Book Value

Book value is a loosely used generic term referring to the accounting value of a business or operation. It is generally referred to as the net balance sheet value on a given date. This means assets less liabilities and less intangibles. Other variations of book value include carrying value, basis, and tangible book value.

McDonald’s Intrinsic Value

Fast Food Restaurants, Investment Fund / By / 04/19/2022
McDonald's

President, Chief Executive Officer and Director of McDonald’s Inc. said it best in the earnings call in late January 2022, we are “… witnessing the beginning of the next great chapter at McDonald’s, …”. He continued with “2021 was a record-setting year for McDonald’s on many dimensions, …” Simply put, McDonald’s had the best financial performance ever in its history during 2021. It just didn’t marginally exceed records, McDonald’s dramatically surpassed all financial records in its entire history. McDonald’s was already the standard bearer in the informal-eating-out industry; it took this standard to a whole new level. When a company has net profits of more than 20%, it is labeled a ‘darling’; over 25%, it is just unheard of financial results; in 2021, McDonald’s net profit was greater than 32%. This sets such a high standard for fast-food restaurants; it is unlikely to be matched by others – EVER.

When a company performs to this level, intrinsic value soars. Intrinsic value is built on a company’s inherent worth. The more stable and reliable a company, the greater the intrinsic value for that company. The reason is simple, the discount rate used with evaluating earnings improves because management demonstrates that it can indeed perform and in this case, perform at exceptional levels.

What is even more fascinating is this: 

If you look at McDonald’s balance sheet, total assets on 12/31/21 are $53.8 Billion; total liabilities are $58.4 Billion. McDonald’s has a NEGATIVE EQUITY POSITION OF $4.6 BILLION. You read that correctly. In simple layman’s terminology, this is called ‘Bankrupt’. Every business textbook used in college defines bankruptcy as liabilities exceeding assets. This makes McDonald’s performance just that more impressive. They are so solid, even creditors ignore this situation and will still loan money to McDonald’s. During 2021, McDonald’s was able to acquire long-term loans totaling $1.154 Billion.  To further validate the incredible worthiness of McDonald’s, from page 57 of their filed SEC Form 10-K (annual report), “There are no provisions in the Company’s debt obligations that would accelerate repayment of debt as a result of a change in credit ratings or a material adverse change in the Company’s business.” You can only count on one hand the number of companies that have this level of credit. 

McDonald’s is financially rock solid.

Value Investing – Setting Buy and Sell Points (Lesson 16)

Phase I - Four Core Principles of Value Investing, Lessons/Tutorials/Resources / By / 02/05/2022
Setting Buy and Sell Points

Setting buy and sell points for any investment security determines the investment’s final return. If the buy is made too early while the security is falling in price, the value investor loses out on not only additional margin upon the sale of that security, but also reduces their margin of safety associated with the intrinsic value point. It is similar on the other side of intrinsic value. If sold too soon, the value investor leaves money on the table. Thus, setting the buy and sell points are important decisions for every investment.

There are tools available to determine these two values. In the simplest of statements, the easiest rule to follow is the Pareto Principle, the old 80/20 rule. This rule basically states that roughly 80% of all outcomes are within 20% of of the value. With security pricing, this principle is simply that 80% of the value change will occur within 20% of the starting point. Thus, if a security’s intrinsic value is $80, then the probability is that 80% of the maximum change in value will happen within 20% points of the price shift. Therefore, the buy is approximately $64 and the sell point is $96. Almost certainly, this rule isn’t pure with security investing. The conception is that if the end results are beyond this 20 percent under and over the intrinsic value point, the value investor must have additional financial support and a lot of history with the security to validate expanding the buy and sell points beyond 20% fluctuation.

This lesson first introduces a basic model to illustrate and reinforce setting the respective buy and sell points. This model emphasizes an important aspect of price change. The angle of change affects the return on the investment. The steeper the price change, the shorter the time period for the change. The shorter the holding period for any investment, the greater the return on the investment. This is illustrated with a chart in this section of the lesson.

Value Investing – Principle #2: Intrinsic Value (Lesson 7)

Phase I - Four Core Principles of Value Investing, Lessons/Tutorials/Resources / By / 03/02/2022
Intrinsic Value

Intrinsic value is just one of the four principles of value investing. Intrinsic value sets the floor price of the investment; i.e. it is an automatic buy. Any price higher than this intrinsic value must be substantiated by other value investing criteria. In effect, other criteria may increase the buy point upwards of 20%.

Intrinsic value utilizes one or more of three different valuation methods. The first method and customarily applicable to high quality stocks is the discounted future free cash flow formula. The second method works best with penny and small-cap stocks; this is the traditional book method. Mid-caps’ intrinsic value is best served by the net assets value method adjusted to fair market value of the underlying assets. Those companies with strong fixed asset positions in the mid-cap market capitalization range are best served by this particular method. In effect, the accuracy increases significantly with the net assets value adjusted by fair market values for the underlying fixed assets.

Value investors customarily use the discounted cash flows method; but here too, there are adjustments tied to certain criteria to provide a more accurate and reasonable intrinsic value for the stock.

Railroad Stocks – Analysis 02/15/2020

Railways Pool / By / 02/05/2022

Every one of the six railroad stocks are at or above their all-time highs. As of today, February 15, 2020, the various stock prices are as follows: Union Pacific 184.65; Norfolk Southern $206.85; Canadian National $93.93;
Kansas City Southern $173.64; Canadian Pacific $270.86; CSX $79.59.

In addition, the price to book ratios are also higher than last quarter. The key question: is there any value in any of the stocks? To do this, a table of various preferred ratios must be prepared and explained in a write-up. 

Two critical points of information are evaluated, both the gross profit margin and operational cash flow per share are explained in this article.

Railroad Stock Investments – The Standard of Measurement to Buy and Sell Railway Stock

Railways Pool / By / 02/05/2022

The transportation sector of the United States economy is composed of nine industrial groups. One particular group moves more volume of tonnage based on ton miles than any other form of transportation – Railroads. In accordance with the Federal Department of Transportation, railroads move 39.5% of all freight in the US (based on ton miles which is the length freight travels). It’s a $60 Billion industry with over 140,000 miles of track. It is dominated by seven major carriers (referred to as Class I Railways).

Railroad companies are an excellent group of investments for several reasons. First, this is a highly stable and regulated industry. Secondly, there are a limited number of railroads, in effect, the threshold of entry for any new railways is impractical and financially capital intensive. Third, each company limits its revenue stream to transportation (there are some alternative sources of revenue but they are less than 5% of their entire total revenue). Every single member in this pool has a long history of positive earnings and superior cash flow.

Value Investing

Value Investing / By / 02/22/2021
Value Investing

Value investing is a concept of buying and selling stocks based on business fundamentals and not as a reaction to news or market trends. It is a well accepted principle that often the market overreacts to news causing stocks to plummet in price or escalate in value. Value investors ignore this and use sound business fundamentals to trade stock. Much of historical wealth accumulation is based in value investments. There are no short-cuts or sudden actions taken by value investors. All decisions are derived by business analytics and trend lines.

EBITDA – Drawbacks

Marginal Value / By / 02/28/2022
EBITDA

There are several business financial attributes required for EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) to work well as a basis for the multiple of earnings method (the method used with the Market Comparable Valuation Approach); see Fair Market Value for a better understanding of the three primary business valuation approaches.

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