as well as PC entertainment software and other merchandise. Revenue is recorded at the time of sale of the products, net of sales discounts, reduced by a provision for sales returns. Other incomes are from advertising revenues for Game Informer which is recorded upon release of magazines for sale to consumers.

This is the business strategy they used to gain more profit is through advertising in newspapers, television and other media to introduce and make the products available to the customers. Another way to increase market share is through increasing awareness of the GameStop brand and membership in the loyalty program, expanding the sales of used video game products, and expanding market leadership position by focusing on the launch of new hardware platforms as well as physical and digital software titles.

How do they fit in the industry they operate in?

Video game industry is the economic sector involved with the development, marketing, and sales of video games. The industry provides lots of job opportunities to people globally. 

GameStop Corp. generally competes with mass merchants and regional chains, computer product and consumer electronics stores, internet-based retailers, and other U.S. and international video game and PC software specialty stores. They also contest with toy retail chains; mail-order businesses; catalogs; direct sales by software publishers; and online retailers and game rental organizations.

Likewise, the company competes with other sellers of used video game products and other PC software distribution firm. Additionally, they compete with other forms of entertainment activities, including browser, social and mobile games, movies, television, theater, sporting events and family entertainment centers. Their top competitors are Electronics Boutique Holdings Corp., Best Buy Co., Inc., Circuit City Stores, Inc., Wal-Mart Stores, Inc., Toys “R” Us, Inc., Target Corporation, Kmart Corporation; and Amazon.com, Inc.

Who are their suppliers and customers?

They deal with new and used video game hardware, and digital Video games software, accessories, as well as personal computer (PC) entertainment software. Other products include controllers, memory cards, and other add-ons; liked playing games and trading cards. Furthermore, they sell a variety of digital goods which generally allow consumers to download software or play games on the internet. Likewise, it renders company’s products primarily through its GameStop, EB Games, and Micromania stores, as well as through its electronic commerce websites. Moreover, they offer GameStop TV in many of its locations and publish Game Informer, a video game magazine with some 7.2 million subscribers.

The company’s suppliers rely on foreign sources, generally in Asia who manufacture a portion of products which they purchased, buy, sell, and trade program that creates value for customers while recycling products no longer being played.

Interactive software is used for entertainment, role playing, and simulation. It is played on a specialized device, mobile device or personal computer, video games which have become extremely realistic, not only in their graphics and animation but in their themes.

What is their workforce like?

The company is in a fast-paced business that demands much and delivers much to those who always improve. To remain in the industry, GameStop looks for individuals who are competitive and demand the best of themselves, and someone who strives to meet and surpass the next challenge, and who set the bar continuously higher.

Approximately, the company has a total 17,000 full-time salaried and hourly employees and between 33,000 and 54,000 part-time hourly employees worldwide. Some of our international employees are covered by collective bargaining agreements, while U.S. employees are not represented by a labor union or are members of a collective bargaining unit. GameStop hires and retains employees who know and enjoy working with the products; this is a line to assist the customers better. Each of stores is managed by one manager, one assistant manager and between two and ten sales associates, most are part-time employees.

Moreover, the success of the company relies on the ability to attract, motivate and retain key management for their stores and skilled merchandising, marketing, financial and administrative personnel at our headquarters. It depends as well on the continued services of the key executive officers; any loss of the key people will adversely affect the business operations.

A store manager is the person responsible for managing the personnel and the economic performance of the store. They handle the day-to-day operation and directly reports to a district or general manager.

How do they treat their employees? What are the pay and working condition like?

Executive people receive compensation which comprises of the following elements; base salary, annual incentive bonus, targeted total annual cash compensation, long-term incentives and total compensation (cash and long-term incentives). Some of the executive officers underwent an employment agreement with the company wherein they get stock options or restricted stock, and cover severance and termination benefits. GameStop also provides savings plan to employees who meet the eligibility requirements, primarily age, and length of service. Another benefit provides are the defined contribution 401(k) plan.

For people working in the physical store, to encourage them to sell the full range of our products and to maximize our profitability, employees are provided with targeted incentive programs to drive overall sales and sales of higher margin products. In some locations, employees have the opportunity to take home and try new video games, to enable them to better explain the games with the customers.

The compensation package, for everybody’s information, is a mixture of salary and benefits received by the employee from his employer. When evaluating job offers, one should not only consider the salary but also the total package.

Pay Structure

Gossips

On November 13, 2012, www.businessweek.com announced that: GameStop ‘Call of Duty’ Sales Top 1 Million in First Day. “Black Ops II’ is shaping up to be our biggest game launch of all time,” Tony Bartel, president of the Grapevine, Texas-based chain said today in an e-mail, “GameStop sold more than 1 million units worldwide during our midnight launch period.”

According to www.bizjournals.com on October 25, 2012: GameStop to debut new GameStop Kids stores. “This is really a way for us to take share away from people who are in the toy business and have an expanded assortment,” CEO Paul Raines said, “and show people how to drive kids to new experiences, new products or an expanded assortment of existing products like Skylanders and Angry Birds.”

An Article coming from www.fool.com on September 8, 2012, stated that: Is It Game Over for GameStop? According to Joel Greenblatt’s “Magic Formula,” GameStop is a great buy — high return on capital and a cheap stock at 5 times cash flow. But as Fool analyst Austin Smith notes, there are downsides to this company.

On August 16, 2012, www.reuters.com said that: GameStop slashes sales outlook, raises the dividend. “Clearly the industry has had a tough first half,” GameStop Chief Executive Officer Paul Raines told Reuters. “The NPD data is significantly down, and perhaps the industry has declined more than anyone, even analysts’ groups, thought it would.”

The video-game retailer sold more than 1 million copies of Activision Blizzard Inc. “Call of Duty: Black Ops II” on its first day. They are launching a new store concept which shows continued confidence by GameStop management in brick-and-mortar retail in the highly digital gaming industry. On the other hand, GME has seen an 11 percent drop in revenue for the most recent quarter and is operating in a deteriorating environment. Also, the company sharply reduced its sales forecast for this year 2012.

CITATION

Who started the company and why?

http://www.today.mccombs.utexas.edu/2010/11/carpenter-kusin-robertson-new-mccombs-hall-of-famers

http://www.123people.ca/ext/frm?ti=personensuche%20telefonbuch&search_term=jim%20mccurry&search_country=CA&st=suche%20nach%20personen&target_url=aHR0cDovL3d3dy5hY2cub3JnL2F0bGFudGEvZXZlbnRzL2V2ZW50LmFzcHg%2FRXZlbnRJZD0yMjIy&section=image&wrt_id=418

http://en.wikipedia.org/wiki/GameStop_Corp.

http://www.fundinguniverse.com/company-histories/gamestop-corp-history/

http://www.chacha.com/question/what-gamestop-is-the-first-gamestop-what-is-gamestop-store-number-one-and-what-is-the-phone-number

What is the background of the company? Its History and Development?

http://www.fundinguniverse.com/company-histories/gamestop-corp-history/

http://www.google.com/finance?q=NYSE%3AGME&ei=3uiiUNCmIojzkQXIZw

http://www.sec.gov/Archives/edgar/data/1326380/000119312512262005/d354414d10q.htm p11

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm

What is the nature of the business?

http://www.fundinguniverse.com/company-histories/gamestop-corp-history/

http://www.sec.gov/Archives/edgar/data/1326380/000119312512381205/d385850d10q.htm p18

http://en.wikipedia.org/wiki/GameStop_Corp.

http://phx.corporate-ir.net/phoenix.zhtml?c=130125&p=irol-irhome

http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=GME

Who is running the company and their background?

http://www.reuters.com/finance/stocks/officerProfile?symbol=GME&officerId=1236761

http://www.sec.gov/Archives/edgar/data/1326380/000119312512225064/d339099ddef14a.htm p4

http://www.sec.gov/Archives/edgar/data/1326380/000119312512225064/d339099ddef14a.htm p12

http://www.reuters.com/finance/stocks/officerProfile?symbol=GME&officerId=775171

Who is directing the company; How are the committees structured?

http://insiders.morningstar.com/trading/insider-committees.action?t=GME

http://www.sec.gov/Archives/edgar/data/1326380/000119312512225064/d339099ddef14a.htm p6

http://insiders.morningstar.com/trading/insider-committees.action?t=GME

http://www.sec.gov/Archives/edgar/data/1326380/000119312512225064/d339099ddef14a.htm p6

http://insiders.morningstar.com/trading/insider-committees.action?t=GME

http://www.sec.gov/Archives/edgar/data/1326380/000119312512225064/d339099ddef14a.htm p5

How do they make money?

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p8

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm#tx283661_15

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm#tx283661_15

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p2

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p4&5

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p39

How do they fit in the industry they operate in?

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p18

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p6

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p15

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p19

Who are their suppliers and customers?

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p2

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm

http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=GME

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p13

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p18

http://finance.yahoo.com/q/pr?s=GME

http://investing.businessweek.com/research/stocks/financials/drawFiling.asp?formType=10-K

What is their workforce like?

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p14

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p16

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p18

How do they treat their employees; what is the pay and working condition like?

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm#tx283661_15 p F-30

http://www.sec.gov/Archives/edgar/data/1326380/000119312512225064/d339099ddef14a.htm p21

http://www.sec.gov/Archives/edgar/data/1326380/000119312512225064/d339099ddef14a.htm p22

http://www.sec.gov/Archives/edgar/data/1326380/000119312512225064/d339099ddef14a.htm p24

http://www.sec.gov/Archives/edgar/data/1326380/000119312512225064/d339099ddef14a.htm p33

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p14

 

Researched  and Written by Meriam, Janice and Karla
Edited by Cris

Baidu.com

Baidu.com (BIDU) Impressive Profit Margin

November 26th, 2012 Posted by Investment Valuation No Comment yet

Baidu.com Inc. (ADR) BIDU a Chinese multinational technology company specializing in Internet-related services and products and artificial intelligence, headquartered at the Baidu Campus in Beijing’s Haidian District. It is one of the largest AI and internet companies in the world.  Baidu was incorporated on 18 January 2000 and was founded by Robin Li and Eric Xu in Beijing, China.

Baidu Value Investing Approach 

This model is prepared in a very simple and easy way to value a company, it adopts the investment style of the Father of Value Investing Benjamin Graham. Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt. The basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. We calculated first the enterprise value as our first step. We believed this is important because it measures the total value of the company.

The Investment in Enterprise Value

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise Value EV) is the present value of the entire company.  Market capitalization is the total value of the company’s equity shares. In essence, it is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt, and taking any remaining cash.

Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short Term Investment)

BIDU EV

Explanation

The market capitalization was trending up, except in 2008, where it experienced a 66% downfall and start to increase in 2009 going forward until 2011 at 124 percent. Then again experienced a downfall at 8 percent in the trailing twelve months. The total debt represents 4.8 percent while the cash and cash equivalent were a 52 percent average, thus the enterprise value was lesser by 47 percent against market capital. Buying the entire business of BIDU, an investor would be paying 100 percent of its equity, no debt, because its cash and cash equivalent were greater than the debt, therefore cash absorb debt.
The cost of buying Baidu.com Inc ADR to date November 15, 2012, would be $13918 at $39.77 per share. The market price to date was $93.57 per share.

Net Current Asset Value (NCAV) Method

 The concept of this method is to identify stocks trading at a discount to the company’s Net Current Asset Value per Share, specifically two-thirds or 66 percent of net current asset value.
BIDU NCAVPS
 The stock price of Baidu was overvalued from 2007 until the trailing twelve months of 2012. Because the market value per share was greater than the 66 percent ratio. The 66 percent ratio represents only 19 percent of the market value per share, thus the price was overvalued.
The above statement tells us that the stock price of Baidu.com Inc (ADR) was expensive because the stock traded above the liquidation value of the company.

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation  

Another stock test by Graham is by using market capitalization and dividing it to net current asset value (NCAV).  The idea is, if the result does not exceed the ratio of 1.2, then the stock passes the test for buying.

BIDU NCAV
The MC/NCAV valuation for BIDU indicates that the price was overvalued from 2007 to the trailing twelve months 2012 because the ratio was greater than the 1.2 ratios. Therefore, the stock of BIDU was expensive from 2007 to 2012 trailing twelve months.

The margin of Safety (MOS)   

The margin of safety is used to identify the difference between company value and price. Value investing is based on the assumption that two values are attached to all companies, the market price and the company’s business value or true value. Graham called it the intrinsic value. According to Graham, the investor should invest only if the market price is trading at a discount to its intrinsic value. Value investing is buying with a sufficient margin of safety. Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. The enterprise value is used because I think it is a much more accurate measure of the company’s true market value than market capitalization.
Intrinsic Value = Current Earnings x (9 + 2 x Sustainable Growth Rate)  
BIDU MOS

Explanation

EPS, the company’s last 12-month earnings per share; G: the company’s long-  term (five years) sustainable growth estimate;  9: the constant represents the appropriate P-E ratio for a no-growth company and  2: the average yield of high-grade corporate bonds.
The average intrinsic value was $8275 and the sustainable growth rate was 47 percent average, while the earning per share was 91 percent average. The earnings per share (EPS) and the sustainable growth rate (SGR) factor intrinsic value.

Earning per Share (EPS) formula

EPS

When it comes to the sustainable growth rate (SGR), it shows how fast a company can grow using internally generated assets without issuing additional debt or equity. To calculate the sustainable growth rate for a company, you need to know its return on equity (ROE). It needs to know what percentage of a company’s dividend payout ratio. From there, multiply the company’s ROE by its plow back ratio, which is equal to 1 minus the dividend payout ratio.

BIDU SGR

Explanation

The sustainable growth rate was 47 percent average, same as with the return on equity because there was no payout ratio.  BIDU is not paying cash dividends to its shareholders from 2007 to 2012. Moving forward, Return on Equity (ROE) is an indicator of a company’s profitability by measuring how much profit the company generates with the money invested by common stock owners. ROE shows how many dollars of earnings result from each dollar of equity and the formula is:

   ROE
There are two approaches in calculating the sustainable growth rate, these are the relative ratio approach and the average ratio approach. I have summarized the difference between these two approaches in the table given below.
BIDU Relative

Explanation

It produced the same percentage of the margin of safety but the intrinsic value was higher applying the relative approach.

BIDU Graph

Explanation

The Intrinsic value line or the true value of the stock of Baidu.com Inc (ADR) was so high during 2007 and 2008 and it experiences a great downfall the following period, 2009 at negative 99 percent. Then it starts to rise up at 224 percent in 2010. Then up again by 96 and 40 percent in 2011 and ttm2012.  The enterprise value was quite stable at 47 average.
Where is the margin of safety in the graph? There is no line for a margin of safety because it is the space in between the EV line and the IV line. Can we calculate it in figures? Yes by getting the difference between the enterprise value and the intrinsic value, that is the margin of safety. As for BIDU, the average margin of safety was 97 percent.

Baidu Relative Valuation Methods    

The relative valuation methods for valuing a stock is to compare the market values of the stock with the fundamentals (earnings, book value, growth multiples, cash flow, and other metrics) of the stock.

Price to Earnings/Earning Per Share (P/E*EPS)  

This valuation will help us define whether the stocks are undervalued or overvalued by multiplying the Price to Earnings (P/E) ratio with the company’s relative Earning per Share (EPS) and comparing it to the enterprise value per share, we can determine the status of the stock price.
BIDU EP EPS

Explanation

The P/E*EPS valuation shows that the stock of Baidu.com Inc (ADR) was trading at an undervalued price from 2007 to the trailing twelve months 2012.  The enterprise value represents 11 percent of the P/E*EPS ratio, thus the price was undervalued and cheap.
The stock of Baidu Inc ADR was really cheap from 2007 to the trailing twelve months 2012 because the price represents only one-tenth of the enterprise value. There is another approach in calculating the P/E*EPS ratio and that is by using the average price to earnings ratio.  I have used the relative approach in the above table.
BIDU Relative PE
The Average approach shows that the enterprise value represents only 9 percent, thus it is more undervalued using this approach.

The Enterprise value (EV)/Earning Per Share (EPS) or (EV/EPS)    

The use of this ratio is, to separate price and earnings in the enterprise value. By dividing the enterprise value of projected earnings (EPS), we get the price (P/E) and the difference is the earnings (EPS).
BIDU EV EPS
The EV/EPS valuation indicates that the price (P/E) was 14 percent and the earnings were 86 percent average.

Enterprise Value (EV)/ Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA).   

This metric is used in estimating business valuation.  It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. This metric is useful for analyzing and comparing profitability between companies and industries.
BIDU EV EBITDA

Explanation

The EV/EBITDA valuation indicates that it will take 5 years to cover the costs of buying the entire business.  In other words, it will take 5 times the cash earnings of BIDU to cover the purchase price.

The EBITDA represents 30 percent of the enterprise value. In addition, the profit margin was 71 percent average, while its net profit margin was 40 percent average. This indicates that BIDU was profitable.
In conclusion, 
The market capitalization for Baidu.com Inc (ADR) was increasing except in 2008 where it experienced a downfall at 66 percent. The total debt of BIDU was 4.8 percent, while its cash and cash equivalent were 52 percent. Thus enterprise value was lesser of 47 percent of the market value. Therefore buying will be paying 100 percent of its equity no debt. Purchasing the entire business of BIDU to date, November 15, 2012, will cost $13918 at $39.77 per share.  The market price to date was $93.57 per share.
On the other hand, the net current asset value approach shows that the stock was overvalued from 2007 to 2012. Because the stock was trading above the liquidation value of BIDU.  While the MC/NCAV indicates that the price was overvalued because the ratio exceeded 1.2.

The Margin of Safety

Further, there was a margin of safety from 2007 to 2012 with an average of 97 percent.  Speaking of the company’s growth, its sustainable growth rate was 47 percent, its annual growth rate was 102 percent. While the return on equity was 47 percent average. The intrinsic value was $8275 average.
Furthermore, the price was undervalued because the price represents only 11 percent of the P/E*EPS ratio.  While EV/EPS tells us that the price (P/E) was 14 percent and the earnings (EPS) was 86 percent.

EV/EBITDA

It will take 5 times the earnings of BIDU to cover the cost of purchasing the entire business.  The profit margins of BIDU were very impressive at 71 and 40 percent for gross and net margins, respectively.
The margin of safety was high at 97 percent average. In addition, the price was undervalued and cheap. On the other hand, it’s gross and net profit margins were impressive at 71 and 40 percent, respectively. Therefore, I recommend a BUY on the stock of Baidu Inc ADR.
Researched and Written by Criselda

 Interested to learn more about the company? Here’s investment guide for a quick view, company research to know more of its background and history; and value investing guide for the financial status.

investment-technology-group-inc-itg

Investment Technology Group Inc (ITG) Has Negative Growth

November 25th, 2012 Posted by Investment Valuation No Comment yet

Investment Technology Group Inc (ITG) is a financial services company based in the United States.  ITG is a  multinational agency brokerage and financial markets technology and was founded in 1983.

ITG Value Investing Approach  

This model is prepared in a very simple and easy way to value a company, it adopts the investment style of the Father of Value Investing Benjamin Graham. Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt. The basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. I calculated first the enterprise value as our first step. I believed this is important because it measures the total value of the company.

The Investment in Enterprise Value   

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise Value EV) is the present value of the entire company.  Market capitalization is the total value of the company’s equity shares. In essence, it is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt, and taking any remaining cash.
Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short Term Investment)

ITG EV

Looking closer at the table above, the market capitalization for ITG decreased at a rate of 53 percent in 2008 and 24 percent average thereafter. Total debt represented 12 percent average, while cash and cash equivalent represented 42 percent average of the enterprise value. Thus, enterprise value was lesser by 30 percent against market value. buying the entire business of ITG will be paying 100 percent of its equity, Purchasing the entire business of  Investment Technology Group to date, November 12, 2012, will cost $75 at $1.92 per share. The current market price to date is $7.86 per share.

Benjamin Graham’s Stock Test

Net Current Asset Value (NCAV) Approach   

The Net Current Asset Value (NCAV) is a method from Benjamin Graham to identify whether the stock is trading below the company’s net current asset value per share, specifically two-thirds or 66 percent of net current asset value. Meaning they are essentially trading below the company’s liquidation value and therefore, the stocks is trading in a bargain, and it is worth buying.

Net Current Asset Value (NCAV) Method      

ITG NCAVPS

The net asset current value approach indicates that the price of Investment Technology Group was overvalued because the market price was greater than the 66 percent ratio of NCAVPS. The stock price of ITG was expensive from 2007 until the trailing twelve months (6) 2012.

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation   

Another stock test by Graham is by using market capitalization and dividing it to net current asset value (NCAV).  The idea is, if the result does not exceed the ratio of 1.2, then the stock passes the test for buying. So, let us see if the stock of VSEC passed the test.

  ITG MC NCAV

The MC/NCAV indicates that the stock price was overvalued from 2007 to 2012 because the ratio exceeded the 1.2 ratios. Hence, the price of Investment Technology Group was expensive and therefore, didn’t pass the stock test.

Benjamin Graham’s Margin of Safety (MOS)  

The margin of safety is used to identify the difference between company value and price. Value investing is based on the assumption that two values are attached to all companies, the market price and the company’s business value or true value. Graham called it the intrinsic value. According to Graham, the investor should invest only if the market price is trading at a discount to its intrinsic value. Value investing is buying with a sufficient margin of safety. Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. The enterprise value is used because I think it is a much more accurate measure of the company’s true market value than market capitalization.

ITG MOS

Explanation

Benjamin Graham’s margin of safety indicates a 61 percent average for Investment Technology Group, while in the trailing twelve months (6) 2012 it has a margin of safety at 99 percent.  Intrinsic value was $144 average.

The formula: Intrinsic Value =  Current Earnings x (9 + 2 x Sustainable  Growth Rate)  

wherein;

EPS: the company’s last 12-month earnings per share,  G: the company’s long-term (five years) sustainable growth estimate,  9: the constant represents the appropriate P-E ratio for a no-growth company as proposed by Graham (Graham  proposed an 8.5, but we changed it to 9), and 2: the average yield of high-grade corporate bonds.

ITG IV

Earnings per share (EPS) and the sustainable growth rate (SGR) factors intrinsic value.

EPS

Sustainable Growth Rate (SGR)

Sustainable growth rate (SGR), on the other hand, shows how fast a company can grow using internally generated assets without issuing additional debt or equity. To calculate the sustainable growth rate for a company, you need to know its return on equity (ROE). You also need to know the dividend payout ratio. From there, multiply the company’s ROE by its plow back ratio, which is equal to 1 minus the dividend-payout ratio.

    ITG SGR

Explanation

The average return on equity was -4.34, the ratio was negative because the ROE ratio for 2011 and the ttm6 was negative also due to negative net earnings during these periods. There was no payout ratio because the company is not paying cash dividends to its common shareholders.

There are also two approaches to calculating the sustainable growth rate. These are by using the relative ROE and the average ROE. Changes in approach also affect the results of intrinsic value and the margin of safety. To understand further, the results of these two approaches were summarized in the table below.

ITG Relative

Explanation

The intrinsic value line dropped in 2009 at a rate of 82 percent and started to rise again in 2010 at 57 percent. Then it continued to soar up very high in 2011 and the ttm9 2012 at a rate of 1947 percent and 175 percent, respectively. The financials of ITG showed zero earning from 2008 until 2011 and during the ttm6 2012, its net earnings were -57 percent.  This is the reason why in ttm6 the IV line soared up very high because the loss was great. On the other hand, EV line was deteriorating in value at a rate of 37 percent average.

ITG Graph

For the Investment Technology Group, there was a zero margin of safety during 2010 because EV line was higher than the IV line. Converting the space in value or in percentage, we get an average of 61 percent and this is the margin of safety. MOS is the result of subtracting the intrinsic value against the enterprise value.

ITG Relative Valuation Methods  

Relative valuation methods for valuing a stock is to compare the market values of the stock with the fundamentals (earnings, book value, growth multiples, cash flow, and other metrics) of the stock.

Price to Earnings/Earning Per Share (P/E*EPS)   

This valuation will help us understand whether stocks are undervalued or overvalued. To get the answer, we simply multiply the price to earnings (P/E) ratio with the company’s relative earning per share (EPS) and comparing it to the enterprise value per share, we can determine the status of the stock price.

ITG PE EPS

It indicates that the price was overvalued in 2007 because the enterprise value was greater than the P/E*EPS ratio. In 2008 to 2012, the price was undervalued because enterprise value was lesser than the P/E*EPS ratio. The enterprise value was 74 percent average of the P/E*EPS ratio. Overall, the P/E*EPS valuation indicates that the Investment Technology Group price was cheap.

The Relative and Average Approach

Another approach in calculating this ratio is by using the average price to earnings ratio.

ITG Relative PE

The relative ratio approach for ITG has a lower price to earnings ratio than the average price to earnings ratio. The average percentage for P/E*EPS in 2011 was -1427 percent. This is the reason why the percentage in the average approach was negative.

The Enterprise Value (EV)/Earning Per Share (EPS) or (EV/EPS)      

The use of this ratio is, to separate price and earnings in the enterprise value. By dividing the enterprise value of projected earnings (EPS), the result represents the price (P/E). And the difference represents the earnings (EPS).

ITG EV EPS

The EV/EPS valuation method indicates that the price (P/E) was 57 percent and the earnings (EPS) was 43 percent average. This indicates that the price was overvalued because the ratio was more than 50 percent.

Enterprise Value (EV)/ Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA)

This metric is used in estimating business valuation. It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. This metric is useful for analyzing and comparing profitability between companies and industries.

   ITG EV EBITDA

The average result for EV/EBITDA was 8 years or 8 times. Meaning, it will take 8 times the cash earnings of ITG to cover the costs of buying the entire business. and considered a long period of waiting. This valuation also indicates the profitability of the company. Since 8 years is a long period, digging into the financials of ITG, its net earnings were negative 20 percent. Investment Technology Group suffered losses from 2008 until ttm6 2012. So, ITG is unprofitable.

Conclusion

Overall, the stock price of ITG was overvalued or expensive. The growth was negative which shows that ITG is unprofitable. Therefore, I recommend a SELL in the stock of Investment Technology Group.

Researched and Written by Cris

cherokee-inc-chke

Cherokee Inc (CHKE) Investment Valuation

November 24th, 2012 Posted by Investment Valuation No Comment yet

Cherokee Inc (CHKE) is an American based global apparel and footwear company, headquartered in Sherman Oaks, California. Cherokee was established in 1973 and are available in 110 countries in 12,000 retail locations and on digital commerce.

CHKE Value Investing Approach  

This model is prepared in a very simple and easy way to value a company, it adopts the investment style of the Father of Value Investing Benjamin Graham. In addition, Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt. The basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. We calculated first the enterprise value as our first step. We believed this is important because it measures the total value of the company.

The Investment in Enterprise Value   

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise Value EV) is the present value of the entire company.  Market capitalization is the total value of the company’s equity shares. In essence, it is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt, and taking any remaining cash.
Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short Term Investment)

CHKE EV

Explanation

The market capitalization for Cherokee Inc, as shown in the table above, was erratic in movement at a rate of 7 percent average. The total debt was 0.8 percent average and the cash and cash equivalent was a 7 percent average. As a result, the enterprise value was lesser by 6 percent against the market value. So, if you plan on purchasing the entire business of Cherokee Inc, you will be paying 100 percent of its equity and no debt.

The costs of buying CHKE to date, November 12, 2012is $119 at $14.88 per share.  While the market price to date, on the other hand, was $14.58 per share.

Net Current Asset Value (NCAV) Approach  

The Net Current Asset Value (NCAV) is a method from Benjamin Graham to identify whether the stock is trading below the company’s net current asset value per share, specifically two-thirds or 66 percent of net current asset value. Meaning they are essentially trading below the company’s liquidation value and therefore, the stocks is trading in a bargain, and it is worth buying.

Net Current Asset Value (NCAV) Method  

CHKE NCAVPS

The net current asset value approach shows that the stock of CHKE was at overvalued prices from 2007 up to the trailing twelve months because the market value was greater than the 66 percent ratio. So, 66 percent represents only one percent of the market value. To analyze it more, the data show that Cherokee Inc stocks were expensive.

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation   

Another stock test by Graham is by using market capitalization and dividing it to net current asset value (NCAV).  The idea is, if the result does not exceed the ratio of 1.2, then the stock passes the test for buying. So, let us see if the stock of VSEC passed the test.

   CHKE MC EPS

Then MC/NCAV valuation tells us that the stock price was overvalued from 2007 to 2012 because the result of the ratio exceeded the 1.2 ratios and the price was considered expensive.

 The Margin of Safety (MOS)  

The margin of safety is used to identify the difference between company value and price. Value investing is based on the assumption that two values are attached to all companies, the market price and the company’s business value or true value. Graham called it the intrinsic value. According to Graham, the investor should invest only if the market price is trading at a discount to its intrinsic value. Value investing is buying with a sufficient margin of safety. Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. The enterprise value is used because I think it is a much more accurate measure of the company’s true market value than market capitalization.

CHKE MOS

Explanation

The margin of safety for CHKE was 7 percent on average.  There was no margin of safety from 2007 to 2010 and the trailing twelve months 2012. In 2011, the MOS was 40 percent. I’m wondering why the margin of safety was zero from 2007 to 2010.

Intrinsic Value =  Current Earnings x (9 + 2 x Sustainable  Growth Rate) 

CHKE IV

The intrinsic value factors earning per share and the sustainable growth rate. The sustainable growth rate of Cherokee Inc was negative all throughout except in 2011.

The earnings per share (EPS) and the sustainable growth rate (SGR) factor intrinsic value.

  EPS

Sustainable Growth Rate (SGR)

Sustainable growth rate (SGR) shows how fast a company can grow using internally generated assets without issuing additional debt or equity. To calculate the sustainable growth rate for a company, you need to know its return on equity (ROE). You also need to know the dividend payout ratio. From there, multiply the company’s ROE by its plow back ratio, which is equal to 1 minus the dividend payout ratio.

   CHKE SGR

The ROE of Cherokee was a 56 percent average, the payout ratio was 138 percent and the average SGR was negative 20 percent. The sustainable growth rate was negative because the payout ratio was greater than the return on equity.

Return on Equity (ROE)

Return on Equity (ROE) is an indicator of a company’s profitability by measuring how much profit the company generates with the money invested by common stock owners.

  ROE

 There are two approaches in calculating the sustainable growth rate, these are the relative ratio approach and the average ratio approach.

CHKE Relative

The relative approach has a higher margin of safety against the average approach. CHKE Graph

Explanation

As we can see in the graph, the intrinsic value line is under the enterprise value line, except in 2011 where the IV line rises up a little above the EV line by 40 percent, then it went down again in 2012.  The space between these two lines is the margin of safety and we can get this by subtracting the difference between these two lines.

ITG Relative Valuation Methods  

The relative valuation methods for valuing a stock is to compare the market values of the stock with the fundamentals (earnings, book value, growth multiples, cash flow, and other metrics) of the stock.

Price to Earnings/Earning Per Share (P/E*EPS)   

This method will determine whether the stocks are undervalued or overvalued. By multiplying the Price to Earnings (P/E) ratio with the company’s relative Earning per Share (EPS). And comparing it to the enterprise value per share, we can determine the status of the stock price.

  CHKE PE EPS

The stock was trading overvalued in 2007 and 2010, while in 2008, 2009 and 2011 the price was undervalued. The P/E*EPS rate was 89 percent of the enterprise value. Thus the overall price was overvalued. It means that the price was expensive.

The other approach for calculating this valuation is by using the average price to earnings ratio. CHKE Relative PE

The percentage P/E*EPS ratio using a relative approach was greater by one percent against the average approach.

The Enterprise value (EV)/Earning Per Share (EPS) or (EV/EPS)   

The use of this ratio is, to separate price and earnings in the enterprise value.

  CHKE EV EPS

In the EV/EPS valuation, it tells us that the price (P/E) was 86 percent and the earnings (EPS) was a 14 percent average.  On the other hand, the stock price was overvalued because the price to earnings percentage was greater than 50 percent.

Enterprise Value (EV)/ Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA)         

This metric is used in estimating business valuation.  It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. This metric is useful for analyzing and comparing profitability between companies and industries.

CHKE EV EBITDA

The EV/EBITDA valuation tells us that it will take 9 years to cover the costs of buying Cherokee. In other words, it will take 9 times the cash earnings of the company to cover the cost of the purchase price. A very long period of waiting.

This valuation also tells us about the profitability of the company. The company’s EBITDA represents 12 percent of the enterprise value and its net earnings were 33 percent average.

In conclusion, 

The market capitalization for Cherokee Inc was erratic in its movement at a rate of 7 percent average.  While the total debt was 0.8 percent and the cash and cash equivalent were a 7 percent average. Thus, the enterprise value was lesser by 6 percent against the market value.  Buying the entire business of CHKE would be paying 100 percent of its equity.

The total costs of buying CHKE to date, November 12, 2012, was $119 million at $14 per share. While the market price to date was $14.58 per share.

Current Asset Value Approach

The net current asset value approach shows that the stock price was overvalued from 2007 to 2012. Because the market value was greater than the 66 percent ratio of NCAV. Further, it indicates that the stock was trading above the liquidation value of CHKE. On the other hand, MC/NCAV shows price was overvalued from 2007 to 2012. Because the ratio exceeded the 1.2 ratios, thus the price expensive.

The margin of safety for CHKE was a 7 percent average. There was a zero margin of safety from 2007 to 2010 and the ttm2012.  The sustainable growth rate and the annual growth rate of CHKE were negative all throughout except in 2011. The ROE was 56 percent.

Relative Valuation

Moreover, the relative valuation method shows that the stock was trading at overvalued prices in P/E*EPS valuation. While in the EV / EPS method shows the price (P/E) 86 percent and the earnings (EPS) was 14 percent.  This indicates that the price was overvalued.

It will take 9 times of the cash earnings of CHKE to cover the cost of buying the business.

Overall, it shows that the stock of CHKE was trading at an overvalued price and expensive. There was only a 7 percent margin of safety. Therefore, a SELL is recommended in the stock of Cherokee Inc.

Researched and Written by Cris

Interested to learn more about the company? Here’s company research to know more about its background and history; and value investing guide for the financial status.

GameStop-Corp-GME

GameStop Corp (GME) Trading at Fair Value

November 22nd, 2012 Posted by Investment Valuation No Comment yet

GameStop Corp (GME) is an American video game, consumer electronics, and wireless services, retailer. The company is headquartered in Grapevine, Texas, United States, a suburb of Dallas, and operates 7,267 retail stores throughout the United States, Canada, Australia, New Zealand, and Europe.  Wikipedia.

GameStop Value Investing Approach

This model is prepared in a very simple and easy way to value a company, it adopts the investment style of the Father of Value Investing Benjamin Graham. The essence is that any investment should be purchased at a discount, meaning the true value should be more than the market value. Further, Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt. The basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. We calculated first the enterprise value as our first step. We believed this is important because it measures the total value of the company.

The Investment in Enterprise Value

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise Value EV) is the present value of the entire company.  Market capitalization is the total value of the company’s equity shares. In essence, it is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt, and taking any remaining cash.

Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short Term Investment)

GME EV

Explanation

The table shows that the market capitalization of GameStop Corp deteriorated at 65 percent in 2008 and 5 percent average thereafter.  The total debt was represented 7.3 percent, while the cash and cash equivalent was 15 percent. Therefore,  the enterprise value was lower by 8 percent against market value.  Purchasing the entire business is buying 100 of its equity, no payoff for existing debt since cash and cash equivalent was greater than the total debt.

Buying the entire business of GameStop the investor would be paying $2.9 billion at $21.32 per share. The current market price to date,  November 6, 2012, is $23.72 per share.

Net Current Asset Value (NCAV) Method 

The concept of this method is to identify stocks trading at a discount to the company’s Net Current Asset Value per Share, specifically two-thirds or 66 percent of net current asset value.

GME NCAVPS

GameStop tells us that the stock was trading at an overvalued price because the market value was greater than the 66 percent of NCAV.

It indicates that the stock was trading above the liquidation value of GameStop, therefore, the price was expensive.

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation  

Another stock test is by using market capitalization and dividing it to net current asset value (NCAV).  If the result does not exceed the ratio of 1.2, then the stock passes the test for buying. So, let us see if the stock of GameStop passes the stock test.

   GME MC NCAV

The MC/NCAV valuation indicates that the price was overvalued from 2007 to ttm9 2012 because the ratio exceeded the 1.2 ratios. Therefore, the price was expensive. The stock of GameStop indicates that it did not pass the test. 

The margin of Safety (MOS)  

The margin of safety is used to identify the difference between company value and price. Value investing is based on the assumption that two values are attached to all companies, the market price and the company’s business value or true value. Graham called it the intrinsic value. The difference between the two values is called the margin of safety. According to Graham, the investor should invest only if the market price is trading at a discount to its intrinsic value. Value investing is buying with a sufficient margin of safety. Moreover, Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. The enterprise value is used because, in my opinion, it is a much more accurate measure of the company’s true market value than market capitalization.

GME MOS

Explanation

The margin of safety valuation tells us that there was a margin of safety for GameStop from 2007 to ttm9 2012 at an average of 69 percent.  The highest MOS was in 2008 at 82 percent.

The intrinsic value for GME was erratic in movement and the average intrinsic value was $89.

Intrinsic Value =  Current Earnings x (9 + 2 x Sustainable  Growth Rate)  

   GME IV

The most important factor for intrinsic value was the sustainable growth rate and the earnings per share. The earning per share is a good measure of profitability, and it represents the earning power of the company.  The formula for Earning Per Share (EPS) was:

EPS

Sustainable Growth Rate (SGR)

GME SGR

The average ROE of GameStop Corp was 14.85 percent while the average SGR was 14.6. There was no payout ratio from 2007 to 2011 because the company is not paying any cash dividend. In the trailing twelve months, there was a payout ratio of 12.6.

GME Graph

The intrinsic value line was higher than the enterprise value line, meaning, there was a margin of safety for GameStop from 2007 to ttm9 2012. The space between these two lines is the margin of safety. Calculating the space in figures, it will give us a 69 percent average, as shown in the table above.

Relative and Average Approaches

There are two approaches in calculating the sustainable growth rate, and that is, by using the relative return on equity ratio and the average ROE. I have summarized the results of using these two approaches in the table below.

GME Relative

The table shows that by using the average approach in calculating the sustainable growth rate produces a lower percentage of a margin of safety.

Price to Earnings/Earning Per Share (P/E*EPS)

This method will determine whether the stocks are undervalued or overvalued by multiplying the Price to Earnings (P/E) ratio with the company’s relative Earning per Share (EPS) and comparing it to the enterprise value per share, we can determine the status of the stock price.

   GME PE EPS

The P/E*EPS was $32 while the enterprise value per share was $26. The ratio was 22 percent below the enterprise value per share. It indicates that the price of GameStop Corp was cheap using the PE/*EPS.

The two approaches in calculating this valuation are by using the relative and the average price to earnings ratio. The table below summarizes the results of these two approaches.

GME Relative PE

Using the average price to earnings ratio, the data conveys us a high result, thus it is more favorable than by using the relative ratio.

Enterprise Value (EV)/Earning Per Share (EPS) or (EV/EPS)   

The use of this ratio is to separate price and earnings in enterprise value. By dividing the enterprise value to projected earnings (EPS), the result represents the price (P/E) and the difference represents the earnings (EPS).

GME EV EPS

The EV/EPS valuation tells us that the price (P/E) was 47 percent and the earnings (EPS) was 53 percent average.  This means that, out of the enterprise value per share, the price was nearly half and earnings were a little more than half.  This is the price that the investor is willing to pay.

This might indicate that the stock of GME was trading at fair value.

Enterprise Value (EV)/ Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA).    

This metric is used in estimating business valuation.  It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses.

GME EV EBITDA

The EV/EBITDA valuation tells us that it will take an average of 6 years to cover the costs of buying the entire business. In other words, it will take 6 times the cash earnings to cover the costs of purchasing.

This metric is also used to gauge the profitability of the company. Digging into the financials of GameStop, it shows that the net earnings were 4 percent average. The company had a free cash flow of 2007 to ttm9 2012.

In conclusion,

The market capitalization for GameStop was deteriorating at a rate of 641 percent.  Its total debt was 7.3 percent and its cash and cash equivalent was 15 percent. Thus the enterprise value was lesser of 8 percent than the market value. Purchasing the entire business to date, November 6, 2012, will cost $2.9 billion at $21.32 per share.  Today’s market price was $23.72 per share.

The net current asset value method, tells us that the price was overvalued because the market value was greater than the 66 percent of NCAV ratio. Thus indicating that the price was expensive. On the other hand, MC/NCAV method shows that the price was overvalued because the ratio exceeded the 1.2 ratios. Thus indicating the price was expensive, therefore, the stock of GameStop has not passed the stock test.

The margin of safety

Moreover, the margin of safety on GameStop was averaging 69 percent. The sustainable growth rate was $14.62 while the annual growth rate was $38.23. On the other hand, the return on equity was 14.85 percent while the earnings per share were $2 average.

The price was undervalued because the enterprise value was lesser by 22 percent against the P/E*EPS ratio. While the EV/EPS tells us that the price (P/E) was a 47 percent and the earnings (EPS) was 53 percent.

Relative valuation

The EV/EBITDA valuation indicates that it will take 6 years to cover the costs of purchasing the business. In other words, it will take 6 times the cash earnings to cover the costs of buying GameStop.

Overall, the stock of GME was trading at a price that was fair value.  Therefore, I recommend a HOLD on the stock of GameStop Corp.

Research and Written by Cris

Sasol Limited SSL

Sasol Limited (SSL) Investment Valuation

November 22nd, 2012 Posted by Investment Valuation No Comment yet

Sasol Limited (SSL) is an international integrated chemicals and energy company that leverages technologies and the expertise of their 31 270 people working in 32 countries. Moreover, SSL develop and commercialize technologies, and build and operate world-scale facilities to produce a range of high-value product stream, including liquid fuels, chemicals, and low-carbon electricity.

SSL Value Investing Approach

This model is prepared in a very simple and easy way to value a company, it adopts the investment style of the Father of Value Investing Benjamin Graham. The essence is that any investment should be purchased at a discount, meaning the true value should be more than the market value. Further, Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt. The basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. We calculated first the enterprise value as our first step. We believed this is important because it measures the total value of the company.

The Investment in Enterprise Value on SSL

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise Value EV) is the present value of the entire company.  Market capitalization is the total value of the company’s equity shares. In essence, it is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt, and taking any remaining cash.

Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short Term Investment)

SSL EV

Explanation

The market value of Sasol was stable at $26 billion average and moving at a rate of 11 percent. While the total debt of SSL represents a 52 percent average while the cash and cash equivalent represent a 50 percent average of the enterprise value, therefore, enterprise value was greater by 2 percent against market value. Purchasing the entire business of SSL is paying 98 percent of equity and 2 percent debt.

The cost of buying the entire business of SSL to date, November 7, 2012, will be $27546 at $44.57. The market price to date is 42.86.

Net Current Asset Value (NCAV) Method

The Net Current Asset Value (NCAV) is a method from Benjamin Graham it is to identify whether the stock is trading below the company’s net current asset value per share, specifically two-thirds or 66 percent of net current asset value. Meaning they are essentially trading below the company’s liquidation value and therefore, the stocks are trading in a bargain, and it is worth buying.

SSL NCAVPS

The net current asset value approach tells us that the stock of SSL was trading at an overvalued price from 2007 to 2012. Because the market value was greater than the 66 percent of NCAVPS. The price of the stock of SSL was expensive because the stock was trading above the liquidation value of SSL.

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation  

Another stock test by Graham is by using market capitalization and dividing it to net current asset value (NCAV).  The idea is, if the result does not exceed the ratio of 1.2, then the stock passes the test for buying. 

SSL MC NCAV

The stock price of SSL was undervalued for 2007 to 2012 because the ratio was lesser than the 1.2 ratios. Furthermore,

The margin of Safety (MOS)   

The margin of safety is used to identify the difference between company value and price. Value investing is based on the assumption that two values are attached to all companies, the market price and the company’s business value or true value. Graham called it the intrinsic value. According to Graham, the investor should invest only if the market price is trading at a discount to its intrinsic value. Value investing is buying with a sufficient margin of safety. Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. The enterprise value is used because I think it is a much more accurate measure of the company’s true market value than market capitalization.

SSL MOS

Explanation

The margin of safety tells us that there was a margin of safety for 2007 to 2012 at a rate of 95 percent average. The margin of safety was stable at 95 percent all throughout its 5 years. Moreover, the stock price was cheap and it is over the requirement of Graham at 40-50 percent MOS.

Intrinsic Value =  Current Earnings x (9 + 2 x Sustainable  Growth Rate) 

SSL IV

Explanation

The table above shows the historical intrinsic value for Sasol. The intrinsic value was increasing and this represents the true value of the stock. It factors the earnings per share (EPS) and the sustainable growth rate (SGR). While EPS is the portion of the earnings which is attributable to the ordinary shareholders. It is the earning power of the company.  While the SGR shows how fast a company can grow using internally generated assets without issuing additional debt or equity or in other words it shows how much growth a company can potentially generate internally given its level of profitability.

Furthermore, to arrive at the intrinsic value, the annual growth rate must be calculated first by multiplying SGR to (9+2). Then the result which is the annual growth rate is multiplied to EPS to get the intrinsic value.  The table below will show us the historically sustainable growth rate and how it is calculated.

Sustainable Growth Rate (SGR)

SSL SGR

The return on equity (ROE) and the payout ratio factors SGR.

ROE

Return on Equity clearly shows how many dollars of earnings result from each dollar of equity.

The average ROE was $19 and the average payout ratio was $40, while SGR was $11 average.

There are two approaches to calculating the sustainable growth rate and that is by using the relative ratio for return on equity and the average return on equity. I summarized the results of these two approaches in the table shown below.

SSL Relative

Explanation

Using the average ratio for SSL, it produces a higher result and it is more favorable for the company. As we can see, it affected the results of the intrinsic value and the margin of safety. The graph below will make us understand it better.

  SSL Graph

The graph shows that the intrinsic value (IV) line is far above the enterprise value (EV) line. This means, that there was a margin of safety for SSL. The space between the two lines is the margin of safety.

Price to Earnings/Earning Per Share (P/E*EPS)  

This method will determine whether the stocks are undervalued or overvalued by multiplying the Price to Earnings (P/E) ratio with the company’s relative Earning per Share (EPS). And comparing it to the enterprise value per share, we can determine the status of the stock price.

SSL PE EPS

The P/E*EPS valuation shows that the stock price was undervalued. Because the P/E*EPS result was higher than the market value. The market value represents 11 percent of the P/E*EPS ratio, therefore the stock was trading at the cheap price.

The Relative and Average Approaches

There are actually two ways of calculating P/E*EPS valuation, one is by using the relative price to earnings ratio and the other one is by using the average P/E ratio.  The summary of the results was in the table below.

SSL Relative PE

Enterprise Value (EV)/Earning Per Share (EPS) or (EV/EPS)

We use this ratio to separate price and earnings in the enterprise value. By dividing the enterprise value of projected earnings (EPS), the result represents the price (P/E) and the difference represents the earnings (EPS).

SSL EV EPS

In the EV/EPS valuation, the price (P/E) represents 3 percent and the earnings (EPS) represents 97 percent. It indicates that the price was undervalued and cheap in 2007 to ttm6 2012.

Enterprise Value (EV)/ Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA).        

It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. This metric is useful for analyzing and comparing profitability between companies and industries.

SSL EV EBITDA

The average EV/EBITDA was 1 time.  This means it will take only one year of the cash earnings to cover the costs of buying the business.

This valuation also shows the profitability of the company, for SSL, its net earnings were 14 percent average. The company’s free cash flow was negative for 2010, 2012 and the trailing twelve months.

Overview

The market value of Sasol was stable at $26 billion average and was moving at a rate of 11 percent. On the other hand the total debt was 52 percent and the cash and cash equivalent was a 50 percent average. Buying the entire business of SSL will be paying 98 percent of equity and 2 percent of total debt. The costs of buying SSL to date would be $27546 at $44.57 per share.  The market price to date is $42.86 per share.

The margin of safety

On the other hand, the margin of safety was averaging 95 percent. While the intrinsic value was $1041 average. The sustainable growth rate was $11 average moreover, the annual growth rate was $32 average. In addition, the return on equity was $19 average while the price of earnings was $13 average.

Furthermore, the price was undervalued from 2007 to 2012.  While the EV/EPS valuation shows that the price (P/E) was 3 percent and the earnings (EPS) was 97 percent. It will take one year of the earnings to cover the costs of buying the entire business of SSL.

The margin of safety was 95 percent and the stock was trading at an undervalued price. Therefore I recommend a BUY in the stocks of Sasol Limited  (ADR).

Researched and Written by Cris

Giant Interactive Group Inc-GA

Giant Interactive Group Inc (GA) Is Undervalued and Cheap

November 21st, 2012 Posted by Investment Valuation No Comment yet

Giant Interactive Group Inc. (GA) develops online games. The Company focuses on multiplayer online, or MMO, games that are played through networked game servers in which players are able to simultaneously connect and interact. Bloomberg.

Value Investing Approach on GA 

This model is prepared in a very simple and easy way to value a company, it adopts the investment style of the Father of Value Investing Benjamin Graham.  Moreover, Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt. The basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. We calculated first the enterprise value as our first step. We believed this is important because it measures the total value of the company.

The Investment in Enterprise Value   

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise Value EV) is the present value of the entire company.  Market capitalization is the total value of the company’s equity shares. In essence, it is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt, and taking any remaining cash.
Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short Term Investment)

GA EV

Explanation

The table above shows that the market capitalization for Giant Interactive Group Inc (ADR) was stable except in 2011 where it dropped at 41 percent. The total debt was zero while the cash and cash equivalent represent 152 percent, meaning its cash was greater by 52 percent of the enterprise value.

Moreover, the enterprise value was negative 193 percent against market capitalization. This indicates that the cash and cash equivalent was greater than the market capitalization and total debt. This could also mean that the market capitalization for GA was undervalued or understated. The company has ample cash and cash equivalent which is equivalent to 79 percent of the total assets of GA. The net cash per share was $20 per share average, while the average market value per share was $7.2, this indicates that the stock was trading below its cash value.  The market price to date, November 18, 2012, was $5.21 per share.

Net Current Asset Value (NCAV) Method   

The Net Current Asset Value (NCAV) is a method from Benjamin Graham it is to identify whether the stock is trading below the company’s net current asset value per share, specifically two-thirds or 66 percent of net current asset value. Meaning they are essentially trading below the company’s liquidation value and therefore, the stocks is trading in a bargain, and it is worth buying.

GA NCAVPS

The net current asset value indicates that the price was undervalued because the market price was lesser than the 66 percent ratio.

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation 

Another stock test by Graham is by using market capitalization and dividing it to net current asset value (NCAV).  The idea is, if the result does not exceed the ratio of 1.2, then the stock passes the test for buying.       

  GA MC NCAV

The price was undervalued because the ratio does not exceed the 1.2 ratios.

 The margin of Safety (MOS)   

GA MOS

The average margin of safety was 109 percent, it was over 100 percent because the enterprise value was negative, due to cash which was greater than the market value and no debt. It resulted in a high intrinsic value.

Intrinsic Value = Current Earnings x (9 + 2 x Sustainable Growth Rate)  

GA IV

Explanation

The earnings per share (EPS) and the sustainable growth rate (SGR) factor intrinsic value.

EPS

The above results showed that the average intrinsic value was $182, earning per share was average 4, the sustainable growth rate was 16 percent and the annual growth rate was 41 percent.

Sustainable Growth Rate (SGR)

To calculate the sustainable growth rate for a company, you need to know its return on equity (ROE). You also need to know the dividend payout ratio. From there, multiply the company’s ROE by its plow back ratio, which is equal to 1 minus the dividend payout ratio. Sustainable growth rate = ROE x (1 – dividend-payout ratio).

   GA SGR

Explanation

The return on equity was averaging 20 percent, while the payout ratio was 24 percent average, thus SGR was 16 percent. GA pays cash dividends to its shareholders from 2009 t the trailing twelve months.  Return on Equity (ROE) is an indicator of a company’s profitability by measuring how much profit the company generates with the money invested by common stock owners.

Return on Equity (ROE)

     ROE

Return on Equity shows how many dollars of earnings result from each dollar of equity.  There are two approaches in calculating the sustainable growth rate, the relative ratio approach, and the average ratio approach.

GA Relative

 

GA Graph

Explanation

The graph shows that the intrinsic value line was high above the enterprise value, this means that there was a margin of safety for GA. Getting the figures, the difference between the EV and the IV line is the margin of safety. The average margin of safety for GA was 109 percent.

GA Relative Valuation Methods 

The relative valuation methods for valuing a stock is to compare the market values of the stock with the fundamentals (earnings, book value, growth multiples, cash flow, and other metrics) of the stock.

Price to Earnings/Earning Per Share (P/E*EPS) 

This method will determine whether the stocks are undervalued or overvalued by multiplying the Price to Earnings (P/E) ratio with the company’s relative Earning per Share (EPS) and comparing it to the enterprise value per share, we can determine the status of the stock price.

GA PE EPS

The P/E*EPS valuation indicates that the price was undervalued. The percentage of P/E*EPS was -407 percent average. It shows that the price was cheap from 2007 to the trailing twelve months, since, in the enterprise value valuation shows that the enterprise value was negative and buying the entire business is like buying for free.

The two approaches in calculating the P/E*EPS were by using the relative ratio and the other one is by using the average approach.  The summary of results using these two approaches as shown in the table below.

  GA Relative PE

The price to earnings ratio is higher in relative approach.

The Enterprise value (EV)/Earning Per Share (EPS) or (EV/EPS) 

The use of this ratio is to separate price and earnings in the enterprise value. By dividing the enterprise value of projected earnings (EPS), the result represents the price (P/E) and the difference represents the earnings (EPS).

GA EV EPS

Explanation

In the EV/EPS method shows that the price was 23 percent. While the earnings were 77 percent average.

Enterprise Value (EV)/ Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA)  

This metric is used in estimating business valuation. It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. This metric is useful for analyzing and comparing profitability between companies and industries. It gives us an idea of how long it would take the earnings of the company to pay off the price of buying the entire business, including debt.

  GA EV EBITDA

Explanation

The EV/EBITDA shows an average of -3, this indicates that the investor will recover right away the cost of buying the business since the enterprise value was negative.  The trailing twelve months shows a result of one, meaning it will take one year to cover the costs of buying.

Hence, the enterprise value was negative, meaning, GA has ample cash and cash equivalent greater than the market capitalization. The net margins of the company were 61 percent average which is very impressive net earnings. Therefore,  Giant Interactive was profitable.

In conclusion, 

The market capitalization for GA was stable except in 2010 where it experienced a fall of 41 percent. The total debt was zero percent. While the cash and cash equivalent were 152 percent of the enterprise value. This means that cash and cash equivalent was greater by 52 percent of the enterprise value. Thus making the enterprise value negative.

The enterprise value was 193 percent against the market capitalization.  The company’s cash and cash equivalent was 79 percent of the total assets. Thus, GA has ample cash. The net cash per share was $20 per share, while the average market value per share was $7.2. This indicates that the stock was trading below its cash value.

Buying the entire business is like buying the company for free. Because its enterprise value was negative, therefore the investor will pocket the cash.  The market price to date November 19, 2012, was $5.21 per share.

Current Asset Value Approach

Further, the price was undervalued, because the market value was greater than the 66 percent ratio. Because the price was over the 66 percent ratio.  Overall, the market value per share represents 68 percent of the 66 percent ratio. Therefore the price is considered undervalued.  The stock price of GA was trading below the liquidation value of the company, hence the price was cheap.

MC/NCAV

Furthermore, the price was undervalued because the ratio does not exceed the 1.2 ratios. Overall, the average ratio was 0.71, therefore, the price was undervalued and cheap.

The margin of safety was 109 percent, it exceeded 100 percent. Because EV was negative due to its ample cash which is greater than the market value. This resulted in high intrinsic value with an average of $182. While SGR was 16 percent and 41 percent for annual growth rate. On the other hand, the return on equity was 20 percent.

Relative valuation

The stock price was undervalued in the P/E*EPS valuation because the enterprise value was negative or equivalent to zero dollars. On the other hand, EV/EPS indicates that the price (P/E) is 23 percent while the earnings (EPS) is 77 percent.  It indicates that the price was undervalued and cheap because the price was 25 percent of EV.

EV/EBITDA

The EV/EBITDA valuation was negative 3, meaning the costs of buying the entire GA were like buying it for free. Because the enterprise value was negative and the cash was greater than the market value. The cash of GA represents 79 percent of the total assets and the net margins were 61 percent average.

Overall, the price was undervalued and cheap. Further, GA has a high margin of safety and a very impressive net margin.  Furthermore, the stock was trading below its cash value. Therefore, I recommend a BUY in the stock of Giant Interactive Group Inc (GA).

Research and Written by Cris

Research In Motion Ltd (RIMM)

Research in Motion Ltd (RIMM) basically the maker of BlackBerry

November 16th, 2012 Posted by Investment Valuation No Comment yet

Research in Motion Ltd (RIMM) is a leading designer, manufacturer, and marketer of innovative wireless solutions for the worldwide mobile communications market. RIMM is known principally as the maker and provider of BlackBerry wireless devices and e-mail services.

RIMM Value Investing Approach 

This model is prepared in a very simple and easy way to value a company, it adopts the investment style of the Father of Value Investing Benjamin Graham. The essence is that any investment should be purchased at a discount, meaning the true value should be more than the market value. Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt. The basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. We calculated first the enterprise value as our first step. We believed this is important because it measures the total value of the company.

The Investment in Enterprise Value 

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise Value EV) is the present value of the entire company.  Market capitalization is the total value of the company’s equity shares. In essence, it is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt, and taking any remaining cash.

Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short Term Investment)

RIMM EV

Explanation

The market value of Research in Motion Ltd was decreasing at 29 percent averages well as its enterprise value at 34 percent average.  The enterprise value total debt was 0.005 percent. Thus resulting in a no-debt-equity ratio of zero, impressive. While cash and cash equivalent was 7 percent of the enterprise value, enterprise value was lesser by 7 percent than the market value. Buying the entire business of RIMM would mean buying 100 percent of its equity, with no debt.

The market price of RIMM has dropped at a rate of 27 percent average. The buying price to date, October 27, 2012, for the entire business was $1735 at $3.31 per share.

Net Current Asset Value (NCAV) Approach

The Net Current Asset Value (NCAV) is a method from Benjamin Graham it is to identify whether the stock is trading below the company’s net current asset value per share, specifically two-thirds or 66 percent of net current asset value. Meaning they are essentially trading below the company’s liquidation value and therefore, the stocks are trading in a bargain, and it is worth buying.

Net Current Asset Value (NCAV) Method

   RIMM NCAVPS

The net current asset value approach for RIMM shows that the stock was trading at an overvalued price because the market price was greater than the 66 percent of NCAV. The result of 66 percent was only 7 percent of the market price.

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation

Another stock test by Graham is by using market capitalization and dividing it to net current asset value (NCAV).  The idea is, if the result does not exceed the ratio of 1.2, then the stock passes the test for buying. 

RIMM MC NCAV

The table above indicates that in MC/NCAV method, the price was overvalued from 2007 to 2011 because the ratio was greater than 1.2 thus telling us the stock did not pass the stock test. While during ttm6 2012, the price was undervalued because the result of the ratio did not exceed 1.2 therefore, the price was cheap.

 The margin of Safety (MOS)  

The margin of safety is used to identify the difference between company value and price. Value investing is based on the assumption that two values are attached to all companies – the market price and the company’s business value or true value. Graham called it the intrinsic value. The difference between the two values is called the margin of safety. According to Graham, the investor should invest only if the market price is trading at a discount to its intrinsic value. Value investing is buying with a sufficient margin of safety. Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. The enterprise value is used because, in my opinion, it is a much more accurate measure of the company’s true market value than market capitalization.

RIMM MOS

Intrinsic Value =  Current Earnings x (9 + 2 x Sustainable  Growth Rate) 

EPS, the company’s last 12-month earnings per share.  G: the company’s long-  term (five years) sustainable growth estimate.   9: the constant represents the appropriate P-E ratio for a no-growth company 2: the average yield of high-grade corporate bonds.

RIMM IV

Explanation

The intrinsic value factors earning per share and the sustainable growth rate. To arrive at the intrinsic value, we must calculate first the annual growth rate. Then by 9+2 multiplied by the growth or the sustainable growth rate (SGR). The factors used in the calculation were explained above.

As we can see, the intrinsic value has increased from 2007 to 2010  averaging 42 percent. It experienced a sudden drop of 87 and 94 percent in 2011 and ttm6 2012, respectively.

RIMM SGR

The sustainable growth rate factors return on equity and payout ratio.  RIMM was not paying the cash dividend to its shareholders’, therefore, there was no payout ratio. Thus, the result of the sustainable growth rate is the same as the return on equity. In the calculation above, I have used the relative return on equity.

RIMM Graph

Explanation

The graph above shows that the intrinsic value line was higher than the price or enterprise value. This goes to show that there was a margin of safety for RIMM from 2007 to ttm6 2012.  In the trailing twelve months,  it had almost intersected with each other. If we put in figures or in percentage the distance between the two lines, that is the margin of safety. In the above table, the average percentage from 2007 to ttm6 2012, was 69 percent, this is the distance of the space between the two lines from 2007 to ttm6 2012. In 2010, the intrinsic value soared up very high at a rate of 63 percent from 2009, then a  sudden fall in 2011 at a rate of 87 percent and it continues to fall in ttm6 at 94 percent.

There are two approaches in calculating SGR, and that is the relative and the average approach.

RIMM Relative

Using the average approach, it produces a higher result.  On the other hand, this does not work for the margin of safety in which it was using the relative approach gave us a higher percent of MOS.

Price to Earnings/Earning Per Share (P/E*EPS)  

This valuation determine whether the stocks are undervalued or overvalued by multiplying the Price to Earnings (P/E) ratio with the company’s relative Earning per Share (EPS) and comparing it to the enterprise value per share, we can determine the status of the stock price.

RIMM PE EPS

The price was undervalued because the enterprise value was lesser than the P/E*EPS ratio. The stock was trading at an undervalued price because the enterprise value was 80 percent average of the P/E*EPS  ratio.

There is another approach in calculating the P/E*EPS valuation and that is the average approach.

RIMM Relative PE

Using the average price to earnings ratio produces a higher percentage because it takes into consideration the performance of the company in the prior periods.

Enterprise Value (EV)/Earning Per Share (EPS) or (EV/EPS)  

The use of this ratio is, to separate price and earnings in the enterprise value. By dividing the enterprise value into the projected earnings (EPS), the result represents the price (P/E) and the difference represents the earnings (EPS).

RIMM EV EPS

In the EV/EPS valuation tells us that the price (P/E) was 30 percent average. On the other hand, the earnings (EPS) was 70 percent on average.

Enterprise Value (EV)/ Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA).  

This metric is used in estimating business valuation. It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. This metric is useful for analyzing and comparing profitability between companies and industries. It gives us an idea of how long it would take the earnings of the company to pay off the price of buying the entire business, including debt.

RIMM EV EBITDA

It will take 9 years or 9 times cash earnings of Research in Motion Ltd to cover the costs of buying the entire company.

Conclusion

The market value of RIMM was decreasing at a rate of 29 percent average. While the enterprise value was also decreasing at a rate of 34 percent average. RIMM has a debt-equity-ratio of zero, impressive.  Cash and cash equivalent were 7 percent.  Buying price to date, October 27, 2012, was $1735 at $3.31 per share. Buying the entire business will be buying 100 percent of its equity.

The net current asset value approach tells us that the stock of RIMM was trading at an overvalued price. Because the price was trading above the liquidation value of the company. While the MC/NCAV  indicate that the price was overvalued because the ratio was greater than 1.2.

The margin of safety

On the other hand, the average margin of safety was 69 percent.  In 2010 the intrinsic value was the highest at 92 percent. Using the average return on equity, the margin of safety was 66 percent.

The sustainable growth rate was $27 average, while the annual growth rate was $63 average. Moreover, the return on equity was $27 average. The margin of safety was at $206.98 average.

Relative Valuation

Furthermore, the price was undervalued because the enterprise value was lesser than the result of P/E*EPS. In an average approach, the P/E represent 146 percent while in relative approach, the P/E was 132 percent.

The EV/EPS indicate that the price (P/E) represents 30 percent and the earnings (EPS) was 70 percent.

In addition, it will take 9 times the cash earnings to cover the cost of buying the entire business.

The margin of the safety was 69 percent and the price was trading at a price undervalued. Therefore I recommend a BUY in the stock of Research in Motion Ltd (RIMM).

Researched and Written by Cris

 

Interested to learn more about the company? Here’s investment guide for a quick view, company research to know more of its background and history; and value investing guide for the financial status.

Humana-Inc-HUM

Humana Inc (HUM) Investment Valuation

November 15th, 2012 Posted by Investment Valuation No Comment yet

Humana Inc (HUM) is a for-profit American health insurance company based in Louisville, Kentucky. Humana Inc is headquartered in Louisville, Ky., is committed to helping our millions of medical and specialty members achieve their best health.

HUM Value Investing Approach 

Our basis of valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement.   In this model, we first calculate the enterprise value as our first step in the valuation.  I consider this important because this is a great measure of the total value of a firm and is often great starting points for negotiation of a business.

The Investment in Enterprise Value    

The concept of enterprise value is to calculate what it would cost to purchase an entire business.

HUM EV

The market capitalization of Humana Inc was erratic in movement, so as to the enterprise value. The market capitalization and the enterprise value were moving at an average of 4 and 5 percent, respectively. The total debt represents 19.6 percent while the cash and cash equivalent represent 20 percent, thus the enterprise value is lesser by almost 1 percent than the market capitalization.

Buying the entire business is buying 100 percent of its equity, no debt because cash offset total debt. The cost of buying the entire business of Humana Inc to date November 5, 2012, will be $10 billion at $60.36 per share.  Today’s (November 5, 2012) market price was $75.21 per share.

Net Current Asset Value (NCAV) Method  

The Net Current Asset Value (NCAV) method of selecting stocks has outperformed the market significantly. The concept of this method is to identify stocks trading at a discount to the company’s Net Current Asset Value per Share, specifically two-thirds or 66 percent of net current asset value.

HUM NCAVPS

The net current asset value method for Humana Inc indicates that the price was overvalued. Because the market value was greater than the 66 percent of NCAV from 2007 to ttm9 2012.

The stock of Humana Inc was trading at a price above the liquidation value of the company. Therefore the price was expensive from 2007 to ttm9 2012.

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation  

   HUM MC NCAV

The MC/NCAV valuation for HUM indicates that the price was overvalued because the result of the ratio was over 1.2.

The margin of Safety (MOS)     

The Margin of Safety requires knowing when the buying price is low in absolute terms, rather than merely relative to the market as a whole. Value investing is buying with a sufficient margin of safety.  The question is, How large of a margin of safety is needed for a stock to be considered a true value investment?

I used the enterprise value because it takes into account the balance sheet so it is a much more accurate measure of the company’s true market value than market capitalization.  Let us find out through the margin of the safety table below for Humana.

HUM MOS

Explanation

The margin of safety was averaging 71 percent.

Intrinsic Value =  Current Earnings x (9 + 2 x Sustainable  Growth Rate)  

  HUM IV

The intrinsic value factors earnings per share and the sustainable growth rate.

HUM SGR

Explanation

The average sustainable growth rate was $13 and the annual growth rate was $35 average. In the calculation of the sustainable growth rate, the main factor was the return on equity. Return on Equity measures the return on the money the investors have put into the company. This is the ratio potential investors look at when deciding whether or not to invest in a company. This encompasses the three pillars of corporate management, profitability, asset management, and financial leverage.
ACN ROE
HUM Graph

Explanation

The graph shows the movement of the intrinsic value and the enterprise value, historically. The intrinsic value was moving up and downs, while the enterprise value was somewhat stable. As we can see, the intrinsic value line was higher than the enterprise value line. This means that there was a margin of safety.   The space between these two lines is the margin of safety. By calculating the difference between these two lines, we can get the margin of safety.

The Relative and Average Approaches

There are two approaches in the calculation of the sustainable growth rate, and this affects the intrinsic value and the margin of safety.  These two approaches are by using the relative return on equity and the other one is by using the average return on equity.

HUM Relative

Price to Earnings/Earning Per Share (P/E*EPS) 

This evaluation will determine whether the stocks are undervalued or overvalued by multiplying the Price to Earnings (P/E) ratio with the company’s relative Earning per Share (EPS) and comparing it to the enterprise value per share, we can determine the status of the stock price.

HUM PE EPS

The price was undervalued because the enterprise value was lesser than the P/E*EPS ratio.

Overall, the stock of HUM is trading at a price undervalued, because the total enterprise value for 5 years represents 97 percent of the P/E*EPS ratio. In other words, the price is lesser than the ratio. There are two approaches in calculating this valuation, one is by using the relative price to earnings ratio and the other one is by using the average price to earnings ratio.

A higher result was conveyed using the average ration rather than by using the relative ratio. The percentage of P/E*EPS was 110 percent using average against 103 percent in relative.

Enterprise Value (EV)/Earning Per Share (EPS) or (EV/EPS)  

The use of this ratio is, to separate price and earnings in the enterprise value. By dividing the enterprise value of projected earnings (EPS), the result represents the price (P/E) and the difference represents the earnings (EPS).

    HUM EV EPS

This is the separation of price to earnings in the enterprise value. The price (P/E) represented a 16 percent average and the earnings (EPS) were an 84 percent average.

This valuation depends on the discretion of the analysts whether the price was appropriate or not.

Enterprise Value (EV)/ Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA).     

This metric is used in estimating business valuation.  It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. In addition, this metric is useful for analyzing and comparing profitability between companies and industries.  It gives us an idea of how long it would take the earnings of the company to pay off the price of buying the entire business, including debt. Let’s find out.

HUM EV EBITDA

Explanation

The result of EV/EBITDA was average 5 years or 5 times.  This means, buying the entire business of HUM, it will take 5 years to cover the costs of buying.  In other words, buying the entire business will take 5 times the cash earnings of the company to cover the purchase price.

This valuation shows the profitability of the company, digging into the finances of HUM. The main source of the revenue is the premiums, and it remains stable at 96 percent all throughout, but the total deductions before income tax were 95 percent. The total benefit, claims, and expenses of the company were on average 95 percent plus income tax of an average 2 percent, thus net earnings would result to 3 percent average.   There was no free cash flow from 2007.

In conclusion, 

Humana Inc’s market capitalization was erratic in movement so as to the enterprise value, moving at a rate of 4 and 5 percent, respectively.  The total debt represents 19.6 percent and the cash and cash equivalent was a 20 percent average.  Buying the entire business of Humana Inc will be paying 100 percent of its equity.  The purchase price to date, November 5, 2012, was $10 billion at $60.36 per share. To date’s market price was $75.21 per share.

The price was overvalued because the stock is trading above the liquidation value of HUM.

The margin of safety

The margin of safety was 71 percent average wherein the highest was in 2009 at 80 percent. The intrinsic value was $218 average.  The SGR was averaging $13, while the annual growth rate was $35 and the ROE was $14 average.

On the hand, the P/E*EPS indicates that the price was undervalued. Because the enterprise value was 97 percent of the P/E*EPS ratio.  This means, that the price was lesser than the ratio and therefore cheap.

The EV/EPS valuation shows that the price (P/E) was averaging 16 percent. While the earnings (EPS) were 84 percent.

EV/EBITDA

Further, the EV/EBITDA valuation shows an average of 5 years or 5 times.  Meaning it will take 5 times the cash earnings of HUM to cover the costs of buying the entire business.

Overview, the margin of safety was 71 percent. In addition, the stock is trading at an undervalued price, in other words, the price was cheap. Therefore, I recommend a BUY on the stock of Humana Inc (HUM).

Research and Written by Criselda
Humana-Inc-HUM

Humana Inc (HUM) Is Financially Stable And Healthy

November 9th, 2012 Posted by Company Research Report No Comment yet

Humana Inc (HUM) shows that the company is financially stable and healthy in the past five years.

Humana Balance Sheet

Liquidity ratios of Humana Inc. from 2007 to 2011 are as follows:

huliq

  • Working capital in dollars was 4861, 5324, 6820, 7418 and 7972, with an average of 6469. This is the funds left after deducting short-term obligations from the company’s current asset.  As we noticed, the company is doing good, its working capital is consistently increasing year to year and continued to have positive results.
  • The company’s current ratio was 4.27, 4.27,4.80, 4.55 and  4.65. The average was4.51, which means that its current asset was 451 percent of its current liabilities. It shows that the company possessed vast current resources.
  • Its quick ratio was also 4.27, 4.27, 4.80, 4.55 and 4.65, with an average of 4.51, which means that current resources(net of inventory) were 451 percent of its short-term obligations since the company has no inventory.
  • And net working capital ratio was .37, .41, .48, .46 and .45 with an average of .43. This means that the average net working capital left was 43 percent after paying off its current obligations.

Analysis

Based on the above table, the company is financially stable as far as its current resources are concerned. Working capital was consistently positive and continued to increase yearly.  Its current ratio has an average of more than 451 percent as well as its quick ratio and after the settlement of its current obligations, the company’s  working capital left was 43 percent.

Humana Inc. is a health insurance company, its current assets are consists of short-term investments and cash and cash equivalents and premiums and other receivables. The company has no inventory, accounts receivable as well as accounts payable. 

hulev

Facts

  • Debt ratio was .69, .66, .59, .57 and .54, with an average of .61 which means that in five years time its total liabilities was  61 percent against total assets. The company’s total debt when compared to its total assets reached more than 50 percent.
  • Debt to equity ratio was 2.20, 1.93, 1.45, 1.33 and 1.20, with an average of 1.62. This tells us that its debt was  162 percent of owners’  equity.
  • And solvency ratio was .12,  .10, .15,  .15 and  .18. The average was .14. This tells us that  Humana Inc. is 14 percent solvent.

humajor

  • Current liability to total asset was .11, .12, .13, .13 and .12. The average was .12. This tells us that the creditors, most probably suppliers have only 12 percent claims on the total assets of the company.
  • Long term liability to total asset was .13, .15, .12, .10 and .09with an average of .12 meaning that the banks have also 12 percent claims on the company’s assets.
  • Owners’ equity to total asset was .31, .34, .41, .43 and .46. The average was .39. This means that the stockholders or owners have the majority control of the total assets of the company at a percentage of 39.

Referring to the above data, the company was indebted at an average of 61 percent of total assets and 162 percent if compared to its owners’ equity. As a health insurance company, the company is operating its business through loans.

Humana Property, Plant & Equipment

The table below shows us the investment in property, plant, and equipment of Humana Inc. from 2007 to 2011:

huppe

Humana Inc. has an investment in PPE of 637, 711, 679, 815 and 912, with an average of 751 in five years’ period; however, there was no record of accumulated depreciation. The company had only recorded depreciation and amortization of 185, 220, 250, 263 and 270 or average of 238 and this represents 29, 31, 37, 32 and 30 percent of the gross PPE.

Humana Income Statement

Profitability

Profitability ratios of  Humana Inc. from 2007 to 2011 are as follows:

huprof

  • Net margin of the company has an average of .03 percent and is quite low. This is the after-tax profit a firm generated for each dollar of revenue.
  • Asset turnover ratio was 1.96, 2.22, 2.19, 2.10 and 2.08, with an average of 2.11 which means that Humana Inc. generates $2.11 average of sales for every $1 of assets.  As noticed, the asset turnover ratio is inversely related to the net profit margin, the higher the asset turnover the lower the net margin and vice versa.
  • Return on asset  was .06, .05, .07, .07 and .08 with an average of .07. This means that the company generated a profit of $0.07  for each $1 in the asset.
  • Return on equity was.32, .22, .28, .25 and .28. The average was.27 which shows the firm’s earnings on the funds invested by the shareholders or owners. The company’s high ROE was in 2007.
  • Financial leverage or equity multiplier was 3.20, 2.93, 2.45, 2.22 and 2.20. an average of 2.62. This is derived by dividing total asset by total stockholders’ equity. It allows the investor to see what portion of the ROE is the result of debt.
  • Return on invested capital was .15, .10, .14, .13 and .15.Average of .13. This shows us how well a company generates cash flow relative to the capital it has invested in its business.

Analysis

The company had a low net margin of 3 percent average. Its operating asset was efficiently used as the firm generated $2.11 average of sales for every dollar of the asset while it has also generated a profit of $0.07. Return on equity was 27 percent average which means that it earned $0.27 for every $1 of equity investment. And finally, the company’s return on invested capital had an average of 13 percent which shows the company’s efficiency in generating cash flow relative to invested capital or  $0.13 for each dollar of invested capital.

Income

huincome

  • Revenue was consistently increasing per year with a growth rate of 14, 7, 9 and 9 percent respectively from 2007 to 2011.
  • Gross profit was 5019, 5238,  6185, 6780 and 8009, trailing twelve months of 8064. The trend is increasing year after year. This is the result after deducting the cost of revenue from revenue.
  • Operating income/income before tax was 1289, 993, 1602, 1750 and 2235with trailing ttwelve monthsof 1966.This was the difference between gross profit and the operating expense.  Humana Inc. operating income in 2008  declined by 23 percent compared to 2007 results, but they were able to recover in 2009 and continue trending up until 2011.
  • And finally, income, after tax was 834, 647, 1040, 1099 and 1419 and trailing twelve months, was 1248. The company’s after-tax income in 2008  declined by 22 percent but managed to rise up in 2009 until  2011.

Analysis

The past five years performance of Humana Inc. was impressive because it showed positive revenue, with consistently increased per year. After deducting the cost of revenue, operating expenses and provision for income tax, the company maintained a positive income throughout its five years of operation, with a slight decline in 2008. The good thing is the company was to recover thereafter until 2011.

Expenses

Shown below are the expenses of  Humana Inc. from 2007 to 2011:

huexp

  • The cost of revenue was 20271, 23708, 24775, 27088 and 28823, with ttm of 30211. This represents 80, 82, 80, 80 and 78 percent of revenue.
  • Selling, the general and administrative expense was  3476, 3945, 4228, 4663 and 5395, with ttm of 5713. This is also 14, 14, 14, 14 and 15 percent of revenue.  The trend was also increasing per year.
  • Income tax was 456, 346, 562, 650 and 816, with ttm of 718, which is equivalent to 2, 1, 2, 2 and 2 percent of revenue.

Considering the industry of  Humana Inc. as a health care insurance, we could not compare it with a marketing or manufacturing company whose returns,  percentage wise reached as high as 20 percent. In the insurance industry,  5 percent net margin is quite high enough.

Margins

Detailed below is the company’s margin from 2007 to 2011:

humarg

  • Gross margin was .20, .18, .20, .20 and .22. The average was .20. The result fluctuated in 2008 by 2 percent; however, immediately recover and increased by 2 percent in 2011.
  • Operating income and pretax margin was .05, .03, .05, .05 and .06. with an average of .05.  with the same trend went to gross margin also.
  • Net margin was .03, .02, .03, .03 and .04. Average of  .03. The company incurred low net margin in 2008 but high in 2011 at 4 percent, resulted to an average of 3 percent in 5 years period.

Humana Inc. gross margin was at a normal level at 20 percent average throughout five years of operation with this kind of industry. After considering all the related operational costs plus provision for income tax, the company’s net margin was only 3 percent average. This is quite low; the company must exert effort to at least hit the 5 percent mark.

Modified Income Statement

humodi

  • As per above table, the company’s revenue was consistently going high, with its highest in 2011. with a yearly growth rate of  14, 7, 9 and 9 percent respectively.
  • After deducting the cost of revenue and operational costs, it resulted in a positive net income with its highest peak was in 2011.
  • The past year’s performance of Humana Inc. as far as its income statement is concerned is quite good and well managed.

Humana Cash Flow

The graph below shows us how the cash flow of  Humana Inc.:

hucflow

  • Net income was 834, 647, 1040, 1099  and 1419, which is the result of the normal day to day operation of the business. Its peak was in 2011.
  • Accounts receivable was 658, 61, -153, -60 and -46.
  • Depreciation & amortization was 185, 220, 250, 263 and 303.
  • While other operating expenses was  92, 24, 19, 58 and 81.
  • So, its net cash provided by operating activities was 1224, 982, 1422, 2242 and 2079.  The result was trending up except in 2008  wherein it dropped by 20 percent against 2007 but thereafter it continued to increase, however it slightly decreased in 2011 by  7 percent.

As shown in the above table, operating cash flow was good throughout its five years period, it shows a positive result.  Transactions affecting cash flow operating apart from the net income were accounts receivable, depreciation and amortization and other operating expenses.

Cash Flow From Investing Activities

Transactions related to cash flow from investing activities of Humana Inc. from 2007 to 2011 are as follows:

hucfi

  • Sales/Maturity of Fixed maturity was 3059, 5867, 5534, 3833 and 2882.
  • Acquisition & disposition was -493, -423, -12, -832 and -226.
  • Purchase of investments was -3489, -5681, -7197, -4589 and -3678.
  • Property & equipment, net was -213, -262, -184, -222 and -336.
  • And other investing activities was -709.
  • Net cash for investing activities was -1845, -498, -1859, -1811 and -1359.

Data of Humana Inc. shows that investing cash flow of the company resulted in a negative balance since its cash outflow was more than its cash inflow.  Total cash outflow in the past 5 years was -4904, -6366, -7393, -5643 and -4240 and total were 28,546; while its cash inflow was 3059, 5867, 5534, 3833 and 2882 with a total of 21175.  Overall difference was -7371.

Cash Flow from Financing Activities

hucff·

Change in short-term borrowings was 326, -1448, -250, 35 and -56.

  • Long-term debt issued was 749 in 2008,
  • Long-term debt payment  in 2008 was -51,
  • Common stock issued in 2007 was 62,
  • Repurchase of treasury stock was -27, -106, -23, -109 and -541,
  • Cash dividends paid was -82 in 2011,
  • Other financing activities was 561, 303, 354, -298 and -338,and
  • Net cash provided by financing activities was  921, -554, 81, -371 and -1017.

Transactions involved under this category, financing cash flow, were limited to issuance of common stock and payment of dividends to shareholders in 2010 and 2011 only.

Free Cash Flow

Shown below is the free cash flow of  Humana Inc. from 2007 to 2011:

hufcf

Free cash flow was the net amount after deducting capital expenditure from operating cash flow. For the past five years, the company free cash flow was 1011, 720, 1238, 2020 and 1743.  It shows that Humana Inc. has sufficient funds to retire long-term debt, pay dividends and invest additional lines of business.

Cash Flow Ratios

Cash flow ratios measure a company’s ability to meet ongoing financial and operational commitments. The following ratios are used on computingHumana Inc.’s cash flow  from 2007 to 2011:

hucfratios

Facts

  • Operating CF to sales was .05, .03, .05, .07 and .06; average of .05, which means that the company generates an average of $0.05 of cash flow for every $1 dollar of sales.
  • Operating cash flow ratio and current coverage ratio was  .83, .60, .79, 1.07 and  .95. an average of .85. It is the result after dividing cash flow from operation by total current liabilities. This tells us how much cash flow can cover the short-term obligation of the company.
  • Free cash flow ratio was .83,  .73, .87, .90, and  .84.with an average of .83. It shows that the company has available funds to retire additional debt, additional dividends and invest another line of business.
  • Capital expenditure ratio was 5.75, 3.75, 7.73, 10.1 and 6.19 with an average of 6.7. By the way, capital expenditure is a ratio that measures a company’s ability to acquire long-term assets using free cash flow. It shows us that the company has the ability to invest in itself.
  • Total debt ratio was .14, .11, .17, .24  and  .22 with an average of .18. This means that Humana Inc has only 18 percent ability to carry its total debt.  This ratio provides an indication of a company’s ability to cover total debt with its yearly cash flow from operations. According to Rio, the higher the percentage ratio; the better the company’s ability to carry its total debt.

Analysis

As shown above, the company is doing well in its operation, cash flow ratios show that  Humana Inc. has available funds to expand its business thru investment of other lines. In the same manner, it has also the ability to cover not only short-term debt but long term debt as well.  With regards to its CAPEX, the company has the ability to acquire long-term assets using its cash flow, so the company will further grow.

Written by Rio

Edited by Cris

DeVry-Inc

DevRy Inc is in Medium Scale for Financial Liquidity

November 7th, 2012 Posted by Company Research Report No Comment yet

DeVry University is a for-profit college based in the United States. The school was founded in 1931 by Herman A. DeVry as DeForest Training School and officially became DeVry University in 2002. Wikipedia

Balance Sheet

The balance sheet is a statement wherein we can determine how liquid and efficient based on the resources one company had.

Liquidity

Financial liquidity will tell us how liquid and quick of the company can turn their assets into cash in order to pay its current debt.

The net working capital ratio was the results of net working capital over total assets. DeVry Inc per total average in five years was considered in medium scale in terms of financial liquidity available at 1.42 of every $1 of debt. It had a slight slowdown during 2009 at .98. The same thing happened in net working capital; movement was in sideways but still, they had an available of 8 percent over their total assets.

Leverage

Leverage measures efficiency of the company in handling their debt from short-term to long term. I’m having a thought now if DeVry Inc had positive leverage. Let’s find out on the graph below.

DV leverage based on the total average is 28 and 39 percent of debt ratio and debt equity ratio, respectively; meaning they had low leverage which in every $1 of the asset only .28 and .39 finance by the local creditor and equity holder, respectively. They had a high solvency ratio at 53 percent.

Cash Conversion Cycle

The entire cash conversion cycle is a measure of management effectiveness. Lower conversion is better. As we all know, cash is king and is the start and the end of a business. No business can start without cash, and all businesses end in cash, whether it be liquidated or sold out. This is why a business that can manage its cash efficiently will do better than its competitor. Cash conversion cycle, start off with cash, becomes inventory and accounts payable, which then becomes sales and accounts receivables before converting into cash again.

What can we say about the cash conversion of Devry Inc?

DV cash conversion cycle results were impressive an average of 5 days cycle but a little monitoring in payables and receivables because of the average of receivable at 21 days while payables were 16 days. It tells us that they will pay first their payables prior to have a collection and there a credit term was only 15 days maximum.

Asset Management

Asset management measures efficiency in handling the company’s resources.

DV asset management as per total average in five years of operation it had 17 days receivable turnover and payable turnover at 24 days whereas fixed asset turnover at four years maximum will be useful.

PPE

The PPE of DV was increasing yearly and based on presuming estimated life of five years, their PPE has a remaining life of 3 years.

 Majority Holders

Majority holders determine who the major claimants of the assets of the company are.

I want to know who is/are for Devry Inc so I asked some help for Dyne.

DeVry Inc was highly financed by equity holders at 72 percent, then by local creditors at 20%then the bank or bondholder at 8 percent. It tells us that in every $1 of asset the equity holder will claim at .72, the local creditor at .20 and banks or bondholder is .08.

Income Statement

The income statement is where we can determine if the company’s revenues are on trend at the same time if they are profitable or not?

Modified Income Statement

DV revenue from 2008 to 2011 was highly increasing an average of 20 percent but in 2012 was slightly down by 4 percent. Total expenses were consistently increasing with an average of 16 percent per year. The net income was also increased from 2008 to 2011 at an average of 13 percent. In 2012, it dropped down to 132 percent from 2011 due to net income affected by the revenue results.

Expenses

DeVry Inc’s expenses consistently went upward an average per year by 12 and 14 percent respectively for the cost of revenue and total operating expenses whereas income tax has an average increase yearly by 25 percent from 2008 to 2011 but in 2012 it went down by 157 percent.

Margins

The margin is one kind of metrics in determining the profitability of the company to generate earnings relative to sales. One is gross margin which reveals how much a company earns taking into consideration the costs that it incurs for producing its products or services; a ratio of gross profit ( revenue less cost of revenue) over company’s revenue. Second is EBIT (Income before interest and taxes) is a measure of a company’s profitability that excludes interest and income tax expenses.

Does DeVry Inc profitable use this metric?

DV margins were relative to its revenue in the first four years ( 2008 to 2011). It slowly went upward by 3 percent but need to highly monitor since the result of 2012 drop down by 9 percent based on net margin. It tells us that for their four years 2008 to 2011 out of $1 it has an average return of .03 but in 2012 alone it went down by .09.

ROE using the DuPont Model

DV ROE shows from 2008 to 2010 were increasing from 4 to 7 percent and went down in 2011 and 2012 at 1 to 16 percent respectively. It was highly affected by the financial structure ratio went down by 10 percent in 2011; operating margin and capital turnover in 2012 drop down by 13 percent both. Applying the DuPont model in our analysis is a big part and it helps us determine if ROE of the company is affected by three things:

  • Operating efficiency, which is measured by net profit margin;
  • Asset use efficiency, which is measured by total asset turnover; and
  • Financial leverage, which is measured by the equity multiplier.

It result to the formula of ROE (DuPont formula) = (Net profit / Revenue) * (Revenue / Total assets) * (Total assets / Equity) = Net profit margin * Asset Turnover * financial leverage.

We are basically done with the first two parts of the financial statement. It’s now high time to deal with the last part and that’s the cash flow.

Cash Flow

Before we start, I asked Dyne to define cash flow. And she said “Cash flow statement is where you can determine if the company is financially healthy and stable.

Cash flow Summary

DV net cash from operating activities, according to Dyne, was highly increasing upward from 2008 to 2011 with an average of 15 percent but drop down in 2012 by 47 percent. The net cash flow from investing shows every two years increased. Whereas cash net used in financing was in sideways. It results in a net change in cash per average cash provide at 9 percent.

Cash flow from Operating

DV cash from operating activities grew successively from 2008 to 2011 by 15 percent but drop down in 2012 of 47 percent. This was due to cash collection was also increasing from 2008 to 2011 but went down in 2012 and the cash payments were continuously up.

Cash Flow from Investing

DV investing activities shows in every two years has an additional activity from its investment. In 2009 they invested in acquisitions and a slight increase in PPE while in 2010 and 2011 an increased in PPE and acquisition.

Cash Flow from Financing

Free Cash Flow

DV free cash flow from 2008 to 2011 went upward with an average of 20 percent increase per year and in 2012 it was still a positive result but drop down by 84 percent compared with 2011 data.

Cash Flow Efficiency

DV cash efficiency was very efficient. It indicates with all positive results. They are very efficient based in TTM which from CAPEX ratio with an equivalent of $2.15 for every $1 of a fixed asset, operating and current coverage available at .88, for total debt at .64 and free cash flow ratio available at .53 and from sales at .13.

Written by Dyne

Edited by Cris

Interested in learning more about the company? Here’s investment guide for a quick view, company research to know more of its background and history; and investment valuation for the pricing.

Accenture plc acn

Accenture plc (ACN) Investment Valuation

November 6th, 2012 Posted by Investment Valuation No Comment yet

Accenture plc (ACN) is a global management consulting and professional services firm that provides strategy, consulting, digital, technology and operations services. ACN has been incorporated in Dublin, Ireland, since 1 September 2009. Wikipedia

ACN Investment in Enterprise Value 

Enterprise value (EV) is the present value of the entire company. EV takes into account the balance sheet, so it is a much more accurate measure of a company’s true market value than market capitalization. The concept of enterprise value is to calculate how much it would cost to purchase an entire business. It also measures the value of the productive assets that produced its product or services, both equity capital (market capitalization) and debt capital. Market capitalization is the total value of the company’s equity shares.

Enterprise value measures the economic value of the company because allowances for liabilities and cash are made. EV is a capital structure neutral metric.  This makes EV extremely useful in analyzing and comparing companies with different capital structure.  In essence, it is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt while pocketing any remaining cash.

 

Explanation

If we look at the table closely, we can see that the market capitalization for Accenture was increasing at 16 percent average as well as its enterprise value at a rate of 18 percent average. Total debt was represented at 0.03 percent, while cash and cash equivalent were 16 percent of the enterprise value, thus, making the enterprise value lesser by 16 percent than the market value. Anyone who plans to buy the entire business of ACN would have to pay the 100 percent of equity.  ACN has no debt to speak of, therefore resulting in a no-debt-equity ratio of zero, which is a very favorable sign. If you’re planning to purchase the entire business of ACN, the costs will be $731 at $58.12 per share. To date, October 15, 2012, the market capitalization was $47.2 billion at $69.42 per share.

Benjamin Graham’s Stock Test  

Net Current Asset Value (NCAV) Approach

Did you know that Graham developed and tested the net current asset value (NCAV) approach between 1930 and 1932? Yes, he did and he even reported that the average return, over a 30-year period, on diversified portfolios of net current asset stocks was about 20 percent. An outside study showed that from 1970 to 1983, if investor purchases stocks that complied with Graham’s requirements and holding them for a year, they could have earned an average return of 29.4 percent.

Net Current Asset Value (NCAV) Method  

Benjamin Graham’s net current asset value (NCAV) method is well known in the value investing community. When a stock is trading below net current asset value per share, they are essentially below the company’s liquidation value and therefore, stocks is a bargain and worth buying. The concept of this method is to identify stocks trading at a discount to the company’s Net Current Asset Value per Share, specifically two-thirds or 66 percent of net current asset value.

  

The stock price of Accenture was expensive because it was trading above its liquidation value. 66 percent of NCAVPS represents only 5 percent of the market price per share.

Market Capitalization/Net Current Asset Value (MV/NCAV) Valuation 

Another stock test by Graham is by using market capitalization and dividing it to net current asset value (NCAV).  If the result does not exceed the ratio of 1.2, then the stock passes the test for buying. Stocks of ACN were trading at an overvalued price because the ratio exceeded 1.2 from 2007 to the trailing twelve months.

 Accenture PLC

Explanation

The margin of safety requires knowing when the buying price is low in absolute terms, rather than merely relative to the market as a whole. This formula is used to identify the difference between company value and price. Value investing is based on the assumption that two values are attached to all companies – the market price and the company’s business value or true value. Graham called it the intrinsic value. The difference between the two values is called the margin of safety. Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below.

 

Explanation

The margin of safety for Accenture Plc was 88 percent average of the intrinsic value. The intrinsic value for ACN was greater than enterprise value, meaning the price was trading below the true value of the stock, therefore, there was the margin of safety. Now, let us see how the intrinsic value was calculated.

Intrinsic Value =  Current Earnings x (9 + 2 x Sustainable  Growth Rate)  

wherein,

EPS, the company’s last 12-month earnings per share; G: the company’s long-term (five years) sustainable growth estimate;  9: the constant represents the appropriate P-E ratio for a no-growth company as proposed by Graham (Graham  proposed an 8.5, but we changed it to 9); and  2: the average yield of high-grade corporate bonds.

 

The intrinsic value factors earning per share and the sustainable growth rate.  It is calculated by multiplying the annual growth rate with the earning per share. Further, let me show you how the sustainable growth rate was computed.

Sustainable Growth Rate (SGR)

 Accenture PLC

The average return on equity using the relative was $65.19, while the sustainable growth rate was $47.79 on average. Accenture was paying out cash dividends every year with an average of $26.85 in 5 years. Sustainable growth rate factors return on equity and the payout ratio. Return on equity (ROE) is an indicator of company’s profitability by measuring how much profit the company generates with the money invested by common stock owners.

Accenture PLC

Below you will find the graph for ACN’s intrinsic value.

 

The intrinsic value line is high above the enterprise value line, the difference between these lines is the margin of safety.  The percentage in between was 742 percent or in other words, the intrinsic value was 742 percent. Moreover, the margin of safety was 88 percent of the true value of the stock of ACN.

Relative and Average Approaches

 

By using both the relative and the average return on equity in calculating sustainable growth rate produces the same result.  The margin of safety was 88 percent average using the two approaches.

ACN Relative Valuation Methods  

Price to Earnings/Earning Per Share (P/E*EPS)  

This valuation will help your clouded minds determine whether the stocks are undervalued or overvalued by multiplying the price to earnings (P/E) ratio with the company’s relative earning per share (EPS) and comparing it to the enterprise value per share, we can determine the status of the stock price.

 

P/E*EPS indicate that the stock was trading at an undervalued price because P/E*EPS was greater than the enterprise value. The P/E*EPS was 415 average, while the enterprise value was $12 average. The average percentage for P/E*EPS was 132 percent. The trading price for the stock of Accenture PLC was cheap using this valuation.

The P/E*EPS valuation using two approaches.

 Accenture PLC

Enterprise value (EV)/Earning Per Share (EPS) or (EV/EPS)  

The use of this ratio is to separate price and earnings in the enterprise value by dividing the enterprise value to projected earnings (EPS). The result represents the price (P/E) and the difference represents the earnings (EPS).

 

Results above showed that price (P/E) was 76 percent and earnings (EPS) was 24 percent. The price was overvalued, in other words, the trading price for the stock of Accenture is considered expensive.

Enterprise Value (EV)/ Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA)  

 Accenture PLC

The EBITDA was 13 percent of the enterprise value.  The average EV/EBITDA was 8 years or 8 times. In other words, it will take 8 years or 8 times the earnings to cover the costs of buying.

It tells us that 8 years is quite a long time of waiting. This shows that ACN is not profitable in its operation using this valuation.  On the other hand, the net income was 7 percent and the (EBIT) was 12 percent, a fair rate of earnings.

Conclusion

Summing up all the above evaluations, the stock was found out trading at an overvalued price. I, therefore, recommend that the stocks of ACN be HOLD.

Written by Cris

DeVry-Inc

DeVry Inc (DV) Has Solid Financial Strength – Investment Valuation

November 6th, 2012 Posted by Investment Valuation No Comment yet

DeVry Inc (DV) successfully completed its initial public offering on June 21, 1991. In 1995, its stock began trading on the New York Stock Exchange (NYSE) Wikipedia

The Investment in Enterprise Value

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise value (EV) is the present value of the entire company. EV takes into account the balance sheet, so it is a much more accurate measure of a company’s true market value than market capitalization. It measures the value of the productive assets that produced its product or services, both equity capital (market capitalization) and debt capital. Market capitalization is the total value of the company’s equity shares.

Enterprise value measures the economic value of the company because allowances for liabilities and cash are made. EV is a capital structure neutral metric. This makes EV extremely useful in analyzing and comparing companies with different capital structure.  In essence, it is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt while pocketing any remaining cash.

 DeVry Inc

Explanation

By closely looking at the table above, The market value of DeVry Inc was erratic in its movement as well as the enterprise value. Total debt was 1 percent, while the cash and cash equivalent were 10 percent on average, thus the enterprise value was lower by 9 percent than market capitalization. Buying the entire business of DeVry Inc would be paying for 100 percent equity. The trend in the market for DeVry Inc. was decreasing at the rate of 12 percent average.

If you are up to business and you want to buy the entire business of DeVry Inc, the cost to date, October 28, 2012, would be $1880 at $27.65 per share. This amount factors total debt and cash and cash equivalent.

Benjamin Graham’s Stock Test

Net Current Asset Value (NCAV) Method 

Benjamin Graham’s Net Current Asset Value (NCAV) method is well-known in the value investing community. Graham was looking for firms trading so cheap that there was little danger of falling further.  His strategy calls for selling when a firm’s share price trades up to its net current asset value. The reason for this according to Graham is, when a stock is trading below the net current asset value per share (NCAVPS), they are essentially trading below the company’s liquidation value and therefore, the stock is trading in a bargain, and it is worth buying. The concept is to identify stocks trading at a discount to the company’s NCAVPS, specifically two-thirds or 66 percent of net current asset value.

  

The net current asset value approach for DV indicates that the stock is trading at an overvalued price from 2007 to ttm6 2012. Because the stock is trading above the liquidation value of DeVry Inc. The market value was 378 percent above the 66 percent, therefore the price was expensive. 

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation    

Another stock test by Graham is by using market capitalization and dividing it to net current asset value (NCAV). If the result does not exceed the ratio of 1.2, then the stock passed the test for buying. So, let us see if the stock of  DeVry Inc passed the stock test.

  DeVry Inc

This valuation, Market Cap/Net Current Asset Value tells us that the price for the stock of DeVry Inc was trading at an overvalued price, from 2007 to ttm6 2012 because the ratio exceeds 1.2. It indicates that the stock of DV did not pass the stock test of Benjamin Graham because the price was expensive.

Benjamin Graham’s Margin of Safety (MOS)    

Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. In my calculation, I used the enterprise value because it takes into account the balance sheet so it is a much more accurate measure of the company’s true market value than market capitalization.  Let us find out through the margin of safety table below for DeVry Inc.

 DeVry Inc

The margin of safety evaluation for DeVry Inc indicates that there was MOS from 2007 to ttm6 2012 at an average of 59 percent. The highest rate was during 2010 at 84 percent and its lowest was during 2007 at 16 percent. The intrinsic value was 306 percent over the enterprise value. In other words, the enterprise value was 33 percent of the intrinsic value. Moving on, the formula for intrinsic value was:

Intrinsic Value

Intrinsic Value = Current Earnings x (9 + 2 x Sustainable  Growth Rate)    

wherein,

EPS, the company’s last 12-month earnings per share;  G: the company’s long-term (five years) sustainable growth estimate; 9: the constant represents the appropriate P-E ratio for a no-growth company as proposed by Graham  (Graham  proposed an 8.5, but we changed it to 9); and 2: the average yield of high-grade corporate bonds.

 DeVry Inc

Intrinsic value factors earnings per share and the sustainable growth rate, then the annual growth.  The annual growth was computed first to arrive at the intrinsic value, it is calculated by = 9+2 multiplied by the SGR. To get the intrinsic value, the annual growth was multiplied to the earnings per shares per period. The sustainable growth rate was calculated by the formula shown below in the table as well as the result for Devry Inc.

Sustainable Growth Rate (SGR)

 DeVry Inc

 DeVry Inc

The intrinsic value soared up high in 2010 at a rate of 67 percent from 2009, then sloping downward in 2011 at 54 percent and another downward trend in the trailing twelve months (ttm) at the same rate of 54 percent. The intrinsic value was high above the enterprise value line. The space between these two lines was the margin of safety.  If we put in percentage space in between these two lines from 2007 to the trailing twelve months, we will get a 59 percent average. This is the margin of safety for DeVry Inc.

The Relative and the Average Approaches

There are two approaches for calculating the sustainable growth rate and it, the relative and the average approaches. The above calculations in the tables above were the result of using the relative approach.

DeVry Inc

For DeVry Inc, using the relative, it produced a higher result; the margin of safety was 59 percent against 43 percent by using the average approach. Using the average approach, we take into consideration the previous period performance of DeVry Inc. The average approach for DV produced a lesser result because 2006 ROE was only $6.05.

The calculation for the EPS was:

 DeVry Inc

DeVry Relative Valuation Methods 

Price to Earnings/Earning Per Share (P/E*EPS)

 DeVry Inc

The P/E*EPS valuation shows that the price was undervalued because enterprise value was lesser than the P/E*EPS ratio. P/E*EPS ratio was 122 percent average over the enterprise value, thus the stock is trading at the undervalued price.

Enterprise Value (EV)/Earning Per Share (EPS) or (EV/EPS) 

 

The EV/EPS indicates that the price (P/E) was 39 percent average and the earnings (EPS) were 61 percent. This indicates that the stock of DeVry was trading at the undervalued price. Because the price was less than half of the enterprise value.

Enterprise Value (EV)/ Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA).   

This metric is used in estimating business valuation. It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. This metric is useful for analyzing and comparing profitability between companies and industries.  It gives us an idea of how long it would take the earnings of the company to pay off the price of buying the entire business, including debt.

 DeVry Inc

The investor will have to wait 9 years to cover the costs of buying the entire business. In other words, it will take 9 times of the cash earnings of DeVry Inc to cover the costs of the purchase price.

Further, it tells us that the cash earnings (EBITDA) of DeVry Inc represent only 12 percent of the enterprise value.

Conclusion

The margin of safety averaging 59 percent and the relative valuation shows that the stock was trading at undervalued price.  I, therefore, recommend a BUY in the stock of DeVry Inc.

Written and edited by Cris

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