Working out the value of a company

Hi guys,

I have been researching, studying, reading, watching videos and most of them have indicated to invest in stocks which have had consistent earnings and growth for at least 5 years and therefore, it is not speculative. However, my questions are as follows,

1. If this is the case, wouldn't it be by the time it has had consistent earnings and growth for the last 5 years, the SP has already caught up to the value of the stock? If this is the case, wouldn't we have already missed the train? (the likes of SUM and RYM).

2. If number 1 is the case, they what else do we base it on? Are we basing it totally on its positive cash flow, balance sheet, management and etc?

3. So we know calculating the intrinsic value can be quite subjective, so therefore, companies with consistent earnings and growth for at least 5 years, a more accurate value can be calculated for. However, if companies which don't, are we basing it on the future forecast growth rate? Doesn't this become speculative?



Thanks!!!

Quote:

---

Originally Posted by baller18

1. If this is the case, wouldn't it be by the time it has had consistent earnings and growth for the last 5 years, the SP has already caught up to the value of the stock? If this is the case, wouldn't we have already missed the train? (the likes of SUM and RYM).

---

Often this is the case. The really good companies have decades of growth pedigree and have demonstrated how they perform through cycles and are priced accordingly. The trick is to buy when the whole market is sad or buy when a temporary scenario hits the share price.

Quote:

---

Originally Posted by baller18

2. If number 1 is the case, they what else do we base it on? Are we basing it totally on its positive cash flow, balance sheet, management and etc?

---

Everyone has their own method. All of the above sounds pretty good to me. Can be tricky though, I like businesses that have a lot of intrinsic goodwill that isn't on the balance sheet.

Quote:

---

Originally Posted by baller18

3. So we know calculating the intrinsic value can be quite subjective, so therefore, companies with consistent earnings and growth for at least 5 years, a more accurate value can be calculated for. However, if companies which don't, are we basing it on the future forecast growth rate? Doesn't this become speculative?

---

All forward looking assumptions are speculative.

For me, 5 years is a dangerous time period. Just enough time to transit from bottom to top for a cyclical company. I think your timing filter needs additional filters in order to work.

I made a speculative estimate about 3 years ago that DIL would move from loss to profit, based on the trajectory of revenue growth rather than the then current profit and loss position while the then balance sheet had just enough cash to make that viable. The market took much comfort just 12 months later when they moved to reported profits on high sales growth.

Basically, there is no "one size fits all" approach and as you can see from various debates on various threads, more than one way to make money as well.

Hey Baller.

Good question for debate. And thanks to Halebop and those that take the time to reply and help learners!

Here's a couple of companies to think about that might help your studies (disc; have holdings in both of these after going through the same processes as you! So I guess this doubles as a ramp :) ) I simply haven't had enough time to research others yet.

MFT

Currently earns 66cps with a price around $10.60 which gives a 6% return. Already better rate than say bank interest. They've opened a lot of new branches around the world and are expanding slowly but steadily. These branches aren't yet profitable but the cost of them is already being carried in the 66cps earnings from existing business. So over time the new branches will pickup business and become profitable and Mainfreight as a truely global organization will benefit from increased economies of scale, brand recognition etc. I believe this company will continue their stable growth and therefore is a 'safer' buy. I remember seeing the shareprice a few years ago at $5.xx and thinking, well that has done its dash.... Silly me.


CNU

Chorus pays a fully imputed 8.5% dividend at the current price. That's not bad. It has reasonable barriers to entry that protect earnings. The major risk is regulatory however the government has recently shown its intention to protect earnings.

Of course DYOR but IMHO here's a couple of companies that might worth looking into to see if they fit your criteria.

They're more of a 'row the stable boat slowly wearing a lifejacket on the lake to the shore of riches' rather than the 'catch the biggest wave in the sea quickly to the shore'.... which may lead to drowning and tears. Boring I know but I sleep at night and will play in the waves only in small amounts when I have much more to go around.

They make a good cornerstone holding anyway IMHO.

Good luck.

nextbigthing

Thanks heaps halebop and NBT! I will study the points you guys have mentioned when I get home tonight!!!
Thanks heaps!!!

Quote:

---

Originally Posted by Halebop

The really good companies have decades of growth pedigree and have demonstrated how they perform through cycles and are priced accordingly. The trick is to buy when the whole market is sad or buy when a temporary scenario hits the share price.

---

Exactly. The problem is that when the market is high you will not get the value discount to make a good investment out of a good company. So probably best to soar like a vulture, and then when you see problems dive in and start your analysis then. But only buy the short term digs, not the long term dogs!

SNOOPY

Thanks guys!!!