Selling divisions? Buybacks? Controversy?
Boy, oh boy, IBM is taking a beating.
Earnings misses, financial “engineering”, and of course PAYING someone to take a business off your hands...WOW. Talk about a train wreck. (No BNSF pun intended)
Those geezers Buffett AND Munger (see below) have clearly made a HUGE “unforced error” with IBM, one their largest equity investments of all time.
"I was perfectly OK with it. It's a very Buffett-style play. It's simple. They announced what they were going to do and why they thought it was going to work. You could see how entrenched IBM was in many places, including the Burlington railroad. I think our business experience helps our investment judgment, and vice-versa. ... We've always said that what we like best was owning a wonderful business outright, and second best we like good ideas in securities. That has never changed." – Charlie Munger
http://www.fool.com/investing/general/2012/05/08/charlie-......
Buffett’s and Munger’s dementia is clearly starting to show. After all, they’re violating their own rule about not investing in tech companies.
I mean, come on, Buffett was recently spotted singing Frank Sinatra to 400 women.
https://www.youtube.com/watch?v=0l66YFP7UG0
Clearly, the man needs to retire, reinstate a proper dividend, and break Berkshire up into smaller parts to “unlock value”, right?
OR wait…perhaps there’s another possibility?
Maybe, just maybe, the old man and his partner are going to go out with one last big victory for the shareholders.
Maybe, after 50 years of reading IBM annual reports, Buffett sees something that the masses have missed?
Maybe, Buffett happened to notice IBM taking a page from the book of Bill Anders, former General Dynamics CEO. GD sold off/exited unprofitable businesses, and bought back a ton of shares. Berkshire owned GD, and did quite well on that investment, if my memory serves.
General Dynamics was thought to be crazy, selling off this business, and that business. They were “manipulating” their earnings by buying back huge blocks of shares. Surely that can’t be considered “real” growth, can it?
http://www2.wiwi.huberlin.de/institute/hns/material/M_Dia......
Maybe, Buffett made a GOOD buy betting $10 billion on IBM at 15x earnings in 2011 @$175ish, and now you can make a FANTASTIC bet today buying IBM at 11.3x earnings in 2014 @ $169ish three years after Buffett, and make an absolute killing.
Maybe, the wisdom of the masses is wrong…again...and Buffett spent the day skipping around Kiewit Plaza happily buying MILLIONS of IBM shares.
Maybe, just maybe, NOW is the time to be greedy when others are fearful?
Tuesday, October 21, 2014
Wednesday, October 1, 2014
Deere (DE) looks cheap today
Deere
DE has the 3 big things I like to see: 1) A consistent, multi-decade history of mouthwatering economics, 2) a dominant, wide-moat position in a critical industry that is unlikely to be disrupted (meaning those past mouthwatering economics are likely to continue into the future), and 3) an attractive price.
Take a look for yourself at DE over the past 20 years: High ROE, solid growth, decreasing share count, etc. Deere is an iconic brand, and the undisputed king of agricultural machinery. They also have decent, but not nearly as good, segments in construction, forestry, and home lawn care. The global need for those industries is not going away anytime soon.
Now, against my better judgment, I’m gonna nerd out on price…
As far as price, depending on the discount rate you use, DE is priced for basically ZERO growth. Specifically, at an 11% discount rate, assuming zero growth, DE would be worth about $82.63. DE is currently selling for $81.60. I don’t really use DCF’s to be an exact valuation, but more of a sanity check…that’s why Buffett says if you need to use a detailed DCF analysis, then the stock isn’t cheap enough.
I just played around with a reverse DCF (I like reverse DCF’s much more than normal DCF’s), inputting the current stock price, and fiddling with reasonable range of discount rates, a 0% perpetuity growth rate after year 10, looking to see what growth rate is currently “baked in” to Deere’s current price. The results were this: depending on a range of discount rates between 7% and 13%, DE is basically priced at an expected future EPS growth rate between -6.2% and 2.57% over the next 10 years, and assuming 0% growth after those 10 years.
Pardon, the silly finance math, the real point here is that anyone who knows DE knows that DE is going to grow EPS at more than 2.57% annualized over the next 10 years, and will probably keep growing well after that. I don’t know what rate DE will grow at…maybe 5%?, maybe 8%?, maybe more? But, I do believe that, in the long run, the probability is that it will be way more than 2.5%...therefore DE is underpriced. You don’t need super exact estimates when a DOMINANT business is this cheap…just like Buffett says…you just need to recognize a really WACKY low baked-into-the market-price growth assumption.
Perhaps ironically, I actually expect DE’s EPS to drop over the next couple years since their margins and profitability are SO high right now…you can argue that DE’s ‘normalized earnings are closer to $7 per share (so we’re still talking a “normalized” PE under 12) but over the long run, say 10 years, I can’t see an annualized growth rate under 4%-5%. Otherwise stated, I can’t see DE having normalized EPS under $12 in 10 years…and I doubt that along that growth trajectory, DE won’t sell for 14x normalized earnings or more, at at least few points along that road. What THAT means, to me, is that it’s really hard to in vision a world where DE stock grows at LESS 7% annualized or more, at some point, over the next decade + you get your nearly 3% dividend as well. So maybe a total return around roughly 10% over the next decade…which is likely going to be much higher than the S&P 500.
Sorry for the long-winded pitch. At the end of the day, this seems to me to be another asymmetrical long-term bet, especially compared to the S&P 500.
DE to outperform.
DE has the 3 big things I like to see: 1) A consistent, multi-decade history of mouthwatering economics, 2) a dominant, wide-moat position in a critical industry that is unlikely to be disrupted (meaning those past mouthwatering economics are likely to continue into the future), and 3) an attractive price.
Take a look for yourself at DE over the past 20 years: High ROE, solid growth, decreasing share count, etc. Deere is an iconic brand, and the undisputed king of agricultural machinery. They also have decent, but not nearly as good, segments in construction, forestry, and home lawn care. The global need for those industries is not going away anytime soon.
Now, against my better judgment, I’m gonna nerd out on price…
As far as price, depending on the discount rate you use, DE is priced for basically ZERO growth. Specifically, at an 11% discount rate, assuming zero growth, DE would be worth about $82.63. DE is currently selling for $81.60. I don’t really use DCF’s to be an exact valuation, but more of a sanity check…that’s why Buffett says if you need to use a detailed DCF analysis, then the stock isn’t cheap enough.
I just played around with a reverse DCF (I like reverse DCF’s much more than normal DCF’s), inputting the current stock price, and fiddling with reasonable range of discount rates, a 0% perpetuity growth rate after year 10, looking to see what growth rate is currently “baked in” to Deere’s current price. The results were this: depending on a range of discount rates between 7% and 13%, DE is basically priced at an expected future EPS growth rate between -6.2% and 2.57% over the next 10 years, and assuming 0% growth after those 10 years.
Pardon, the silly finance math, the real point here is that anyone who knows DE knows that DE is going to grow EPS at more than 2.57% annualized over the next 10 years, and will probably keep growing well after that. I don’t know what rate DE will grow at…maybe 5%?, maybe 8%?, maybe more? But, I do believe that, in the long run, the probability is that it will be way more than 2.5%...therefore DE is underpriced. You don’t need super exact estimates when a DOMINANT business is this cheap…just like Buffett says…you just need to recognize a really WACKY low baked-into-the market-price growth assumption.
Perhaps ironically, I actually expect DE’s EPS to drop over the next couple years since their margins and profitability are SO high right now…you can argue that DE’s ‘normalized earnings are closer to $7 per share (so we’re still talking a “normalized” PE under 12) but over the long run, say 10 years, I can’t see an annualized growth rate under 4%-5%. Otherwise stated, I can’t see DE having normalized EPS under $12 in 10 years…and I doubt that along that growth trajectory, DE won’t sell for 14x normalized earnings or more, at at least few points along that road. What THAT means, to me, is that it’s really hard to in vision a world where DE stock grows at LESS 7% annualized or more, at some point, over the next decade + you get your nearly 3% dividend as well. So maybe a total return around roughly 10% over the next decade…which is likely going to be much higher than the S&P 500.
Sorry for the long-winded pitch. At the end of the day, this seems to me to be another asymmetrical long-term bet, especially compared to the S&P 500.
DE to outperform.
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