Xro - xero

[gregrday]

Thanks Percy. The valuation process is pretty 'valuable' (stock pun there!), since now I actually have some numbers to track against. If everything goes as I forecast (it won't), then I will have some idea if the price is under or overvalued. So I'm really looking forward to the next earnings release to see how they're doing. I'll be looking to do this in other NZ stocks, so suggestions welcome, but I prefer companies that only do one thing, and that I can more or less understand. So... restaurant brands maybe? or Michael Hill?

cheers
Greg

[buns]

So you are into 3 peice quarter packs and Diamond rings?

Good work on that DCF. As well as tracking the XRO earnings reports, look at the rest of the DCF as well, for instance the WACC (cost of equity/debt) which drives the whole thing.

[gregrday]

thanks buns. re: Restaurant brands, I did pretty well out of them recently before selling a month or so ago. Its a company I can understand, so follow reasonably closely. re: MHI, another company I understand, and hold a position in, mainly because of management and international exposure. But I'm happy to look at other simple, one trick companies.

re: WACC, yes next one will go into more detail on this. Xero was a special case since it was such an early stage, and everything was a guesstimate.

cheers
Greg

[Sauce]

Hi Gregday,
Nice work on on the DCF valuation.
Perhaps you could help us get to the bottom of the numbers for RYM on the owner earnings vs free cashflow thread. I'm not sure it meets your definition of a one trick company, and it may be a bit harder to get to the bottom of the numbers (but not impossible). but considering its been the best performing NZ company over the last decade, growing entirely from its own cashflows with little debt, my thoughts are that its a business worth understanding!
Regards,
Sauce

[gregrday]

Thanks Sauce, I havent really looked at the owner earnings concept, although I understand the idea. I have looked at Ryman, and ... well, got confused about just about every aspect of the business. I didnt really understand how they made money, how it was booked, and how the properties were owned. All in all, it just confused me (which is not that hard), so looked for easier pastures! Most of my stocks are US-based, and theres a good supply of 1-trick, simple companies there.

cheers
Greg

[Sauce]

Thanks Sauce, I havent really looked at the owner earnings concept, although I understand the idea. I have looked at Ryman, and ... well, got confused about just about every aspect of the business. I didnt really understand how they made money, how it was booked, and how the properties were owned. All in all, it just confused me (which is not that hard), so looked for easier pastures! Most of my stocks are US-based, and theres a good supply of 1-trick, simple companies there.

cheers
Greg

Hi Greg,

Your not wrong about confusing! The accounting has been doing my head in. However the business model and their cashflows are actually very easy to understand. If you ever do decide to look at it, I suggest reading through their investor center online, and then checking out the 2007 Annual report first. The reason is that their accounting is so confusing from 2008 - now is the change in accounting from GAAP to IFRS.

However, the reason I suggested them is twofold. They benefit from enormous positive cashflow, and they managed to grow those cashflows throughout the GFC. Something very good is going on within this business and I think it would help any investor to better understand it.

Interesting that you invest mostly in the US. I can see a lot of benefits to that. Its hard to find companies with the potential for secular growth in small markets like AU and NZ for starters!

Cheers
Sauce

[Lizard]

Hi Greg,

I really enjoyed reading your valuation. Nice work.

Clearly, picking something like XRO to value in public is a pretty challenging. Since DCF's are going to multiply and compound the errors and biases in any assumptions, your chances of getting within a factor of 10 of reality on a high-growth, embryonic business is umm, well I guess you know that...

To get even close, I would suggest you need to scrutinise your assumptions a bit harder. The most crucial one first up is that sales growth %. You've gone from noting that the % growth is falling (on two data points) in one post to assuming that it continues. Realistically, I think another 2 years of 200% growth is very unlikely. To get a better trend, maybe try converting the quarterly customer no. chart in the agm back to an approximate set of customer numbers and turn it into a log-plot, then extrapolate etc?

The next big factor to consider is scalability - what proportion of costs are fixed vs what proportion can achieve efficiency of scale. A fair mix of both in this case I would think. I would try and separate and extrapolate separately.

Finally, any valuation of a growth business probably needs to consider cash demands - does the business have sufficient cash and profits to cover the remaining period of losses plus investment cashflow requirements plus a proportional increase in working capital? If not, then at some point, some of the returns will go to the new money that finances that growth. If it does require this, then, even after accounting for a cost for this, the margin-for-error around your valuation will probably have trebled, since it will depend heavily on how well management negotiate this step.

Probably sounding impossibly pernickety, but unless the underlying figures have all been thought through, I reckon you are probably better in a DCF to just "intuit" a few cashflows for the next 5 years. Or maybe just toss the "company" dcf altogether and go for some other rough & ready estimates (probably equally inaccurate, but less time consuming). Though, as you pointed out, it doesn't hurt to have some forecasts you are measuring the company against either in terms of sales and margins - at least you'll probably be quicker than most to pick changes in trends.

[gregrday]

Hey Lizard,
thanks for the pointers. XRO was the first early-stage valuation I've done, so it was pretty interesting. Because it was early stage, I didn't want to go down the route of analysing everything and pretending the numbers meant something. I really just tried to base Xero estimates on things that have already happened in the SaaS space. Probably the most interesting thing from the whole valuation exercise was the realisation that none of the SaaS players are really doing well. Salesforce being some weird exception based on their stockprice (i mean a 160+ PE?!?).

re: Cash demands, yes, this is a very good point. My spreadsheet has them breaking even in 2011 (as per the AGM), and carry forward 20million in operating losses. Given their current cash situation, they should be able to live with that, but any deviation will mean going back to market or hooking up some debt, either one of which would be pretty hard on the share price I think.

Time to think about the next valuation I think...
:-)

Greg

[Peitro]

Must be near the 25k mark now.

Wish the Yodlee feeds would get up and running....

[gregrday]

Hi guys,

following up on the XRO valuation I did a month or so ago, I've done a new summary and valuation of Michael Hill.

I've changed the format, added in the summary section, and performed a simple growth discounted cash flow to produce a per-share value. I'm really interested in getting feedback about this doc, ie, is this useful? Any thoughts for improvements appreciated too.

check it out at http://gregnz.wordpress.com, let me know what you think (and all my mistakes of course)

cheers
Greg