Wednesday, 4 March 2020

Earnings Yield of the Enterprise

EBIT multiple  = EV / EBIT

Earnings Yield of the Enterprise (before tax)  EY = EBIT / EV

For example:
EY of A = 11.3%
EY of B = 15.3%

The EY of B at 15.3% is higher than the 11.3% of A, hence, B is a cheaper buy than A.

The EY computation is pre-tax EY and this is good enough for comparison among companies.  

For determining if you would like to invest in a stock, use after-tax EY so that you can compare with other alternative investments.


EY (after tax) = (EBIT x (1 - tax rate) / EV

For example:
EY (after tax) of A = 8.5%
EY (after tax) of B = 11.5%



 Why is the earnings yield so important?

1.  It allows you to see how cheap a stock currently is.  Unlike a DCF analysis, calculating a stock's current earnings yield requires no estimates into the future.

2.  Using earnings yield as your main valuation tool to compare the relative price-value relationship of companies in the same industry, helps you to see which one is a better buy.. For individual cases, the investor should be happy to invest in a company with normal growth rate of 5% with an after-tax earnings yield of 12%.



How to use EV / EBIT?

1)  EV / EBIT as a primary tool to
  • evaluate its earnings power and
  • to compare it to other companies, 

in addition to the PE ratio.


2)  Joel Greenblatt uses for his Magic Formula the Earnings Yield of the enterprise, in conjunction with the Return on Invested Capital (ROIC).

3)  Buffett uses this when evaluating a business and has said that he will generally be willing to pay 7 x EV / EBIT for a good business that is growing 8% - 10% per year


4)  For cyclical plantation companies which have a lot of debts, it is more appropriate to use EBIT multiple and EV per hectare, rather than basing on PE ratio and market cap per hectare.


Summary

EBIT multiples (EV / EBIT) are better market valuation metrics than PE. 

However, both EBIT multiples and PE are all relative and comparative metrics.. 

It would be better if we can determine the absolute value of a stock, the intrinsic value. 

We can then compare the market price with the intrinsic value and determine the margin of safety to give us a better decision making in stock investment.



Reference::

Pages 251 - 252
The Complete VALUE INVESTING Guide that Works!  by K C Chong






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Enterprise Value: Valuation of a company at its firm level

Think of enterprise value as the theoretical takeover price. 

In the event of a buyout, an acquirer would have to take on the company's debt but would pocket its cash.  EV differs significantly from simple market capitalization in several ways, and many consider it to be a more accurate representation of a firm's value.  The value of a firm's debt, for example, would need to be paid by the buyer when taking over a company, thus EV provides a much more accurate takeover valuation because it includes debt in its value calculation. (Investopedia)

Enterprise Value of a Firm

EV of a Firm
= Market Capitalization + Debt + Minority Interest - Cash - Other Non-Operating Assets.


Minority Interest is the result of the consolidation of the subsidiary company's account and it doesn't belong to the common shareholders of the company.  The market value of MI is obtained by multiplying its book value by an appropriate price-to-book value.

The other non-operating assets such as investment in other companies, listed or non-listed, money market funds, investments in associates, etc.  are treated in a similar way as cash or cash equivalent as they can be sold without impacting its core business.


Debt and cash 

 Debt and cash can have an enormous impact on a company's enterprise value. 


A)  EBIT MULTIPLE

Hence, when evaluating the fair price of a company or comparing companies, a better measure of value is the enterprise value divided by the EBIT or the operating income, instead of the too simplistic or flawed PE ratio.

EBIT Multiple = EV/EBIT


For an ordinary firm, an EBIT multiple of less than 8 may be considered as cheap.
For a high growth company, an EBIT multiple of 15 may be considered as fairly valued.



B)  EBITDA Multiple

For HIGHLY INDEBTED businesses, the EBITDA is often used by all capital providers to have an idea of the
  • earnings available at their disposal for investments and interest payment, as well as 
  • comparison among companies in the similar industry.  

This valuation metric resembles cash flows and is also useful for companies with temporary negative earnings.  

It is also a quick and dirty way for a Leverage Buy Out to value a target and to see how much leverage could slap on a company and still service the debt.

An EBITDA multiple of less than 11 for an ordinary company may be considered cheap.




Additional notes:

Valuation of a company at its firm level based on enterprise value.

Enterprise value looks at the value of the entire firm, for capitals both provided by equity shareholders and by the debt holders, and at the same time separating those assets not required or not used for the core operations of the business. 

It is important to understand enterprise value and use it for valuing an investment for potentially better outcome.

For a company

  • without much cash and debt, and 
  • without those non-operating one-time-off items, 
it may be adequate to just use the PE ratio to determine in relative term if the stock is worthwhile to invest in.


However, many companies have 

  • substantial amount of cash or debts in their balance sheets, and 
  • often with some extra-ordinary gain/loss or other one-time-off items, 
the use of the simplistic PE ratio would have missed the forest for the trees.

The simplistic PE ratio is useful as crude screening tool, but it has a serious limitation of ignoring the balance sheet items.  This can materially misrepresent the earnings yield of a business.
The EBITDA figure is not normally listed in the Income Statement, but we can add the depreciation and amortization figures in the cash flows statement to EBIT or operating income.

EBITDA = EBIT + Depreciation and Amortization

EBITDA Multiple = EV/EBITDA




Reference:

The Complete VALUE INVESTING Guide That Works by K C Chong
(Pages 246 - 251)
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Warren Buffett Adds to Delta Investment as Airlines Plunge to Value Territory

Coronavirus fears have taken their toll, providing an opportunity for investors

March 03, 2020



As fears of the new coronavirus mount, the share prices of airlines have taken a hit. Taking advantage of this dip into value territory, famous value investor Warren Buffett (Trades, Portfolio) recently disclosed that Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) has invested an additional $45.3 million in Delta Air Lines Inc. (NYSE:DAL).



According to GuruFocus Real-Time Picks, a Premium feature, Buffett bought 976,507 more shares of the airline on Feb. 27, increasing his stake by 1.38% to a total of 71,886,963 shares. The stock was trading around $46.40 at the time.

DAL 30-Year Financial Data
The intrinsic value of DAL
Peter Lynch Chart of DAL



9aefb0b82f1329864d9138ad393531bc.png


Buffett added to the Delta position toward the end of a week-long U.S. market selloff, which was brought on by fears that the new coronavirus would slow economic growth worldwide. In a whiplash correction, the S&P 500 dropped 13.9% in one week, and the biggest stock fund in the world, the SPDR S&P 500 ETF Trust (SPY), saw over $13 billion in outflows.


94a03d4fd8d465d204fce6dfa4908df1.png


The last time Delta traded at such a low price was in early January of 2019. While the stock price is around the same as what it was a year ago, the company’s earnings have increased since then, making it undervalued according to the Peter Lynch chart.

5fb67ff1dd658cdf23811dd8718f14b1.png

Beginning in January, the U.S. posed travel restrictions on entry from China, which mainly consisted of rerouting airline passengers to certain airports to be screened for the virus. In February, additional travel restrictions were implemented on passengers travelling to the U.S. from Italy, South Korea and Iran, which have also seen significant coronavirus outbreaks.

Aside from government-imposed travel restrictions, there has also been a general drop in demand for international flights as people seek to reduce their exposure to foreign countries and crowded spaces. On Saturday, American Airlines (NASDAQ:AAL) announced it would be suspending flights to and from Milan, Italy from some of its airports, a decision that is due purely to lack of consumer demand.

Decline in demand for luxury services such as airline flights are nothing new during a market downturn. While it’s true that in this particular case, the problem is greatly exacerbated by the fact the recession is the result of an epidemic, demand will pick back up again at some point. Once panic over the new coronavirus recedes, the profits and stock prices of airline companies will rise again.

At a price-earnings ratio of 6.48 as of March 3, Delta is trading at a three-year low point in its valuation. Even if its revenue falls over the next few quarters, the current price is still more attractive than it was a few months ago in regard to the company’s future prospects.

Year to date, Delta shares are down 18.67%, while American Airlines shares are down 33.86%, Southwest Airlines (NYSE:LUV) shares are down 13.02% and United Airlines (NASDAQ:UAL) shares are down 30.46%. However, Buffett also owns shares of all four airlines, indicating a confident long-term bet in the profitability of the industry.


Margaret Moran

https://www.gurufocus.com/news/1064213/warren-buffett-adds-to-delta-investment-as-airlines-plunge-to-value-territory
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What is the Ideal Long Term Investment Strategy for a 21 year old?

Ideal Long Term Investment Strategy for Myself? (self.personalfinance)
submitted  by leapgoose​
21 year old who will start working next week, and will have after-tax monthly income of around $4,200.
Currently have $10,000 saved up that I'd like to use to start investing (15-20 year investment horizon).
I will be living at home for the next year, and plan to add $1,600 - $2,000 per month to this investment account.
I additionally have $10,000 in emergency savings as well -- if anyone was going to comment about that.
​
I would really like to hear everyone's feedback on my potential plans.
I am planning to invest:
  • $3,000 in VTI
  • $3,000 in VIG
  • $4,000 in individual stocks (Amazon / Chegg / Disney / Coca-Cola being some of the stocks I am considering)
My question for you guys is, would it just be smarted to invest $5,000 into VTI and VIG each instead of also having some focused individual stock picking? My idea for this is that I am young, can tolerate some more risk right now, and will genuinely be looking for 3 key companies to invest in that I really believe will exist far into the future. Furthermore, should I setup my Roth IRA (since I haven't yet) first and then include these investments within my Roth IRA? Or should I just put them in any ordinary taxable investment account?
​
I would also really like to hear if you guys have any advice or recommendations on ETFs to buy or individual stocks to check out. The plan I laid out above was based upon the idea that I should go with one Total Market Growth ETF and one Dividend Appreciation ETF after all my research. Please tell me if I am wrong or could go about this a better way! Thank you all!!!

[–]AutoModerator​[M] 1 point  
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[–]molten_dragon​ 1 point  
What are you investing for? Retirement or something else?
[–]leapgoose​[S] 2 points  
I want to build a retirement fund early on to reap as much compound interest as possible. But, I would also like the option to withdraw from this account 20 years down the line if need be for a down payment on a mortgage for my family or if I want to invest in a real estate property. I also plan to create some medium / short range savings accounts as well.
[–]EvertonFury19​ 1 point  
  1. Yes, smart to invest in index funds. Up to you what funds those are but you're better off for long-term investments in passive index funds.
  2. Yes, set up Roth IRA and put as much as you can and/or a traditional IRA
  3. Dividend Appreciation ETF is a way to diversify but for a 20-30+ year window, you can go for more aggressive ETFs.
[–]leapgoose​[S] 1 point  
Can you recommend some more aggressive ETFs to look into please? and maybe any quick tips you have on analyzing different ETFs? Thanks!!
[–]EvertonFury19​ 1 point  
Take a look at the rest of Vanguard's ETF. You might want one of the ETFs that tracks the S&P 500 (VTI is much broader but compare VTI to S&P500 performance)
Of course there's no guarantee that any will do better so go with the ETFs that you feel most comfortable and knowledgeable.
[–]leapgoose​[S] 1 point  
I see that there is a marginal difference in performance over the last 10 years and a marginal difference in fees -- correct me if I am wrong. I went with VTI for more exposure.
[–]EvertonFury19​ 1 point  
don't worry about the fees, vanguard is as close to zero as you're going to get compared to most ETFs.
VTI will give you more exposure in the US stock market but everyone compares to the S&P 500 and if you had picked VTI over S&P 500 exclusively would have missed on better returns over the past few years.
[–]penguinise​ [score hidden]  
My question for you guys is, would it just be smarted to invest $5,000 into VTI and VIG each instead of also having some focused individual stock picking?
It would be smartest to just put all $10,000 into VTI since it is by far the most broadly diversified among those options.
If you desperately need to scratch a stock-picking itch, $4,000 into single names in your position is probably the best time to do it, but what you'll learn sooner or later is that it's quite risky and more importantly in the long run you're not going to beat VTI.
Furthermore, should I setup my Roth IRA (since I haven't yet) first and then include these investments within my Roth IRA? Or should I just put them in any ordinary taxable investment account?
You should contribute the maximum each year to your Roth IRA before doing any taxable-account investing. Worst comes to worst you can always withdraw your original contributions from the Roth IRA without penalty - this is a really bad thing to do, but still much better than never contributing in the first place. Putting money in a Roth IRA is roughly equivalent to a ~17% one-time boost at your age from the taxes you will never pay on the growth.




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What To Avoid Investing In When You’re 20-40

If you are investing, or have invested while you were in your twenties or even earlier, that is an excellent first step. However, if you have invested in the wrong things, you have missed out on excellent opportunities for your money to grow. In this post I will explain what to avoid investing in when you are just starting out your adult life.


My Investment

 Regretfully, I am giving you this information from personal experience, not from “book-smarts.” In other words, I made this investment mistake and I am telling you this so you don’t have to make the same mistake. I invested money into these types of investments over ten years ago. I had purchased thousands of dollars of these investments. Eventually, I had cashed in many of them but have kept $200 to try to accrue higher interest.

Altogether the investments have accrued around $80 over more than 10 years. This may sound like a decent investment. Keep in mind that I have brought up that a 7% interest rate would double your investments over ten years. I commonly use this number because the lifetime return of investment of the S&P 500 is just less than 10%, and the inflation rate is just less than 3%. With only about 40% return over 10 years, that would mean I have an interest rate of around than 2.6%. Keep in mind, with an inflation rate of less than 3% my investment was not beating inflation. It was not even breaking even. This investment was a set of series I US savings bond.


Savings Bonds Are Overrated

Savings bonds are a form of investment where the government issues these bonds for a set amount that investors loan to them. The savings bonds can receive interest for up to 30 years, but can be redeemed before maturation. They usually make great gifts and savings, but not great investments.

Many people see savings bonds as safe investments. They are, but they are what you should avoid investing in when you are young. They have too small of a return to invest in the long term, although you can cash out your savings bonds before 30 years, the interest they accrue is too small to make up for the lack of risk.


Where Bonds Are Acceptable

 Just because individual savings bonds do not make very good investments does not mean they cannot find a place in finance. Savings bonds still make great gifts, especially to young children. Children could see the value of saving and investing from these alone. Savings bonds are safe and have some return so a child would be excited to see money grow, and would want to learn how to make it grow more. Sure, the investment may not beat inflation, but what ten year old knows or cares about inflation? They will just see it as money growing. Furthermore, bond funds are useful in balanced funds to control risk, and to diversify investments. More importantly, bonds should be utilized when you are close to retirement.
Where To Invest Instead

 If you are in your 20s – 40s, you should at least be considering investing in funds that are mostly invested in equities (at least 60% equities). You should avoid investing in bonds too much. Your portfolio will lean more towards growth so your money can work harder for you than the other way around. Your investments may be more prone to losses. However, unless you are planning on retiring early, you could expect your portfolio to recover within 10 years and grow further.

If you need money saved within the short term, it may be better to save your money. Savings are almost completely liquid and at least your money will be collecting a little interest instead of dust. Furthermore, there are high interest savings accounts with comparable interest to savings bonds.


Final Thoughts

 Investing in bonds may not be the best financial strategy when you are young. But they make better investments than most things. Most people could spend their money as it comes or “invest” in black jack. However, if you want to forge your wealth, you need to give your wealth a little more heat. Investing in equities, real estate, or other high return of investment assets will do more for you in the long run than bonds. Besides, if you are just starting to invest in your 20s – 40s, you will be surprised at how quickly you will have to change gears to preserve your wealth.


BYPAPA FOXTROT


Author:Papa Foxtrot
Most of my life I was careful with money and learned where I should invest it. I was very lucky to have parents who taught me financial literacy when I was young. Unfortunately, I am very lucky because many people lack the financial literacy I know. The purpose of Forge Your Wealth is to teach people who are just starting out in life how to obtain their wealth or anyone who just realized they may need to learn more to handle their finances. I currently have a PhD in biochemistry, just started a job in industry (will not disclose where exactly for personal and professional reasons) and am currently married to the love of my life. I am one of the lucky few people in America who graduated with no student debts, my wife was not. Over the series of a little over 3 years we paid for our wedding with no debt and paid off her federal student loans.
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Top 25 Malaysia Investment Blogs And Websites For Malaysian Investors in 2020

Top 25 Malaysia Investment Blogs And Websites For Malaysian Investors in 2020

                                               Last Updated Mar 1, 2020
Bullbear Stock Investing Notes



About Blog Keep INVESTING Simple and Safe (KISS)Investment Philosophy, Strategy and various Valuation Methods. The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It's true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner! 

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Since Aug 2008 
Also in Singapore Investment Blogs 
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Comment:

In terms of the number of years blogging, this site ranks 4th among the 25 blogs mentioned above.   

I am amazed by how fast times fly, however, it has been rewarding and enjoyable; especially when one is passionate in this.
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