Monthly Archives: July, 2013

Is it a Go or a No for Blackberry – Totem Talk Value Investing Guide

July 23rd, 2013 Posted by Company Research Report No Comment yet

Blackberry Ltd or BBRY (formerly known as Research in Motion Limited (USA)) is a global leader in wireless innovation and developed mobile industry with the introduction of BlackBerry. Stories team had introduced Research in Motion Limited (USA) company research in the previous reports. This company research provides information about the company including its founder or how it started, history and development, its nature of the business, the people running and directing the company, how it makes money or in the industry,  suppliers and customers, workforce, and the company’s pay and working condition.

Please read the whole version of BBRY’s company research here:

http://totemtalk.com/research-in-motion-limited-usa-rimm/

Let us help you get to know more on current feedback and trends about the company that might help on your investing. Information was gathered from reliable sources that may include negative and positive news combined with our researcher’s interpretation of these data. For the latest news about Research in Motion Limited (USA), here is Cris’ company update:

http://totemtalk.com/blackberry-ltd-bbry-company-updates/

We all know the backbone of the company. We already met the people behind the company, the nature of their business. Now, let’s get ourselves updated with the financial status of the company. Rio, from our Numbers team will reveal the story behind the digits.

 Liquidity & Solvency

Rio reviewed further the liquidity and solvency of BBRY for the last four quarters, Q3-2012, Q4-2012, Q1-2013 and Q2-2013 in comparison with its performance in the past four years. Here are the results:

The company’s current ratio was still above the standard of 2, there was no change in material amount. Its quick ratio’s trend was still the same which did not go below 1.8 on the latest four quarters. When we speak about the solvency ratio, it was quite very high in the last four years but reduced to a moderate level in the first three quarters but consistently increasing. However, it tremendously dipped down to 9 percent in the 2nd quarter of 2013. It needs close monitoring.

BBRY is still financially healthy as far as its current resources are concerned. The company has the capacity to pay its obligations as its solvency ratio was above the standard rate of 20 percent except in the last quarter of 2013 which is too early to make a conclusion, as shown in the above table.

Financial Leverage

BlackBerry Ltd

The company operates its business with very little borrowing. Debt ratio average is only 27 percent while debt to equity ratio was 37 percent.

Efficiency Ratios

Efficiency ratios are used to measure the quality of the company’s receivables and how efficiently it uses its other assets. Let’s get to meet each of these efficiency ratios. 

  • Inventory turnover ratio represents the number of times inventory is sold and restocked each year.
  • The receivable turnover ratio measures the number of days it takes a company to collect its credit accounts from its customers.
  • Payable turnover ratio is the number of times the company pays its obligation each period. This ratio measures how the company pays its suppliers in relation to the sales volume being transacted.
  • Asset turnover ratio shows how efficient the company’s total assets generate sales.

The table below tells us how efficient BBRY uses its resources in generating revenue.

Efficiency ratios show that BBRY was consistent to be efficient yearly and quarterly in generating sales revenue out of its resources as shown in the above table.  There was no abrupt change noted.

Income Statement

  • · Revenue showed progress every year with a growth of 35, 33 and -7 percent while declining from Q3-2012 to Q1-2013 but recover in Q2-2013 by growth of 15percent. Its gross profit average had a growth rate of 29, 34 and -25 percent from 2009 to 2012  while 5, 26 and -3 percent in Q3-2012 to Q2-2013.
  • And income after tax was also increasing yearly by  30, 39 and -66 percent while from Q2-2012 to Q2-2013 results were -1.04, 9.89 and -1.86 percent.

Expenses

The majority of the expenses fall under the cost of revenue, which consumed a range of 54 to 71 percent on gross sales while operating expenses average from 2009 to 2012 was the only 23percent. However, in the last four quarters; 2nd quarter of 2012 to the 2nd quarter of 2013 it exceeded the total revenue of the company. It tells us that the company was not able to control its operating expenses.

Margin

  • Gross margin was slightly changed by an average of 2 percent both in yearly and quarterly data. After deducting operating and other related expenses it resulted in a negative 3 percent in the latest quarter. BBRY’s net margin did not even reach the standard of 20 percent in the past four year’s analysis.

Blackberry Cash Flow

Cash Flow from Operating Activities

The cash flow from operating activities of BBRY  indicates positive results, though it’s up and down trend, it shows that the company was effective in generating cash flow out of its revenue. So, the company has sufficient funds for its operating activities.

Cash Flow from Investing Activities

Investing transactions generate cash outflows, such as capital expenditures for property, plant and equipment, business acquisitions and the purchase of investment securities while inflows come from the sale of assets, businesses and investment securities.  For BBRY, its investing cash flow shows negative results because of cash outflows exceeded cash inflows.

Cash Flow from Financing Activities

This refers to the company’s continuous borrowing and repayment of debt.  Similar to investing cash flow, the company’s cash outflow exceeded its cash inflows.

Free Cash Flow

  • It shows positive results from 2010 to 2011 while negative in 2009 and 2012 however, it is consistent positive in the 3rd quarter of 2012 to the 2nd quarter of 2013.
  • Cash flow margin of BBRY from 3Q-2012 to 1Q-2013 was going up however it dropped to 21 percent in Q2-2013.

After getting all those results, I asked Rio for the overall view. Gladly she gave me her quick answer. Please join me on the conclusion below.

Conclusion

“Results of my analysis show that BBRY is still financially healthy as far as its current resources are concerned. The company is debt- free and insolvent only in the last quarter of 2013. Income wise, the company is continuously generating income, however, its operating expenses are uncontrolled which resulted in a negative profit margin. When it comes to generating cash flow, the company has sufficient cash flow used for operating activities and positive free cash flow”, Rio said.

We already know the financial health of BlackBerry Ltd from Rio’s report. How about the market value of the company? This is where Cris’ investment valuation report will bring us delight. She will inform u of the pricing status of the company. So, what are we waiting for? Let’s get to it.

The Investment in Enterprise Value on BlackBerry Ltd        

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.  It measures the value of the productive assets that brought about its product or services, both equity capital (market capitalization) and debt capital.

In this evaluation, I believed the historical data is important and not just the current data, “Cris explained. As we can see in the table, it shows that the market capitalization dropped 75 percent in 2011. A dropped can be noticed again during 2012 and the trailing twelve months 2013 by 17 and 23 percent, respectively. Further, the company has zero debt, thus the enterprise value was lesser of 13 percent as the cash represents 13 percent of the enterprise value. The equation for buying the entire BBRY was 100 percent equity. The current cash per share was $5.39 while the average cash per share was $3.93.

The takeover price of the entire business of BlackBerry Ltd to date, July 18, 2013, was $2 billion at $3.77 per share.  While the market price to date was $9.24 per share. The difference was 59 percent.

 The Margin of Safety

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.

Now, let us reveal what the table would say about BBRY’s margin of safety.

The table tells us that the historical margin of safety averaged to 58 percent, while 2012 and ttm2013 has zero margin of safety. This means that the current margin of safety was insufficient and is not a good candidate for a buy position because there will be no safety in buying the stocks of BBRY.  This further implies that the true value of the stock is lesser than the market price.

Intrinsic Value

Intrinsic value factors the calculations for the margin of safety.

The historical intrinsic value was averaging $217 and the annual growth was averaging 49 percent, in addition, the earning per share was averaging $2.44.

For the annual growth, please see the table below:

BlackBerry Ltd

To summarize, the average growth of BlackBerry Ltd was favorable as well as the return on equity. However, the previous year 2012 and the trailing twelve months of 2013 showed an unfavorable outcome. Return on equity was negative 7 and 2 on 2012 and trailing twelve months, respectively.

In order to determine the trend in the true value of the stock of BBRY and the market price, Cris prepared a graph for our easy understanding.

Explanation

As seen in the graph above, the true value line or the IV line was high during the period 2008 up to 2010. Then it dropped very steeply at 87, 93 and 135 percent from 2011 up to the trailing twelve months, respectively. It fell below the market value; this means there was a zero margin of safety in the current period, further it means that the stock price was trading above the true value of the stock.

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

BlackBerry Ltd

The stock of BBRY was undervalued. The P/E*EPS was averaging 32 percent while the price was averaging 29 percent.

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

BlackBerry Ltd

The table for EV/EBTDA indicates that it will take 5 years to recover the cost of purchasing the entire business of BBRY.  In other words, it will take 5 times of the cash earnings of the company to cover the costs of purchasing the entire stock. 

In the earlier part of this report, Rio gave us the summary about the financial health.

Summary

BBRY’s market capitalization dropped 75 percent in 2011. While in 2012 and the trailing twelve months 2013, it dropped again by 17 and 23 percent, respectively. Further, the company has zero debt, thus the enterprise value was lesser by 13 percent as the cash represents 13 percent of the enterprise value. The equation for buying the entire BBRY was 100 percent equity. The current cash per share was $5.39 while the average cash per share was $3.93.

The takeover price of the entire business of BlackBerry Ltd to date, July 18, 2013, was $2 billion at $3.77 per share.  While the market price to date was $9.24 per share. The difference was 59 percent.

Margin of Safety

The historical margin of safety averaged 58 percent, while 2012 and ttm2013 has zero margin of safety.  This further implies that the true value of the stock is lesser than the market price. The historical intrinsic value was averaging $217 and the annual growth was averaging 49 percent, in addition, the earning per share was averaging $2.44. The ROE was negative 7 and 2 for 2012 and trailing twelve months, respectively.

Further, the relative valuation indicates that in the P/E*EPS stock price of Blackberry was undervalued. The P/E*EPS was averaging 32 percent while the price was averaging 29 percent.

Furthermore, the EV/EBTDA indicates that it will take 5 years to recoup the cost of buying the entire business of BBRY.  In other words, it will take 5 times of the cash earnings of the company to recover the costs of purchasing the entire company.

Overall

It shows a frustrating result in the market value of the company as well as the deteriorating growth in the current periods. The downfall of Blackberry’s price was very steep and climbing to the top might be hard, as the company has a long way to go to make a comeback to its former condition. Although, the price seems undervalued considering the relative valuation, the intrinsic value of the company reveals the true value of the stock, thus indicating that the stock is trading above its true value. Cris concluded,”Since the company is still in its early phase of transformation, I therefore recommend a SELL on the stock of Blackberry Ltd.

Researched and Written by: Meriam, Karla, Rio and Cris

Interested to learn more about the company? Here’s company research to know more of it’s background and history; and investment valuation for the pricing.

Research In Motion Ltd (RIMM)

Is it a Go or a No for Blackberry Limited (BBRY)

July 23rd, 2013 Posted by Company Research Report No Comment yet

BlackBerry Ltd or BBRY (formerly known as Research in Motion Limited (USA)) is a global leader in wireless innovation and developed mobile industry with the introduction of BlackBerry. Stories team had introduced Research in Motion Limited (USA) company research in the previous reports. This company research provides information about the company including its founder or how it started, history and development, its nature of the business, the people running and directing the company, how it makes money or in the industry,  suppliers and customers, workforce, and the company’s pay and working condition.

Please read the whole version of BBRY’s company research here:

http://totemtalk.com/research-in-motion-limited-usa-rimm/

Let us help you get to know more on current feedback and trends about the company that might help on your investing. Information was gathered from reliable sources that may include negative and positive news combined with our researcher’s interpretation of these data. For the latest news about Research in Motion Limited (USA), here is Cris’ company update:

http://totemtalk.com/blackberry-ltd-bbry-company-updates/

We all know the backbone of the company. We already met the people behind the company, the nature of their business. Now, let’s get ourselves updated with the financial status of the company. Rio, from our Numbers team, will reveal the story behind the digits.

 Liquidity & Solvency

Rio reviewed further the liquidity and solvency of BBRY for the last four quarters, Q3-2012, Q4-2012, Q1-2013 and Q2-2013 in comparison with its performance in the past four years. Here are the results:

bbryliq

The company’s current ratio was still above the standard of 2, there was no change in material amount. Its quick ratio’s trend was still the same which did not go below 1.8 on the latest four quarters. When we speak about the solvency ratio, it was quite very high in the last four years but reduced to a moderate level in the first three quarters but consistently increasing. However, it tremendously dipped down to 9 percent in the 2nd quarter of 2013. It needs close monitoring.

Explanation

BBRY is still financially healthy as far as its current resources are concerned. The company has the capacity to pay its obligations as its solvency ratio was above the standard rate of 20 percent except in the last quarter of 2013 which is too early to make a conclusion, as shown in the above table.

Financial Leverage

The company operates its business with very little borrowing. Debt ratio average is only 27 percent while debt to equity ratio was 37 percent.

Efficiency Ratios

Efficiency ratios are used to measure the quality of the company’s receivables and how efficiently it uses its other assets. Let’s get to meet each of these efficiency ratios. 

  • Inventory turnover ratio represents the number of times inventory is sold and restocked each year.
  • The receivable turnover ratio measures the number of days it takes a company to collect its credit accounts from its customers.
  • Payable turnover ratio is the number of times the company pays its obligation each period. This ratio measures how the company pays its suppliers in relation to the sales volume being transacted.
  • Asset turnover ratio shows how efficient the company’s total assets generate sales.

The table below tells us how efficient BBRY uses its resources in generating revenue.

Efficiency ratios show that BBRY was consistent to be efficient yearly and quarterly in generating sales revenue out of its resources as shown in the above table.  There was no abrupt change noted.

Income Statement

  • · Revenue showed progress every year with a growth of 35, 33 and -7 percent while declining from Q3-2012 to Q1-2013 but recover in Q2-2013 by growth of 15percent. Its gross profit average had a growth rate of 29, 34 and -25 percent from 2009 to 2012  while 5, 26 and -3 percent in Q3-2012 to Q2-2013.
  • And income after tax was also increasing yearly by  30, 39 and -66 percent while from Q2-2012 to Q2-2013 results were -1.04, 9.89 and -1.86 percent.

Expenses

Explanation

The majority of the expenses fall under the cost of revenue, which consumed a range of 54 to 71 percent on gross sales while operating expenses average from 2009 to 2012 was the only 23percent. However, in the last four quarters; 2nd quarter of 2012 to the 2nd quarter of 2013 it exceeded the total revenue of the company. It tells us that the company was not able to control its operating expenses.

Margin

  • Gross margin was slightly changed by an average of 2 percent both in yearly and quarterly data. After deducting operating and other related expenses it resulted in a negative 3 percent in the latest quarter. BBRY’s net margin did not even reach the standard of 20 percent in the past four year’s analysis.

Cash Flow

Cash Flow from Operating Activities

Cash flow from operating activities of BBRY  indicates positive results, though it’s up and down trend, it shows that the company was effective in generating cash flow out of its revenue. So, the company has sufficient funds for its operating activities.

Cash Flow from Investing Activities

Investing transactions generate cash outflows, such as capital expenditures for property, plant and equipment, business acquisitions and the purchase of investment securities while inflows come from the sale of assets, businesses and investment securities.  For BBRY, its investing cash flow shows negative results because of cash outflows exceeded cash inflows.

Cash Flow from Financing Activities

This refers to the company’s continuous borrowing and repayment of debt.  Similar to investing cash flow, the company’s cash outflow exceeded its cash inflows.

Free Cash Flow

BlackBerry Ltd

  • It shows positive results from 2010 to 2011 while negative in 2009 and 2012 however, it is consistent positive in the 3rd quarter of 2012 to the 2nd quarter of 2013.
  • Cash flow margin of BBRY from 3Q-2012 to 1Q-2013 was going up however it dropped to 21 percent in Q2-2013.

After getting all those results, I asked Rio for the overall view. Gladly she gave me her quick answer. Please join me on the conclusion below.

Conclusion:

“Results of my analysis show that BBRY is still financially healthy as far as its current resources are concerned. The company is debt- free and insolvent only in the last quarter of 2013. Income wise, the company is continuously generating income, however, it is operating expenses are uncontrolled which resulted in a negative profit margin. When it comes to generating cash flow, the company has sufficient cash flow used for operating activities and positive free cash flow”, Rio said.

We already know the financial health of BlackBerry Ltd from Rio’s report. How about the market value of the company? This is where Cris’ investment valuation report will bring us delight. She will inform us of the pricing status of the company. So, what are we waiting for? Let’s get to it.

The Investment in Enterprise Value on BlackBerry Ltd        

What is 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.  It measures the value of the productive assets that brought about its product or services, both equity capital (market capitalization) and debt capital.

BlackBerry Ltd

“In this evaluation, I believed the historical data is important and not just the current data.  As we can see in the table, it shows that the market capitalization dropped 75 percent in 2011. A dropped can be noticed again during 2012 and the trailing twelve months 2013 by 17 and 23, respectively. Further, the company has zero debt, thus the enterprise value was lesser of 13 percent as the cash represents 13 percent of the enterprise value. The equation for buying the entire BBRY was 100 percent equity. The current cash per share was $5.39 while the average cash per share was $3.93.

The takeover price of the entire business of BlackBerry Ltd to date, July 18, 2013 was $2 billion at $3.77 per share.  While the market price to date was $9.24 per share. The difference was 59 percent.

 Margin of Safety

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.

Now, let us reveal what the table would say about BBRY’s margin of safety.

BBRY MOS

The table tells us that the historical margin of safety averaged to 58 percent, while 2012 and ttm2013 have zero margins of safety. This means that the current margin of safety was insufficient and is not a good candidate for a buy position because there will be no safety in buying the stocks of BBRY.  This further implies that the true value of the stock is lesser than the market price.

Intrinsic Value

 

The historical intrinsic value was averaging $217 and the annual growth was averaging 49 percent, in addition, the earning per share was averaging $2.44.

For the annual growth, please see the table below:

BBRY IV

To summarize, the average growth of BlackBerry Ltd was favorable as well as the return on equity. However, the previous year 2012 and the trailing twelve months of 2013 showed an unfavorable outcome. Return on equity was negative 7 and 2 in 2012 and trailing twelve months, respectively.

In order to determine the trend in the true value of the stock of BBRY and the market price, Cris prepared a graph for our easy understanding.

BBRY Graph

As seen in the graph above, the true value line or the IV line was high during the period 2008 up to 2010. Then it dropped very steeply at 87, 93 and 135 percent from 2011 up to the trailing twelve months, respectively. It fell below the market value; this means there was a zero margin of safety in the current period, further it means that the stock price was trading above the true value of the stock.

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

BBRY PE EPS

The overall issue of P/E*EPS tells us that the stock of BBRY was undervalued. The P/E*EPS was averaging 32 percent while the price was averaging 29 percent.

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

BBRY EV EBITDA

The table for EV/EBITDA indicates that it will take 5 years to recover the cost of purchasing the entire business of BBRY.  In other words, it will take 5 times the cash earnings of the company to cover the costs of purchasing the entire stock. 

In the earlier part of this report, Rio gave us a summary of financial health. This time Cris will do the honor of sharing us the wrapped up details of her report.

Summary:

BBRY’s market capitalization dropped 75 percent in 2011. While in 2012 and the trailing twelve months 2013, it dropped again by 17 and 23 percent, respectively. Further, the company has zero debt, thus the enterprise value was lesser by 13 percent as the cash represents 13 percent of the enterprise value. The equation for buying the entire BBRY was 100 percent equity. The current cash per share was $5.39 while the average cash per share was $3.93.

The takeover price of the entire business of BlackBerry Ltd to date, July 18, 2013, was $2 billion at $3.77 per share.  While the market price to date was $9.24 per share. The difference was 59 percent.

Margin of Safety

The historical margin of safety averaged 58 percent, while 2012 and ttm2013 have zero margins of safety.  This further implies that the true value of the stock is lesser than the market price. The historical intrinsic value was averaging $217 and the annual growth was averaging 49 percent, in addition, the earning per share was averaging $2.44. The ROE was negative 7 and 2 for 2012 and trailing twelve months, respectively.

Further, the relative value indicates that the overall issue of P/E*EPS shows that the stock of BBRY was undervalued. The P/E*EPS was averaging 32 percent while the price was averaging 29 percent.

Furthermore, the EV/EBITDA indicates that it will take 5 years to recoup the cost of buying the entire business of BBRY.  In other words, it will take 5 times the cash earnings of the company to recover the costs of purchasing the entire company.

Overall

Overall view, it shows a frustrating result in the market value of the company as well as the deteriorating growth in the current periods. The downfall of BBRY’s price was very steep and climbing to the top might be hard, as the company has a long way to go to make a comeback to its former condition. Although the price seems undervalued considering the relative valuation, intrinsic value of the company reveals the true value of the stock, thus indicating that the stock is trading above its true value. Cris concluded, “Since the company is still in its early phase of transformation, I, therefore, recommend a SELL on the stock of BlackBerry Ltd.”

Researched and Written by Meriam, Karla, Rio, and Cris

Interested to learn more about the company? Here’s company research to know more of its background and history; and investment valuation for the pricing.

Berkshire Hathaway Inc (BRK.B) Investment Valuation

July 17th, 2013 Posted by Investment Valuation No Comment yet

Berkshire Hathaway Inc (BRK.B), incorporated on June 16, 1998, is a holding company owning subsidiaries engaged in a number of diverse business activities.

BRK.B

BRK.B 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. Moreover, this is a great measure of the total value of a firm. It is often great starting points for negotiation of a business.

BRK.B Investment in Enterprise Value  

BRK EV        

Explanation

The market capitalization of Berkshire Hathaway Inc was trending up at a rate averaging 228 percent. In other words, the current price rises 84 percent from 2008 to 2012. In 2009, the price dropped 90 percent from 2008 but managed to rise by 1193 percent the following year.  The total debt was averaging 31 percent and the cash and cash equivalent was averaging 22 percent.  If you are the investor and you are planning to buy the entire business of BRK.B, then you would be paying 90 percent of equity and a 10 percent total debt because cash was less than the debt.

Further, the takeover price of the entire business of BRK.B  to date, July 6, 2013, was $288 billion at $112.63 per share. The market price to date was $114.96 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.

BRK NCAVPS

Explanation

The net current asset value approach tells us that the stock price of BRK.B was trading at an overvalued price. For the reason that the market price was greater than the 66 percent ratio.  The 66 percent ratio was only 14 percent of the market price.

As we can see, the results indicate that BRK.B stock did not pass the stock test because it traded above the liquidation value of the company. Therefore, the price is said to be 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.          

BRK MC NCAV

The MC/NCAV valuation shows that stock price was overvalued from 2008 up to the trailing twelve months. For the reason, its ratio exceeded the 1.2 ratios.  Meaning the price was expensive.

 BRK.B 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. This formula is used to identify the difference between company value and price.

BRK MOS

Explanation

The margin of safety was averaging 36 percent,  this means that if you are buying the stocks of BRK.B you have insufficient security. Below is the formula for intrinsic value as this factor the calculations for the margin of safety.

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

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 on high-grade corporate bonds.

BRK IV

Intrinsic value, it factors earning per share and the growth of the company. The result shows that the earnings per share were averaging $4.85 and the annual growth rate was averaging 23.54 percent, the formula we used is:

EPS

Explanation

The sustainable growth rate (SGR) shows how fast a company can grow by using internally generated assets without issuing additional debt or equity. To calculate the sustainable growth rate for a company, you need to know how profitable the company is by its return on equity (ROE). Moreover, you also need to know what percentage of a company’s earnings per share is paid out in dividends, which is called the dividend payout ratio. And from there, multiply the company’s ROE by its plow back ratio, which is equal to 1 minus the dividend payout ratio.

The formula is Sustainable growth rate = ROE x (1 – dividend-payout ratio).

BRK SGR

Explanation

The table shows that the return on equity was averaging 7.27 percent, while the payout ratio was zero percent. 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. It is also known as Return on net worth. Below is the formula for the return on equity.

Return on Equity = Net Income / Shareholders’ Equity

Return on equity shows how many dollars of earnings result from each dollar of equity. The average approach was used in the above calculations for the sustainable growth rate. Moreover, there is another approach in calculating and that is the average ratio approach.

BRK Relative

Explanation

To sum up the result of these two approaches, it shows that the margin of safety and the intrinsic value are higher in the relative approach. Walking further, I have prepared a graph for the intrinsic value to illustrate to you how the market and the true value is related to the margin of safety.

Intrinsic Value Graph

BRK Graph

Further, as we can see the intrinsic value line was much higher than the enterprise value line, this means there was a margin of safety because the space in between represents the margin of safety.  It is the difference between the true value and the price.

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

Facts

The result of the P/E*EPS valuation shows that the stock price of BRK.B was undervalued from the period 2008 up to the trailing twelve months.  The market price was averaging 97 percent of the P/E*EPS ratio, meaning the stock price was cheap. The price to earnings ratio was averaging $18.15.

Explanation

This valuation shows the relationship between the stock price and the company’s earnings. The price to earnings is the price that the market is willing to pay for the company’s earnings. The price to earnings of the company can change daily as the market price changes. Analysts use the price to earnings ratio more often because it shows if the company is in the growth phase or if the company is mature and how the market is willing to pay. Price to earnings varies as economic changes, different industries and other factors that affect the market price.

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

BRK EV EPS

The result of the EV/EPS valuation tells us that the price (P/E) was averaging 22 percent and the earnings (EPS) was averaging 78 percent. This valuation is either over or undervalued because the result depends upon the analyst’s own discretion.

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

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

BRK EV EBITDA

Facts

The EV/EBITDA valuation is one measure of the company’s profitability if you want to see the cash-generating power of the entire firm. And you don’t care whether it’s equity or debt financing this cash-generating operation. The reason why EV/EBITDA is used for pure valuation and it is used to find attractive takeover candidates.  The table above indicates that the EV/EBITDA multiple is averaging 8 times.  It means that in buying the entire business of BRK.B it will take 8 times  the cash earnings of the company to recover the costs of purchasing.  In other words, it will take 8 years to recover the costs of buying the entire firm.

Summary

The market capitalization of Berkshire Hathaway Inc (BRK>B) rises 84 percent from 2008. Also, the total debt was averaging 31 percent and the cash and cash equivalent was averaging 22 percent.  Buying the entire business of BRK.B, an investor would be paying 90 percent of equity and a 10 percent total debt because cash was less than the debt. Further, the takeover price of the entire business of BRK.B to date, July 6, 2013, was $288 billion at $112.63 per share. The market price to date was $114.96 per share.

Net Current Asset Value

The net current asset value approach tells us that the stock price was traded at an overvalued price because the market price was greater than the 66 percent ratio. The 66 percent ratio was only 14 percent of the market price. The MC/NCAV valuation indicates that the stock was overvalued because the ratio exceeded the 1.2 ratios.

Margin of Safety

The margin of safety was averaging 36 percent, thus, it indicates that the margin of safety was insufficient because it did not pass the requirement of at least 40 percent.  In addition, the earnings per share were averaging $4.85 and the annual growth rate was averaging 23.54 percent. Moreover, the return on equity was averaging 7.27 percent, while the payout ratio was zero percent.

PE/EPS

Moreover, the result of the P/E*EPS valuation shows that the stock price of BRK.B was undervalued. The market price was averaging 97 percent of the P/E*EPS ratio. Meaning the stock price was cheap. The price to earnings ratio was averaging $18.15.

EV/EPS

The EV/EPS valuation tells us that the price (P/E) was averaging 22 percent. Moreover, the earnings (EPS) was averaging 78 percent.

Further, the EV/EBITDA multiple is averaging 8 times. Meaning, it will take 8 years to recover the costs of buying the entire firm.

Overall

The stock price was undervalued moreover, its margin of safety was not sufficient for a good Buy. Therefore, I recommend a HOLD in the stock of Berkshire Hathaway Inc (BRK.B).

Research and Written by Criselda

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

Ebix Inc

EBIX Inc (EBIX) Investment Valuation

July 9th, 2013 Posted by Investment Valuation No Comment yet

EBIX Inc (EBIX) is an international supplier of software and e-commerce solutions to the insurance industry have been on and off; accusing of dishonest practices in accounting which have caused the stock to drop by 57 percent from 2011. 

I think you have the idea that this investment valuation report will iterate the know-how of the company when it comes to the market side and how the news mentioned above will greatly affect Ebix Inc. Let’s dig down into the details.

Value Investing Approach on EBIX

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 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 on EBIX

  EBIX EV

Explanation

The market capitalization of Ebix Inc was trending at a rate of 36 percent average. During 2012, the market cap drops by 25 percent from 2011 but managed to rise by 23 percent in the trailing twelve months. The total debt was averaging 7 percent and the cash and cash equivalent was averaging 4 percent. If buying the entire business of EBIX, the investor would be paying 97 percent of equity and a 3 percent total debt because cash was less than debt. The market price had decreased by 42 percent from that of last year 2012.n:

The takeover price of the EBIX’s entire business to date, June 29, 2013, was $349 million at $8.95 per share. The market price to date was $9.26 per share. 

Net Current Asset Value (NCAV) Approach            

Graham developed and tested the net current asset value (NCAV) approach between 1930 and 1932. Graham reported that the average return, over a 30-year period, on diversified portfolios of net current asset stocks was about 20 percent. And not only that, an outside study showed that from 1970 to 1983, an investor could have earned an average return of 29.4 percent by purchasing stocks that fulfilled Graham’s requirement and holding them for one year.

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.

EBIX NCAVPS

The stock price of EBIX was trading at an overvalued price in 2008 up to the trailing twelve months because the market price was greater than the 66 percent ratio. It indicates that the stock was above the liquidation value of the company.

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

If the result does not exceed the ratio of 1.2, then the stock passes the test for buying.

  Ebix Inc

The MC/NCAV valuation shows that stock price was overvalued in the last five years because the ratio exceeded the 1.2 ratios. The price is considered expensive.

 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. This formula is used to identify the difference between company value and price.

EBIX MOS

Explanation

The above table shows that the margin of safety was averaging 85 percent. The enterprise value was averaging $15, while the intrinsic value was averaging $97.  This means that if you are buying the stocks of EBIX you have the security of 98 percent, further it means that the stock was trading below the real value of the stock. And intrinsic value is the real value of the stock. The formula to be used is:

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

For instance,

  • 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 on high-grade corporate bonds.

   EBIX IV

Explanation

In the calculation of the intrinsic value, we factor earning per share and the growth of the company. The result of the calculation shows that the earning per share was averaging $1.60 and the annual growth rate was averaging 64.15 percent. The term earnings per share (EPS) represents the portion of a company’s earnings, net of taxes and preferred stock dividends, that is allocated to each share of common stock. The figure can be calculated simply by dividing net income earned in a given reporting period by the total number of shares outstanding during the same term. Because the number of shares outstanding can fluctuate, a weighted average is typically used.

Sustainable growth

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 how profitable the company is as measured by its return on equity (ROE). You also need to know what percentage of a company’s earnings per share is paid out in dividends, which is called 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. To cut this short, we have the formula: Sustainable growth rate = ROE x (1 – dividend-payout ratio)

     EBIX SGR

The table shows that the return on equity was averaging 28.45 percent, while the payout ratio was averaging 4.17 percent.

  ROE

Return on Equity shows how many dollars of earnings result from each dollar of equity.  Now, there are two approaches to calculating the sustainable growth rate, these are the relative ratio approach and the average ratio approach. Since sustainable growth rate is the factor of intrinsic value, whatever approach you will use might affect the result of the margin of safety and the intrinsic value depending on the result of the average return on equity. To better understand.

Summary represented in the table below

EBIX Relative

To sum up the result of these two approaches, it shows that the margin of safety has both of the same percentages which are 83 percent. However, the growth produces a higher ratio.

Intrinsic Value

EBIX Graph

Explanation

As we can see, the intrinsic value line was much higher than the enterprise value line. And the margin of safety was averaging 98 percent. To explain further, the space in between these two lines is the margin of safety which is the difference between the intrinsic value and the enterprise value. Remember, the intrinsic value is the true value of the stock of the company. The graph means the market price was lower than the true value of the stock.

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

EBIX PE EPS

The P/E*EPS valuation shows that the stock price was undervalued in the last five years. On average, the market price was 83 percent of the P/E*EPS ratio, meaning the stock price was cheap.

This valuation shows the relationship between the stock price and the company’s earnings. The price to earnings is the price that the market is willing to pay for the company’s earnings. The price to earnings of the company can change daily as the market price changes. Analysts use the price to earnings ratio more often because it shows if the company is in the growth phase or if the company is mature and how the market is willing to pay. Price to earnings varies as to economic changes, different industries and other factors that affect the market price.

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

EBIX EV EPS

The result of the EV/EPS valuation tells us that the price (P/E) that was separated from the enterprise value was averaging 64 percent and the earnings (EPS) was averaging 36 percent. The result depends upon the analyst’s own discretion.  It is either over or undervalued.

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.

EBIX EV EBITDA

Explanation

The EV/EBITDA valuation is one measure of the company’s profitability because EBITDA represents the cash earnings of the company exclusive of expenses that has no cash outlays. It will take 10 years to recover the cost of buying.  In other words, to recover the cost of buying the entire business it will take 10 times of the cash earnings to cover the costs.

It will take a long period of waiting because the company was not generating sufficient cash revenues from its operation.

The Summary 

The market capitalization was moving at a rate of 36 percent average. On the other hand, the total debt was averaging 7 percent. And the cash and cash equivalent were averaging  4 percent. Buying the entire business of EBIX, the investor would be paying 97 percent of equity and 3 percent total debt. Because cash was less than debt. The takeover price of the entire business to date, June 29, 2013, was $349 million at $8.95 per share. The market price to date was $9.26 per share.

Net Current Asset Value

The net current asset value approach tells us that the stock price was trading at an overvalued price. Because the market price was greater than the 66 percent ratio. On the other hand, the MC/NCAV indicate an overvalued price because the ratios exceeded the 1.2 ratios.

Margin of Safety

Further, the margin of safety was averaging 85 percent and also, the enterprise value was averaging $15. Intrinsic value, on the other hand, was averaging $97. In addition, the earning per share was averaging $1.60 and the annual growth rate was averaging 64.15 percent. Furthermore, the return on equity was averaging 28.45 percent, and the payout ratio was averaging 4.17 percent.

P/E*EPS

The P/E*EPS valuation shows that the stock price was undervalued in the last five years.  On average, the market price was 83 percent of the P/E*EPS ratio.  In other words, the stock price was cheap. The price (P/E) that was separated from the enterprise value was 64 percent and the earnings (EPS) was 36 percent.

EV/EBITDA

The EV/EBITDA valuation indicates that it will take 10 years to recover the cost of buying the entire business.  In other words, to recover the cost of buying it will take 10 times of the cash earnings of EBIX.

Overall

The stock of EBIX has dropped 57 percent from 2011 due to allegations of inaccuracies in its financial statements.  Goldman Sachs Group Inc plans to buy Ebix at $743 million at $20 per share. Ebix might have difficulty in winning back the trust of its shareholders and the public. Therefore, I recommend a SELL in the stock of EBIX Inc.

Research and Written by Criselda

Bridgepoint Education Inc

Bridgepoint Education Inc (BPI) A Best Buy?

July 7th, 2013 Posted by Investment Valuation No Comment yet

Bridgepoint Education Inc (BPI). When we talk about community colleges, there are so many colleges that pop up in my mind and one of this is the Bridgepoint Education Inc. The question is, “Are community colleges a better bet than any other exclusive schools like Harvard? Is it wise to consider Education Services in our portfolio?”

BPI Value Investing Approach 

This Pricing Model was prepared in a very simple and easy way to value a company for business valuation.  We adopt the investment style which we think applicable to the company, we looked for companies with a strong balance sheet or those with little debt, above average profit margin and ample cash flow. This valuation style is to seek out undervalued companies whose stock price is temporarily down, but fundamentals are sound in the long run. The philosophy was to buy wisely when prices fall and to sell wisely when the prices rise a great deal. My 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 calculated first the enterprise value as our initial step in this valuation.

BPI Investment in Enterprise Value    

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

BPI EV

The market capitalization of Bridgepoint Education Inc was erratic in movement. During 2012, it experienced a 53 percent drop from 2011. Total debt was zero percent while its cash and cash equivalent were 54 percent of the enterprise value, thus making the enterprise value lesser than the market value.  The equation in buying the entire business of BPI was 100 percent equity and zero percent total debt.

The takeover price of the entire business of BPI to date, May 19, 2013, was $260 million at $282 million at $5.04 per share. The market price to date was $12.49 per share.

Net Current Asset Value (NCAV) Method   

Studies have all shown that Net Current Asset Value (NCAV) method of selecting stocks has outperformed the market significantly.

 The reason for this is when a stock is trading below the Net Current Asset Value Per Share, they are essentially trading below the company’s liquidation value and therefore, the stock was trading at a bargain, and it is worth buying.

BPI NCAV

The net current asset value approach of Benjamin Graham tells us that the stock price was overvalued from 2010 up to the trailing twelve months. The net current asset value was $206 average while the average net current asset value per share was $3.63 and the 66 percent ratio was $2.40 average. In addition, the market price was $15.78 average.

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

Market Capitalization / NCAV = Result (must be lesser than 1.2)
Bridgepoint Education Inc

The MC/NCAV method tells us that the BPI’s stocks are trading overvalued because the ratio exceeded the 1.2 ratios from 2008 to the trailing twelve months.

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.

EV takes into account the balance sheet so it is a much more accurate measure of the company’s true market value than market capitalization. The margin of safety was calculated at Margin of Safety = Enterprise Value – Intrinsic Value. The table shows the historical calculation for the margin of safety.

 Bridgepoint Education Inc

Explanation

The average margin of safety was 97 percent. The intrinsic value was $274 average while the enterprise value was $9 average.

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

The explanation in the calculation of intrinsic value was as follows:

  • 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  as proposed and
  • 2: the average yield on high-grade corporate bonds.
 Bridgepoint Education Inc

Explanation

The result of the calculation shows that the average earning per share $2.27 and the sustainable growth rate were $50.62 average.  Annual growth rate, on the other hand, was $110 average.

The term earnings per share (EPS) represents the portion of the company’s earnings, net of taxes and preferred stock dividends, that are allocated to each share of common stock. The figure can be calculated by simply dividing net income earned in a given reporting period by the total number of shares outstanding during the same term. Because the number of shares outstanding can fluctuate, a weighted average is typically used. The formula for earnings per share was:

     EPS

Sustainable Growth Rate

She 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. Sustainable growth rate = ROE x (1 – dividend-payout ratio)

Below is the table for a sustainable growth rate.

BPI SGR

Explanation

The table shows that the return on equity was 50.62 percent, average while the payout ratio was zero percent. This means that  BPI is not giving cash dividends to its shareholders. In addition, the sustainable growth rate was 50.62 as well because there was a zero payout ratio.

To be able to calculate for the SGR, we need to know first the ROE. It shows how many dollars of earnings result from each dollar of equity.

ROE

Intrinsic Value

Let us walk step by step. 

BPI Graph

As we can see, the intrinsic value line was erratic in movement. In 2009 to 2010, the increased was 188 percent, and from 2010 to 2011, there was another increase of 20 percent. Further, it suddenly dropped to 20 percent in 2012 then remained stable for the trailing twelve months.

Explanation

Let us dig a little on the net earnings of the company and find out if the trend is the same as the intrinsic value. The net earnings from 2009 to 2010 had increased by 188 percent, then it increased by 3 percent in 2011 and then dropped to 3 percent in 2012 and 1 percent in the trailing twelve months. You see, whatever trend it has in the intrinsic value, the same trend it has in the net earnings of the company. So, by just looking at the line of the true value of the stock you will know what had happened to the operation of the company, as intrinsic value factors the growth of the company.

Further, the enterprise value remained stable at an average of $9. The margin of safety is the space between these two lines. In other words, it is the difference between enterprise value and the intrinsic value. If you will notice, the intrinsic value line is high above the EV line, meaning, the MOS was high also during these periods.

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

This valuation 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.

BPI PE EPS

The stock of BPI was undervalued in 2010 because the enterprise value was lesser than the P/E*EPS ratio. The enterprise value was average $9, while the P/E*EPS ratio was average $17, thus the price was cheap.

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).

BPI EV EPS

The EV/EPS valuation tells us that the price (P/E) was 37 percent while the earnings (EPS) was 63 percent. It indicates that the price was undervalued because the price was lesser than earnings.

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.

BPI EV EBITDA

EV/EBITDA tells us that it will take 2 years to recover the costs of buying the entire business of BPI. In other words, it will take 2 times the cash earnings of BPI to recover the cost of buying the entire business. The EBITDA was 59 percent of the enterprise value.

Overview

The market capitalization of Bridgepoint Education Inc was erratic in movement. In 2012 it experienced a 53 percent drop from 2011. Total debt was zero percent while its cash and cash equivalent were 54 percent of the enterprise value. Thus making the enterprise value lesser than the market value.  The equation in buying the entire business of BPI was 100 percent equity and zero percent total debt.    

The takeover price of the entire business of BPI to date, May 19, 2013, was $260 million at $282 million at $5.04 per share. The market price to date was $12.49 per share.

Net Current Asset Value

The net current asset value approach tells us that the stock price was overvalued. Further, it tells us that the stock of BPI did not pass the stock test. Because the stock was trading above the liquidation value of the company.

On the other hand, the MC/NCAV method tells us that the stocks are trading overvalued. Because the ratio exceeded the 1.2 ratios from 2008 to the trailing twelve months.

Margin of Safety

In addition, the average margin of safety was 97 percent while the intrinsic value was $274 average. The average earning per share was $2.27 and the sustainable growth rate was $50.62 average.  While the annual growth rate was $110 average. And the return on equity was 50.62 percent average so as the sustainable growth rate of 50.62. And the payout ratio was zero percent.

P/E*EPS

The relative valuation in the P/E*EPS valuation indicates that the stock of BPI was undervalued in 2010. For the reason that the enterprise value was lesser than the P/E*EPS ratio. On the other hand, the EV/EPS valuation tells us that the price (P/E) was 37 percent while the earnings (EPS) was 63 percent.

EV/EBITDA

The EV/EBITDA tells us that it will take 2 years to recover the costs of buying the entire business. It will take 2 times the cash earnings to recover the cost of buying the entire business. The EBITDA was 59 percent of the enterprise value.

Overall, the stock price of BPI was undervalued, further, its margin of safety was impressive. Further, the EV/EBITDA was satisfactory, therefore, I recommend a BUY on the stock of Bridgepoint Education Inc.

Research and Written by Criselda

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

Note:

Research Reports can be found under the company tab.