Companies aren’t required to file letter to shareholders. Hardly any do. AMZN is more of an exception so for the rest you should go to the company website and read it from there.

For small cap companies, you’d be surprised as to how easy it is to talk to the CEO or CFO. Just a little badgering and you get through real easily.

@ Matt,
I must admit that if Ernie follows all this, he leaves me in the dust in the amount of work. I usually have a good idea of the value after 10min or so and then it’s a matter of whether the business is good enough for the price to meet value rather than vice versa.

I usually read a couple annual reports and quarterly reports. But on the analysis side, I will go through as many quarterly reports and annual reports as possible, examining each line item and looking at trends.

I also try to think as out of the box as possible and businessman.

@ Michael,
I do agree. I’ve looked into trying to change the formula myself but failed after weeks of trying.

The only time you do get in trouble with valuation is when you severely understate maintenance capex, so it would be more prudent to just take the full capex except for certain industries where the maintenance capex has to be calculated.

Do you have any ideas on a new calculation? I will be very interested to see what your idea is.

@ Mechanonuke,
Ernie really took the time to write all this up for me. He told me he is writing a paper on uncertainty and risk which I will have the pleasure of reading, and I’ll ask whether he can put it up.

He hasn’t written anything else, but I sure would love him to send me more stuff as well!

IMO this is probably how the buffett limited partnership valued the “Generals” in the 50’s/60’s. Anyone else concur?

Has Ernie written anything else? Perhaps on bond valuations? or Special situations?

Thank you
d

For example, suppose you had two historical periods with sales of 100 and 200, PPE of 10 and 20, and an average life of 10 years on PPE. Also assume that there is no inflation to make things simple, i.e. you can buy PPE at the same cost every year. So that capex in each of the first two years would be 1 and 2 (PPE of 10 and 20 depreciated straight line over 10 years). Now suppose your estimation of a normalized period’s sales is 250. Total capex is 7 (depreciation of 2 on the original 20 of PPE, incremental 5 of PPE purchased to support the increase in sales). Using the process outlined, you would calculate growth capex as 5 and you would net this out against the full capex amount which would leave you with maintenance capex of 2. However this is clearly understated as it ignores the maintenance costs for the incremental 5 dollars of PPE that you need for the normalized sales level. In this case, you should have projected a maintenance expense of 2.5 per year.

In certain cases (depending on things like the average lives and replacement costs of PPE) this estimation can become even worse. I’m not disagreeing that a certain amount of expenses should be eliminated for a no-growth valuation, but I think the formula needs to be adjusted a bit.

Thoughts?

Gathering the SEC filings (even is you use 10-K Wizard), reading the 3 shareholder letters, 3 MD&A’s, and even a cursory scan of the notes scanning other filings & sections for accounting changes, and an automated spreadsheet analysis of financials, proxies, other information sources…

What I find hard even with a lot of the financial work automated, is finding time to research more than one or two ideas per month, let alone keep up track of an existing portfolio of 10+ names.

Ernie, thanks for sharing your checklist.