Thank you for your great site.

I am a bit puzzled by your calculation of net reproduction asset value.

I don’t think you should substract non interest bearing debt AND the cash not required to run the business from Asset Reproduction Value (ARV). I think that by doing so, there are chances that you could underestimate the capital (equity and interest bearing debt) needed to reproduce the business.

In my opinion, you should indeed substract non interest bearing debt from ARV, and then cash not required to run the business IN EXCESS of non interest bearing debt and 1-2% cash required to run the business. That way, you find the true ARV, which you can compare to the EPV.

I understand from Greenwald’s book that there are several ways to use Net AVR. One in comparison with the EPV, which is the calculation I just described, from my understanding. Second, by comparing the same calculation with the market value of the company, as measured by Market Capitalization + Market Value of Debt – Cash. Third, by calculating what I would call a net net AVR : AVR – All reproduction liabilities, which you would compare to the market cap of the company.

What do you think ?

Best regards,

Rayane

Great post but one thing I don’t get it. In GreenWals’s slide 14. His Net repro value is to subtract all Liab. (A/P, AT, AL, Debt, Deferred Tax, Reserve) from Reproduction Asset Value but your model only subtract non interesting bearing debt and excess cash.

Is any assumption behind that?

Thanks

Jason

Thanks again!

1. EPV is for finding the earnings power. SG&A and R&D add to the future earnings but not 100% of it. So Greenwald suggests you add 25% as a conservative measure.
2. Same reason as above except we are dealing with capex when adding back D&A. If I add back 20%, I am assuming that the remaining 80% will more than cover the maintenance capex.
It’s on page 125 of the book. Last paragraph on the page.

Thanks for your post, it’s great but I have some questions:

- In step 2 you “add a certain percentage of SG&A and R&D back to earnings. I prefer to keep things simply by adding back 25% for both.”
What is the logic behind that?

- When calculating Earnings Power Value in step 4 you “add back 20% of D&A as I do”. Why only 20% and not the whole amount?

Thanks!

I’ve also read Greenwald’s book.

What I didn’t get was why didn’t he use FCF/Owners Earnings instead of adjusted Ebit. He seems to make a load of loose estimates, where he could have started with FCF and made the adjustments for the biz cycle etc.

Thanks

Which multiplier of 2 are you referring to? I made the Graham adjustments and published it after I wrote this article btw.

How exactly do you find the intrinsic value of a business by using the FCF Yield metric? It really doesn’t tell me anything regarding a margin of safety.
.-= Jim´s last blog ..The Wall Of Shame =-.

There’s sort of complex arb play with FTBK. This one is prob a little to complex for me but maybe you or somebody else can figure out the best way to play it…I’m thinking just buy some FTBK maybe if it dives soon…???
.-= Mark´s last blog ..Trading Update =-.

As for a renewal type payment model, I’ll have to consider that. Selling spreadsheets isn’t a business model that I thought too much about so the business aspect is a little raw and primitive at the moment. I’ll see what I can come up with but for now, I’ll keep it as a repurchase method. One way I could do is email all the premium buyers from more than 1 year ago and offer a discount or something.

Thanks for the suggestion Peter.

@ PlanMaestro,

While branding is based on marketing, for leaders such as KO, MSFT or even GOOG, I don’t believe they need to market to still be effective.

But the EPV method doesn’t value all of the tangibles and intangibles. It is only a representation of the minimum that is required to start a business. If a competitor even wanted to come close to competing with MSFT, they would have to spend far far more than what is stated as the asset valuation I came up with.

So this method doesn’t really add back everything. Only what a competitor may have to pay today in order to open it’s doors.

One other thing that EPV considers is that a company like Nucor may have started when inflation was at its lowest point and so of its PPE were bought at low prices, but if a new entrant was to try and come into the market, the same piece of equipment, although newer, would probably cost much more than what Nucor paid.

The difference between the EPV price and the asset valuation is what Greenwald calls the value of the franchise. Its moat, which, in the end, is still a subjective topic and one that I know you are well aware of.

Usually value investors talk about:

1. Brands but that is accumulated marketing
2. Distribution Channels: can be valued too
3. Patents but that is accumulated R&D
4. Location but that is real estate mispriced in the books
etc.

But all those are assets that we can put a value to. So if you are valuing ALL Microsoft’s tangible and intangible assets at replacement cost what is their competitive advantage?

In the competitive advantage literature is usually resources (but you added them all back), culture (that is clearly not Microsoft’s case) or a difficult to copy mix of the resources. Maybe that they can tie up innovations to their OS?
.-= PlanMaestro´s last blog .. Variant Perceptions =-.

I reviewed your new spreadsheets. They look exceptional!!! I might have missed it, but did you include the maintenance capex calculation in the new spreadsheet? In addition, For those who have bought the premium package, would you consider some sort of renewal fee once the year has expired instead of buying the entire premium package again.

But with plenty of cash and the company doing a great job of increasing distribution channels, the upside is much more if things start improving.

The news about Verizon was the only thing leading up to this. They’ve been steadily announcing new deals and product launches that should do well for them.

DCF is still my favorite. I find it easy to use and doesn’t require as much messing around with the numbers. If the valuation fits, good, if it doesn’t pass. Although I’ve automated the EPV, I’m afraid that I’ll be skipping over all the required digging around that Greenwald emphasizes.

But since it wont be a technique I’ll solely be relying on, it should be fine.

I never really used FCF yield because it misses out on much more opportunities, but whatever works for the individual right?

Thanks for the comment.

@Floris,

That’s a great question to ask yourself. I’m always trying to see what the worst case scenario is myself and then make adjustments accordingly.

e.g. MHH and IGOI I felt were past their worse case scenario. In IGOI’s case, they lost a customer accounting for 40% of their revenue but their stock price didn’t drop a cent. I found that intriguing and after some more reading, felt that the only direction left was up.

120% later, I’m glad I don’t like risk as well