Home Page
Introduction
Historical Results and
Commentary
Portfolio Analysis
November 11, 2005
Holdings
|
|
Nov-05
|
|
1
|
F
|
|
2
|
NBG
|
|
3
|
PCLN
|
|
4
|
NKE
|
|
5
|
BA
|
|
6
|
VRSN
|
|
7
|
SNP
|
|
8
|
CAT
|
|
9
|
JNJ
|
|
10
|
C
|
|
11
|
CA
|
|
12
|
FNF
|
|
13
|
MWD
|
|
14
|
TKC
|
|
15
|
HMC
|
|
16
|
CRYP
|
|
17
|
X
|
|
18
|
AAPL
|
|
19
|
COP
|
|
20
|
ACH
|
Performance of Individual Stocks
For last 3 months:
|
Nov-05
|
|
|
FNF
|
1.48%
|
|
COP
|
-3.90%
|
|
CAT
|
-0.69%
|
|
NKE
|
6.38%
|
|
BA
|
-2.55%
|
|
VRSN
|
-0.08%
|
|
SNP
|
-3.67%
|
|
YHOO
|
10.16%
|
|
JNJ
|
-4.77%
|
|
C
|
11.39%
|
|
CA
|
7.85%
|
|
F
|
-22.12%
|
|
MWD
|
2.90%
|
|
TKC
|
7.76%
|
|
HMC
|
3.71%
|
|
CRYP
|
3.40%
|
|
X
|
-11.99%
|
|
AAPL
|
39.86%
|
|
NBG
|
0.26%
|
|
ACH
|
6.76%
|
Total Increase (Decrease) since
last quarter: 2.61
Additions: PCLN
Subtractions: YHOO
Commentary: I have subtracted Yahoo and
added Priceline.com . The commentary
this quarter will focus on Yahoo, but first let me say a few words about Priceline. Priceline.com is a personal favorite of
mine. I try to exclude judgments based
on personal experience from unduly influencing what I put in the portfolio, but
my personal experience with Princeline.com is that it is a unique online travel
site with excellent customer service.
This is significant, because I feel the danger in online travel sites is
that there seems to be very little barrier to entry, and so the sector risks
over saturation (much like the unsuccessful plethora of online bookstores that
tried to copy Amazon.com in the late 1990s).
However, I feel Priceline.com has a unique positioning in the online
travel world that will allow it to succeed, at least for the next 3-5 years.
The
main rationale behind this purchase is that Priceline.com is currently trading
at a reasonably low PE multiple. For
this year, Priceline.com is on track to make about $35 million before
extraordinary items, and with a current market cap of $750 million this gives
it a PE ratio of just about 21. This is
not particularly low, but my hunch is that earnings are set to increase at a
solid clip, and the market will value Priceline.com at a higher multiple to
earnings in the near future.
However,
this is not a value buy in the typical sense.
Minus goodwill and intangible assets, Priceline.com has negative
shareholder’s equity. Were it an
industrial company, it would be an anathema to this portfolio. However, the fact that Priceline.com is good
at generating earnings is significant, and outweighs its dubious value from a
traditional book value perspective.
A Look At Yahoo
The
following is a model that I made to try to guestimate Yahoo’s intrinsic value
right now. If you don’t want to delve
into the details, the conclusion I draw is as follows: The market capitalization of Yahoo at the end
of this year should be about $27.3 billion, and the stock should be around 19.2. Given the fact that the stock is currently at
38.49, it is time to bail. The following
table shows how I estimate the stock price to evolve through the end of 2011.
|
Year
|
2005
|
2006
|
2007
|
2008
|
2009
|
2010
|
2011
|
|
Intrinsic
Value ($bn)
|
27.3
|
29.7
|
32.7
|
35.7
|
39.1
|
42.5
|
48.5
|
|
Estimated Stock Price
|
19.2
|
20.7
|
22.8
|
24.9
|
27.3
|
29.7
|
33.9
|
I
can almost guarantee you that the stock will not take this exact trajectory. This is because to have already reached a
valuation of 38.49, the folks on Wall Street are pumping up stock prices by
using short term results to make long term predictions. Sounds familiar? This nasty habit of Wall Street will probably
add significant volatility to the stock price for several years to come, as
earnings and revenues will fluctuate in their growth rates. However, over the next 5+ years, I would
assume that the maddening waltz of Yahoo’s stock price will oscillate around
the projections given above.
Now
for some fun………..
If
you are a finance purist, please do not look at what I have written below, as
there hare some horrible omissions. Some
of the most glaring omissions and problems with the model are:
- Current debt or the potential
for future debt is ignored
- Beta’s are…well…made up
- Revenue growth
is…well…ummm….not so much derived as roughly estimated by
me….umm….guessing?
- Operating margins are
approximated by looking at similar sized firms (in terms of total
revenues), modified upwards for the tech sector
- The path from Yahoo being a
high growth firm to a established blue-chip is guessed.
Though
the model has some major problems, I think it’s a reasonable model, even though
it is very basic. I suppose the danger
in modeling is sometimes that when things get too complicated, data overload
can hide the true nature of the thing you are trying to model.
In
some respects, the model underestimates the intrinsic value of Yahoo, and in
some cases the model overestimates the intrinsic value of Yahoo:
The
model undervalues the intrinsic value of Yahoo for the following reasons:
- Calculations stop in 2030
even though the are still significant discounted cash flows to equity that
could be recorded here
- Terminal operating margins of
11.50% could be too low.
- If Yahoo has a quick growth
spurt over the next 2-3 years, as projections over the last few quarters
would suggest, everything in the model should be shifted upwards. However, I felt it was prudent not to
assume this, as this is precisely how the whole tech fiasco a few years
ago was engendered.
The
model overvalues the intrinsic value of Yahoo for the following reasons:
- Revenues by 2030 are
estimated at a quarter of a trillion dollars. Is this really going to happen?
- Profits by 2030 are estimated
at $16.8 billion. That is a lot of
moolah.
- No contingency is made for
recessions or periods of abnormally slow growth
- The competitive landscape is
not examined
Well,
here it is:
|
|
1998
|
1999
|
2000
|
2001
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
2020
|
2021
|
2022
|
2023
|
2024
|
2025
|
2026
|
2027
|
2028
|
2029
|
2030
|
|
Revenues
($m)
|
245.0
|
591.8
|
1110.2
|
717.4
|
953.1
|
1625.1
|
3574.5
|
5008.9
|
7048.9
|
9702.3
|
12755.3
|
17242.4
|
22989.3
|
29508.2
|
35794.7
|
42434.8
|
49445.5
|
57166.9
|
65330.7
|
73682.8
|
82259.7
|
91442.2
|
101018.9
|
111365.5
|
122415.4
|
134412.2
|
146884.4
|
160303.8
|
174891.8
|
190755.8
|
207162.2
|
224931.0
|
244180.8
|
|
y-o-y
revenue growth
|
|
141.55%
|
87.60%
|
-35.38%
|
32.85%
|
70.51%
|
119.96%
|
40.13%
|
40.73%
|
37.64%
|
31.47%
|
35.18%
|
33.33%
|
28.36%
|
21.30%
|
18.55%
|
16.52%
|
15.62%
|
14.28%
|
12.78%
|
11.64%
|
11.16%
|
10.47%
|
10.24%
|
9.92%
|
9.80%
|
9.28%
|
9.14%
|
9.10%
|
9.07%
|
8.60%
|
8.58%
|
8.56%
|
|
Operating
Income ($m)
|
-14.7
|
48.5
|
297.8
|
-158.3
|
88.2
|
295.7
|
688.6
|
1038.7
|
1382.7
|
1797.4
|
2234.1
|
2863.7
|
3633.3
|
4451.9
|
5166.9
|
5867.5
|
6723.7
|
7534.3
|
8522.3
|
9310.7
|
10304.9
|
11435.3
|
12224.4
|
13386.4
|
14693.6
|
16130.1
|
17002.0
|
18447.0
|
20113.9
|
21937.1
|
23823.7
|
25867.1
|
28080.8
|
|
Operating
Margin
|
-6.01%
|
8.19%
|
26.83%
|
-22.06%
|
9.25%
|
18.19%
|
19.26%
|
20.74%
|
19.62%
|
18.53%
|
17.52%
|
16.61%
|
15.80%
|
15.09%
|
14.43%
|
13.83%
|
13.60%
|
13.18%
|
13.04%
|
12.64%
|
12.53%
|
12.51%
|
12.10%
|
12.02%
|
12.00%
|
12.00%
|
11.58%
|
11.51%
|
11.50%
|
11.50%
|
11.50%
|
11.50%
|
11.50%
|
|
Pretax
Income (Loss) ($m)
|
4.2
|
83.6
|
258.8
|
-81.8
|
178.2
|
343.1
|
1185.0
|
1617.3
|
1382.7
|
1797.4
|
2234.1
|
2863.7
|
3633.3
|
4451.9
|
5166.9
|
5867.5
|
6723.7
|
7534.3
|
8522.3
|
9310.7
|
10304.9
|
11435.3
|
12224.4
|
13386.4
|
14693.6
|
16130.1
|
17002.0
|
18447.0
|
20113.9
|
21937.1
|
23823.7
|
25867.1
|
28080.8
|
|
Estimated
Tax Rate
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
0.4
|
|
Modified
Final Earnings ($bn)
|
$0.003
|
$0.050
|
$0.155
|
-$0.049
|
$0.107
|
$0.206
|
$0.711
|
$0.970
|
$0.830
|
$1.078
|
$1.340
|
$1.718
|
$2.180
|
$2.671
|
$3.100
|
$3.521
|
$4.034
|
$4.521
|
$5.113
|
$5.586
|
$6.183
|
$6.861
|
$7.335
|
$8.032
|
$8.816
|
$9.678
|
$10.201
|
$11.068
|
$12.068
|
$13.162
|
$14.294
|
$15.520
|
$16.848
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|
|
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|
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|
|
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Estimated
Margin of similar companies (size and sector)
|
|
|
|
|
|
|
0.17
|
0.165
|
0.16
|
0.155
|
0.15
|
0.145
|
0.14
|
0.135
|
0.135
|
0.13
|
0.13
|
0.125
|
0.125
|
0.125
|
0.12
|
0.12
|
0.12
|
0.12
|
0.115
|
0.115
|
0.115
|
0.115
|
0.115
|
0.115
|
0.115
|
|
Estimated
Revenue Growth of similar sized companies
|
|
|
|
|
|
|
0.13
|
0.13
|
0.13
|
0.13
|
0.13
|
0.12
|
0.12
|
0.11
|
0.11
|
0.11
|
0.11
|
0.1
|
0.1
|
0.1
|
0.095
|
0.095
|
0.095
|
0.095
|
0.09
|
0.09
|
0.09
|
0.09
|
0.085
|
0.085
|
0.085
|
|
Weight
applied to yearly estimates compared with last year estimates
|
|
|
|
|
|
|
|
|
0.3
|
0.35
|
0.4
|
0.45
|
0.5
|
0.55
|
0.6
|
0.65
|
0.7
|
0.7
|
0.75
|
0.75
|
0.8
|
0.8
|
0.8
|
0.8
|
0.85
|
0.85
|
0.85
|
0.9
|
0.9
|
0.9
|
0.9
|
0.9
|
0.9
|
|
|
|
|
|
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Calculating Discount Rates
|
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Estimated
T-Bond Rate
|
|
|
|
|
|
|
|
4.5
|
4.5
|
5
|
5
|
5.5
|
5.5
|
5.5
|
6
|
6
|
6
|
6
|
6
|
6
|
6
|
6
|
6
|
6
|
6
|
6
|
6
|
6
|
6
|
6
|
6
|
6
|
6
|
|
US Market Equity Risk
premium (geometric mean, stocks vs. T-Bills, 1962-2000)
|
|
|
|
5.25
|
5.25
|
5.25
|
5.25
|
5.25
|
5.25
|
5.25
|
5.25
|
5.25
|
5.25
|
5.25
|
5.25
|
5.25
|
5.25
|
5.25
|
5.25
|
5.25
|
5.25
|
5.25
|
5.25
|
5.25
|
5.25
|
5.25
|
5.25
|
5.25
|
5.25
|
|
Yahoo
Beta
|
|
|
|
|
|
|
|
2.17
|
2.12
|
2.08
|
2.04
|
2.00
|
1.96
|
1.92
|
1.89
|
1.85
|
1.81
|
1.78
|
1.74
|
1.71
|
1.67
|
1.64
|
1.61
|
1.58
|
1.55
|
1.52
|
1.49
|
1.46
|
1.43
|
1.40
|
1.37
|
1.35
|
1.32
|
|
Estimated
Discount Rate
|
|
|
|
|
|
|
|
1.16
|
1.16
|
1.16
|
1.16
|
1.16
|
1.16
|
1.16
|
1.16
|
1.16
|
1.16
|
1.15
|
1.15
|
1.15
|
1.15
|
1.15
|
1.14
|
1.14
|
1.14
|
1.14
|
1.14
|
1.14
|
1.14
|
1.13
|
1.13
|
1.13
|
1.13
|
|
Compounded
Discount Rate
|
|
|
|
|
|
|
|
1.00
|
1.16
|
1.34
|
1.55
|
1.80
|
2.08
|
2.41
|
2.79
|
3.23
|
3.73
|
4.30
|
4.96
|
5.70
|
6.54
|
7.49
|
8.58
|
9.80
|
11.19
|
12.75
|
14.51
|
16.49
|
18.71
|
21.21
|
24.02
|
27.16
|
30.67
|
|
Discounted
Cash Flows to Equity ($billions)
|
|
|
|
|
|
|
0.97
|
0.72
|
0.80
|
0.86
|
0.95
|
1.05
|
1.11
|
1.11
|
1.09
|
1.08
|
1.05
|
1.03
|
0.98
|
0.95
|
0.92
|
0.86
|
0.82
|
0.79
|
0.76
|
0.70
|
0.67
|
0.64
|
0.62
|
0.60
|
0.57
|
0.55
|
|
|
|
|
|
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Estimated
Tangible Book Value of Equity
|
|
|
|
|
|
|
|
5.1
|
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Estimated Market Capitalization ($bn)
|
|
|
|
|
|
|
27.3
|
29.7
|
32.7
|
35.7
|
39.1
|
42.5
|
45.8
|
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Assumptions
include:
- A cost of equity for the
market of 525 basis points
- A T-bond rate of between 4.5
percent and 6 percent
- Global growth in Internet
technology will continue at a reasonable pace
- 2005 data was estimated based
on the 9 months ending September 30, 2005
- The estimated tax rate of .4
was based on the 9-month rate stated in p.24 of the Sept. 30 2005 10-Q
- The author of this model was
sane and sober during its construction
Yahoo
has a funny history. Back in January of
2000, the stock was trading at 118.75 (which was 474 before two subsequent 2:1
splits). By September 28, 2001, the
stock had fallen to 4.4 (8.8 before splits).
I had purchased the stock for the portfolio in August of 2001 when it
stood at 7.71 (15.42 before splits).
Now, the stock currently stands at 38.49 (November 11, 2005), and I have
sold it. In hindsight, my timing was
pretty good. Sure, the stock lost nearly
half its value over the next few months after purchase, but hey, all’s well
that ends well.
Back to
Quarterly Commentaries
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Introduction
Historical Results and
Commentary
Portfolio Analysis
