RBD - Restaurant Brands

[h2so4]

Snoopy wrote
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Not sure you really need to go to the trouble of working out the return on the return. I use an ROE target of 15% minimum for new companies that I invest in. If say the cost of capital was 7%, I might equally say my target was 8% above the cost of capital. But what is the difference between that and a gross ROE target of 15%? I would say nothing.

Sauce responded
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Well it allows you to put a value on compounding growth.

Snoopy counteresponded
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Using gross figures like my 15% still allows you to do the compounding growth calculation. The only thing you have to remember is that when looking at the result after a few years is that if you use a 'gross return figure', there is an underlying profit in there which you would have got anyway by just investing in government bonds, roughly akin to that cost of capital. But I fail to see how moving the zero return point up to say 7% allows you to put a value on compounding growth. If you didn't do that you can still measure compounding growth equally well.

SNOOPY

SD

On a $1000 1year bond paying 7% how much can I pay today for my bond to earn 15%? Answer $930.43(intrinsic value)

$1000 1year bond @ 7% = $1070.(compound growth calculation)

$1070 discounted at %15 today = $930.43 (discounted cashflow valuation)

The discounted cash that I can take out of my bond during its remaining life is $930.43 if I hope to earn 15%.

[Snoopy]

Given the long-running TA vs FA argument that has raged over RBD, it is easy to weigh up the relative merits of these 2 approaches. It is all documented right here for anyone that bothers to look.

Phaedrus, no-one on this forum would doubt your charting acumen. However in the past you have claimed to be using both FA and TA to get a best of both worlds solution. You have demonstrated clearly why you have sold out of RBD on a technical basis. But on what fundamental basis did you sell out? Overblown forecast PE (of 9!)? Increasing company profits (A record this year and looking to get better over the world cup period)? Insiders selling out (No-one has)?

Can you name a single fundamental indicator that marks RBD as a sell? I can't.

The best reason I can come up with is the patchy performance of retail companies in general of late. But unlike what you might purport, all retail shares do not behave equally on a trending basis. RBD is forecasting strongly increasing profits, so it seems unreasonable to tar the company with a badly performing retail brush.

I rest my case that you are in fact a pure chartist. Nothing wrong with that of course if that is how you operate. But what is this line that you combine both FA and TA strategies? It strikes me as an inaccurate assessment of how you actually behave in this market. Anyway, I do congratulate you on sticking to your charting methods and coming out with a good profit at the end of the day. Nice work. I will be thinking of your cash earning 5% in the bank while my capital is earning close to double that as a shareholder of RBD.

SNOOPY

[Snoopy]

Is my interpretation correct.

The first part values the current div per share as a perpetuity.

The second part values the retained earnings per share as a perpetuity but compounds this at the return of equity rate, discounted at req rate of return?

What's the explanation for ignoring future growth in dividends from the model?

Mathematical simplicity? Allowing increasing dividends woudl simply make the arithmetic too complex. Ignoring increasing dividends (if they occur) doesn't invalidate the use of the model, which is a relatively quick and easy method. But if actual dividends do increase it means the model will give you an extra margin of safety.

SNOOPY

[Snoopy]

So when talking about a compounding annuity, all future cashflows become new capital, but still require discounting. Re-investment of profits is still using cash that could be used elsewhere, just like the initial investment. So it needs to be treated in the same way, with the same "cost". Surely that's fundamental to capital management?

Quite right Sauce. I think I was muddling what I wrote with something I read in the Mary Buffett books. In particular the idea of buying 'a share' as 'a bond' with a market coupon rate. But regarding the dividends received (interest in the bond analogy) as having an incremental coupon rate greater than your bond purchase price because of the internally generated compounding effect of shareholders equity reinvestment.

However you are quite right. All new investment, from whatever source, should be discounted back when calculating 'present value'.

SNOOPY

[Snoopy]

Whats up SD, can't google this one?

I did think of asking you where you got the quote from SSD, before I guessed that I might be able to google it myself and find out. Your statement that Buffett doesn't use different discount factors for different companies was 100% correct. But any implication that he does in fact treat all companies exactly equally from an evaluation perspective (a dollar is a dollar) was not. That is why I saw the context as important.

Likewise I would not dispute that Warren is capable of doing his future cashflow projections and valuation fairly accurately. But that isn't the same as claiming that Warren does this on every investment he makes. I suspect Warren , given his experience, can do a near enough calculation in his head.

SNOOPY

[h2so4]

I did think of asking you where you got the quote from SSD, before I guessed that I might be able to google it myself and find out. Your statement that Buffett doesn't use different discount factors for different companies was 100% correct. But any implication that he does in fact treat all companies exactly equally from an evaluation perspective (a dollar is a dollar) was not. That is why I saw the context as important.

Likewise I would not dispute that Warren is capable of doing his future cashflow projections and valuation fairly accurately. But that isn't the same as claiming that Warren does this on every investment he makes. I suspect Warren , given his experience, can do a near enough calculation in his head.

SNOOPY

Well I'm not here to prove anything. I just post here to offer anything that might be helpful, useful, or fun.

I know and you know you are right.

KIS while waiting for the fat pitches.

[Phaedrus]

In the past you have claimed to be using both FA and TA to get a best of both worlds solution. You have demonstrated clearly why you have sold out of RBD on a technical basis. On what fundamental basis did you sell out? Can you name a single fundamental indicator that marks RBD as a sell?

No Snoopy, I can't. Technically, though, the story is very different. Unmistakable multiple RBD Sell signals were triggered and these have proved their worth because RBD's shareprice has continued slipping since then. Like you, I consider RBD to be a good, sound stock, so I will be monitoring the current downtrend with a view to re-entering if/when this slide ends. Who knows how far it will run - the further the better as far as I am concerned!

I rest my case that you are in fact a pure chartist. But what is this line that you combine both FA and TA strategies? It strikes me as an inaccurate assessment of how you actually behave in this market.

Snoopy, anyone trying to combine two very different approaches will inevitably have to deal with situations when the two methods disagree. When that happens, they must go with one or the other, or possibly try to find some sort of compromise. When that happens to me, I go with TA. Every time. I have found that doing so increases my profits because I am not "fighting the market". I use FA to help me decide what stocks to get into in the first place then time my entries with TA.

I will be thinking of your cash earning 5% in the bank while my capital is earning close to double that as a shareholder of RBD.

What you have overlooked here Snoopy is the crucial fact that in just 3 months RBD's downtrend has wiped out an entire year's dividends more than TWICE OVER! To me it seems quite bizarre to focus solely on dividend gains when these are dwarfed by concomitant capital losses! This is exactly the mistake you and others made with TEL. Seduced by high dividend yields, you chose to totally ignore the unfortunate fact that your capital losses were bigger than your dividend gains.

This strange attitude found its fullest expression in this timeless quote from Major von Tempsky :-

"Frankly I don't personally care what the price is....... as long as it keeps paying its dividends".

[winner69]

word of the day is concomitant ..... learn something new every day .... must use it ...thanks P

[Snoopy]

What you have overlooked here Snoopy is the crucial fact that in just 3 months RBD's downtrend has wiped out an entire year's dividends more than TWICE OVER! To me it seems quite bizarre to focus solely on dividend gains when these are dwarfed by concomitant capital losses! This is exactly the mistake you and others made with TEL. Seduced by high dividend yields, you chose to totally ignore the unfortunate fact that your capital losses were bigger than your dividend gains.

Phaedrus I accept that if I claim to be using the same share picking method method then I cannot cherry pick my best NZX investment (RBD) while forgetting about my worst (TEL) and crow just about RBD. The question is even if you see my methods as sub optimal, have my winners more than made up for my losers? As you saw in the Snoopy vs the Index thread the answer over the last 5 years has certainly been yes.

If you look at the last three months and ask the same question then my three month loss on RBD has not been made up by a corresponding profit on Telecom shares. However, since my time horizon is rather greater than three months this fact is of little relevance to my long term strategy. If lessons are to be learned here, the best one is that where you have an industry heavily dependent on technology such as telecommuications, in Buffett terms "something that is difficult to understand", you might be best to stay out of it altogether. Now perhaps you would just interpret this as a hindsight FA perspective (not that reasons are needed when using TA) on why you would have best kept out of TEL. Perhaps you would be right. However, investing is not a 'rear vision mirror' exercise.

The question is should the deregulation of Telecom's market in New Zealand five years ago, dictate your policy on investing in the new Telecom today? I would say the answer to that question is no.

The concommitant capital losses of which you speak, while real, are not realised until the completion of any investment plan. Acting on market signals is always optional, and I would argue that many of these market losses are really market noise. I would argue this with the performance of RBD over the last three months. I would find it harder to argue the same case for TEL when considered over the much longer timefraame of the last five years.

SNOOPY

[gregrday]

Hi guys, not to walk into a technique fight, I think Snoopy and I are on the same page. This is probably because I have little understanding of technical analysis. But I do see some value in a timing approach, particularly with respect to my options trading. I tend to trade options on weakness that I think is overdone.

I'm only learning, but have done reasonably well off the GFC, when it was blatantly obvious to even neophytes like me that stocks like RBD were undervalued. My current thesis is the same, the amount of money RBD are producing should justify a higher share price. But, in order that my trades are fairly transparent, I basically do what I forecast. eg: Bought RBD, Sold MHI, Sold XRO etc.

So for RBD, I bought at 2.59, which obviously sent the price downwards (its my special power). But... it hasnt altered my thesis, that RBD is undervalued. I don't care particularly about the daily ups and downs, because they havent altered the thesis. I've learned (to some degree) not to be greedy and chase every last penny. I will simply be happy if the thesis plays out and RBD heads to $3.40+. I havent seen anything that has disturbed that thesis, so will remain invested until I do.

Thats my approach at least.

cheers
Greg