Friday, 15 September 2017

BUSINESS ADVENTURES BY JOHN BROOKS



’THE BEST BUSINESS BOOK I’VE EVER READ’’ – Bill Gates  .

Being curios at what Bill said about this book,I’ve chosen to read it and I want to say that the book is an amazing story and presents events that market the XX century or corporate America.

One the story that caught my attention was the ‘’EDSEL ‘’ project which was introuduced and implemented by Ford Motor Company.’’Edsel was car prototype that which has proven a total failure.A real example of  how to through from the window 350 mil $.

In antithesis with EDSEL is ‘’Xerox ‘’ which was started in 1906  in Rochester by Joseph C Wilson  under name ‘’ Haloid Company’’ which was involved in manufacturing photographic papers and copying process.The company has growth rapidily  because it’s revolutionary product and services.

One more time it’s proven that  anyone with great vision  and skills which it’s able to pick up the right persons can do great things.But picking the rights persons and work with them it’s not an easy task.

People in greed for money can do illlegal things like sotck manipulation. Clarence Saunders  is the right example,man with no education and no ethics  created a tsunami on the stock market.In 1919 he founded Piggly Wiggly a chain of retail situated in South Wales .Saunders will remain in history the man who invented ‘’the supermarket’’ whitout to know that.

People with good skills can be in great demand  like Donald  W Wohlgemuth  manager department of ‘’ B.F. Goodrich’’ which was responsabile with designing and construction of suits for astronauts.In one day he got a job offer to work for a large company ‘’ Dedware International Latex Corporation’’ to do research and development on space suits for Appolo.The management of the company  offered Wohlgemuth the position of the manager of engineering with annual salary of 13 700$.

He accepted the offer and the problems for him just started because B.F. Goodrich  didn’t want to let  him go,because to one paragraph in his contract that was stipulated cannot work for company in the same industry and cannot share the secrets of B.F.Goodrich.In the end the court gave him the accept to work for Dedware International Latex.


In conclusion I recommend this book ,even this book  was written many years ago rules of running business and creating value haven’t changed.For all organizations humans factors are very important dosent matter if you have the great,idea,vision you still need to have the right people to implement those.

Monday, 7 August 2017

THE SNOWBALL OF WARREN BUFFETT BY ALICE SCHROEDER

It’s a big honor for me to write about Warren Buffett,being  my idol and the person who admire most from business leaders.About him have told a lot on media but what caught my attention was the book written by Alice Schroeder where she presented entire his prodigious career since he was a child until present.


When I read the book I discovered things that have never been told before.As many of you probably know Warren Buffett is the CEO& Chairman of Berkshire Hathaway.


Once Buffet called Berkshire Hathaway  one of his bad investments that he ever made.Sounds strange considering that today Berkshire Hathaway is 223 billion $ company according to Fortune 500 global ranking.

The story began with many years ago when Buffett had started to buy small stakes in the company until he bought entirely company.In that period Berkshire Hathaway was a textile bankrupted company.He bought the company with the intention to resale,but he didn’t  ,he liquidated the textile business and transformed it into conglomerate holding company.

Only him could be able to do this kind of performance .for those who don’t know Buffet investment strategy in the early stage of his career was ‘’Cigar Butt’’  approach,that means to buy company at cheap price but being cheap dosen’t mean certainly good.

His a value investor by definition his using Benjamin Graham investment philosophy.Benjamin Graham was economic professor at Columbia University,Buffett professor and mentor.

At Charlie Munger (Vicechairman Berkshire Hathaway)  suggestion Buffett have changed his investments strategy from buy cheap companies at cheap price to buy good companies.

He later exaplained: ‘’It’s far better to buy a wonderful company at fair price than a fair company at wonderful price’’

In conclusion I recomand to everybody to read this book you  will  discover the lifeof one of the most respected men in the world.The Snowball is a financial success story of capital accumulation.







Wednesday, 12 July 2017

BANK OF IRELAND EARNINGS POWER VALUATION(STUDY CASE)

In my last article I’ve presented a business valuation technique using cash flow projections,but  today I will present another valuation technique which implies actual earnings.


This method is  known as Earnings Power Value was popularised by Professor Bruce Greenwald from Columbia University.My study case for today is Bank of Ireland one of the imporatant financial institution in Republic of Ireland.In my evaluation I will focus on earnings.Why earnings? Warren Buffet once had said that earnings are  key valuation tools of bank and not book value.


Step 1 Find and adjusted resonable EBIT margin


2012
2013
2014
2015
2016
Revenue
3471
3989
5051
4804
4672
EBIT
-2138
-546
920
1135
998
EBIT Margin(EBIT/Revenue)
-61.00%
-14%
18%
23.62%
21.36%

Average EBIT Margin
20.90%
Adjusted EBIT Margin
23.62%
Normalized EBIT(Revenue*Adjusted EBIT Margin
4662656
Research and Development
Selling ,General and Administrative Expenses
3206
Normalized EBIT
4665862
I will choose and adjusted EBIT Margin of 23.62%  The reason is that can I observe that earnings margin of company will increase that because the bank reduced their non performing loans portofolio from 14.7 billion in june 2015 to 7.9 billion euros dec 2016.

Step 2 : Add Research and Development Costs and Selling,General and Administrative

Research and Development:                             
Selling ,General and Administrative Expenses 3206
2012
2013
2014
2015
PROFIT AFTER TAX
-1824
-487
786
940
TAX(EBIT-PROFIT AFTER TAX)
-314
-59
134
195
TAX RATE(TAX/EBIT)
17.21491228
12.11498973
17.04834606
20.74468085
AVERAGE TAX RATE
18.59482538
ADJUSTED TAX RATE
20%
Step 3: Account for possible under/overstate depreciation and amortization

NORMALIZED EARNINGS AFTER TAX
3732689
DEPRECIATION,AMORTIZATION
132
CAPEX (CORE BANKING PLATFORM)
41
3732862
 Step 4:          WCCO( Weighted Average Cost of Capital)
TOTAL DEBT
113728
FINANCE COST(EXPENSES)
3466
COST IN DEBT%
3.047622397
EQUITY
9401
ESTIMATED COST OF EQUITY
10%
RATIO OF EQUITY
76%
RATIO OF DEBT
2.77%
ESTIMATED COST OF CAPITAL
16.76%
 Step 5: Discounted Normalized Earnings and add cash less debt
EARNINGS DISCOUNTED AT COST OF CAPITAL
22352467.07
ADD CASH
5192
LESS DEBT
113728
22243931.07
 Step6 : Calculate EPV/share:
NO OF OUTSTANDING SHARES
1077884401
EPV/SHARE
20.63EURO/SHARE
ACTUAL SHARE PRICE:7.23 EURO/SHARE
Conclusions:
Bank of Ireland shares  might be undervalued.The problem of this valuation is the calculation of WACC(Weighted Average Cost of Capital.I've calculated WACC after the formula:
WACC+E/V*Re+D/V*Rd*(1-Tc)
Where: Re- cost of equity
                Rd-cost of debt
                D-market value of the company debt
                V-marked value of the company combined(E+D)
               E/V- percentage  of the total financing consisting equity
               E/D-percentage of the total financing consisting debt
               Tc-(the corporate Income tax rate)

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Sunday, 15 January 2017

KERRY GROUP PLC BUSINESS VALUATION (STUDY CASE)

It passed some time since I’ve witten the last article.Today I wish to present a short and quick valuation of Kerry Group Plc,I will not insist on performance measures like (profitability,liquidity and risk.)

In this article I ‘ll focuse on’’Intrinsic Value calculation,but before to start I wish to say something about the company.Kerry Group Plc develops ,manufactures and deliveres technology based ingredients flavours for the food and beverage industry.

After the researches that I’ve made studying public irish companies ,I consider is the best by far public irish company.It’s paying  their shareholders with increasing dividends since 1987 .

In investing is important to understand and try to establish what company’s shares really worth.

We can defined intrinsic value simply: ‘’It is the discounted value of cash that can be taken out of a business during its remaining life.’’ - Warren Buffet CEO Berkshire Hathaway INC

Extract Cash Flow Statement 2015 (mil euros)
Cash Flow from Operating activities
Depreciation and amortization

Accounts receivables
(11.20)
Inventory
45.40
Account payables
21.60
Other working capital
9
Other non-cash items
656.50
Net cash provided by operating activities
721.30
Free Cash in flow

Operating Cash flow
721.30
Capex
(248.40)
Free Cash Flow
472.90

Assumptions:
Starting cash flow :472.90
Expected growth rate:           8,20%
Discount rate              :            9,85%

Projected cash flow 2017-2021(mil E)

2017
511.67
2018
553.63
2019
599.03
2020
648.15
2021
701.30
(Assuming that the company will follow the expected growth rate 8,20%)

                                        INTRINSIC VALUE CALCULATION  

YEAR
CASHFLOW
DISCOUNT FACTOR 9%
PV
2017
511.67
0.917
469.20
2018
553.63
0.842
465.62
2019
599.03
0.772
462.45
2020
648.15
0.650
455.84
                                                                                                                         NPV  :    2312
NPV     :                                                                                       2312
YEAR 5 NPV*12     :                                                                    701
Total cash,cash equivalents and short term investments:  8415.6
Total  Intrinsic value:                                                                 :        11 993
No of outstanding shares 31 Dec 2016                                   :176 mil
Total Intrinsic Value per share                                                  :68.14/euros

Actual Stock Price                                                                        :69.81/euros
RGV  (RELATIVE GRAHAM VALUE)                                             :0.97
INTRINSIC VALUE/STOCK PRICE   :68.14/69.81=O.97

AN RGV LESS THAN ONE INDICATES THAT THE STOCK IS OVERVALUED AND SHOULD NOT BE BOUGHT.
MARGIN OF SAFETY:                                                      2,45%
 1-    STOCKS CURENT PRICE/STOCK INTRINSIC VALUE


CConclusions:   Despite that Kerry Group Plc is an amazing company my advice is to not buy this stock because his intrinsic value is less than curent stock price.2.45 % margin of safety is not enough to buy the company in this moment at 50 euros/share or less is ideal.

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