Old School Value

4 Comments For This Post

1. Floris Says:
   September 9th, 2009 at 10:29 am

   Hey,

   I just purchased your spreadsheet and before I go on with my remark, I just want to thank you for the relative value of this purchase. It would have taken me ages to come up with a file that is even close to this. Nonetheless I have a question/remark regarding the DCF calculation. In your calculation you exclude “other” and “deferred taxes”, which is strange since a non-cash write down shows up as “non-cash items” which can have a great effect on the net income but not on free cash flow. Net income includes the non-cash write down of for example goodwill but your DCF calculation excludes it. Leaving this item out greatly distorts the FCF calculation and the intrinsic value of the stock.

   I already adjusted it but it’d be interested to know whether it is a ‘bug’ or intentional

   regards,

   Floris

2. Jae Jun Says:
   September 9th, 2009 at 3:03 pm

   forgot to answer here so I’m just copying and pasting the conversation I had with Floris.
   =======================================
   (Jae Jun to Floris)
   Hi Floris,

   Thanks for the purchase. There will be even more value added once I complete the major upgrade I am currently working on.

   Onto FCF.
   I used to use the standard formula of
   Cash From operatoins – Capex

   But what I realised is that far too many companies make poor business decision and receiving cash income from things other than their main line of business.

   By leaving out the Other numbers, I am trying to get a Quality FCF number rather than a standard GAAP version.

   e.g. deferred taxes is still cash in hand, but it’s a liability and will have to be paid out anyways. It wasn’t earned from the business, so the value of the business shouldn’t rise just because the company has been deferring its taxes.

   Same goes for impairments. If the company took writedowns, then that proves to me that they made bad business decisions. Make enough of them and my adjusted formula should reflect this with a lower FCF growth rather than what you would get if you add all of that back in.

   My definition of intrinsic value is what is the company worth based on quality earnings, quality assets and quality cash.

   Earnings are easily overstated, assets are hard to liquidate and cash is hard to fudge, but there are still ways to filter out the “excess fat” and come up with an intrinsic value based on the raw, lean, quality numbers.
   ========================
   (Floris to me)
   Hey Jae,

   I definitely understand your reasoning and that is a reason to keep your FCF numbers as it is but let me try to drive home my argument about goodwill impairment.

   I recently bought a company called RCM which suffered from a massive goodwill impairment last year but is currently trading at 50% NCAV (it only has receivables as CAV which you could easily finance). The reason it had to take this impairment was because its stock was trading at a depressed level which enforced the IFRS rule that goodwill has to be ‘fair value’. The writedown was taken because of the price of the stock not because of bad business decisions. It might also be that they paid too much for the firms they acquired (they bought them in 1999) but the root of the problem is accounting rules not underlying business value. Even if they purchased the firms in 1999 then this writedown will most likely not be of a repetitive nature since the bubble caused irrational pricing for most businesses. Furthermore I think the consultancy business wont generate huge ROIC but if decently managed should do fine (which I of course believe it is, otherwise I would not have bought it). Concluding I therefore think your model incorrectly values cases such as this (these are special cases that will, for the majority of your customers/investors will not make a difference)

   This is just an example but I hope this will help you understand my point of view.

   Good luck with your update.
   ===========================
   (Jae to Floris)
   Completely agree with you on that one which is why I tried to compensate with a input override.

   Ive also included an asset based valuation to the spreadsheet you should see soon. By comparing the asset value, epv, dcf and graham value, you should be able to know whether some numbers need to be added back or not.

   Your example is very similar to what I saw in ASFI. Sadly I didn’t take my own advice.
   =======================
   (Floris to Jae)
   Looking forward to it, as long as the strategy is sound occasional hick ups won’t matter, its the long run that counts.

3. Jae Jun Says:
   September 17th, 2009 at 5:22 pm

   If you are getting the error
   “the workbook contains one or more links that can not be updated”

   Press continue, save the spreadsheet and then close EVERYTHING and restart.

4. Jae Jun Says:
   September 17th, 2009 at 5:29 pm

   To delete and reinstall

   Simply delete the entire SMF add in folder that contains the add in files.

   Don’t try to keep the actual valuation spreadsheet in the same folder as the smf add in.

   Re download the entire zip file again and save it to your desktop or somewhere you access regularly.

   Unzip the contents to the desktop.

   Now there will be a zip file called RCH_Stock_Market_Functions.zip as well as all the others.

   Go to C:/ and create a new folder called “SMF”

   Cut or copy RCH_Stock_Market_Functions.zip into C:/SMF

   Select the zip file, and unzip the contents DIRECTLY into “C:/SMF”.

   Do not, unzip it to another folder within “C:/SMF/”. Sometimes your unzip software may unzip it to another folder, make sure to move all the 10 files or so directly under C:/SMF/.

   Now open Excel, and follow the install guide PDF for your version of excel.