24 HR Nickel

 

STOCK CALL: AHS

Expected Fy07 Profit at approx 13-14million

EPS = 13 000 000 / 102 000 000 = 12 cps
Value company at = 12 *14.5 = $1.80 - minus 15% for huge debt of $85million = $1.50
Prospective PE Ratio is 95cents / 12cents = 7.91 (at current share price of 95cents at 17 Oct2006)
Assuming profit of $13million is meet.

*  Debt - currently $85million

So if company makes a profit of $13 Million for Fy07 -
85/13 = 6.5 years to pay of debt - quite risky!!!!  MUST Monitor Debt

STOCK CALL: MCR

Assumptions:

Nickel price for FY07 is avg of US$11.50 cf with US$6.43 - an approx 80% increase.

Production is 13500 t or 3350 t of nickel per quarter. 

Forecast Net profit is $45M compared to FY06 of $24M

45 000 000 / 195 000 000 = 23cps

June 2007 Price Targets

23 * 14.5 = $3.35
23 / 6.25 = $3.70


Update:

HY07 Profit came in at $37million.

Now one can expect at least another $30million for 2nd Half 07 - so total profit for the year is at least $60m at Ni prices of US$10/lb

13,000 tonnes x 2204 = 28,660,000 lb x US$10 = $286m REVENUE
Say 40% for all expenses out of Revenue (EBIT) Exl TAX
appox = $115m
AUD$286-$115=$150
AFTER TAX Profit;
$105m / 195m = 50cents a share = $7+ a share? LOL don't think so as the price of Ni will not be this high for FY08 and FY09 - remember a SP of a stock is its future earnings!

So lets say for FY08 that Ni prices come down to something like US$5/lb
and production is 10kt of Ni
10k x 2204 x 5 = $110million in revenue
Say from that profit is $40million AUD
40m/200m = 20cents a share
TARGET PRICE = $2.90 for FY08

Important Value Investing Ratios:

Important Value Investing Ratios:

Calculate the Debt Ratio:

1. Warren Buffett and long-term debt

Warren Buffett speaks only generally of his approach to debt. Mary Buffett and David Clark have concluded that he focuses on long-term debt, a conclusion that is supported by his public comments. They believe that his concern lies with the company’s ability to repay its debts, should the need arise, from its profits; the longer the time period, the more vulnerable is the company to external changes and the less predictable are its future earnings.

The formula for such a calculation is:

Number of years to pay out debt = TOTAL Long term debt /Current annual profit
The lower the better e.g. 2 or less years.
source:http://www.buffettsecrets.com/warren-buffett-debt.htm

2.  TOTAL DEBT / EQUITY - Should be less than 50% (less is better)
   In 2004 HWE had a Debt Ratio of 91% !!!!! it soon went bankrupt!!
   Make sure the calculation is TOTAL DEBT, not NET DEBT.
3.  Profit as a % of Current LIABILITIES -
      (profit / current liabilities ) * 100
      HWE had a ratio of only 5.8% cf with QAN (capital intensive) of 8.1 % in 2006
4.  Interest Bearing Liabilities Coverage
     Profit / Current Interest Bearing Liabilities = if greater than 1, then profit (or Free Cash      Flow) can easly cover Current Debt.  Otherwise, it shows what proportion of profit (or FCF)      can cover bank debt due within the next month - should be at least      0.8 (or 80%) - HWE had a coverage of only 29%, QAN has a coverage of 120% and AHS was 4 at FY-       figures.
5.  Profit Per Share as a Percentage of BookValue.  A high Rate Of Return on Invested Capital goes along with a high annual growth rate in earnings per share.
     e.g. MXI  (FY06) 5/24 = 20%  (5 cents per share / NTA)
6.  Profit as Percentage of Sales - Every Dollar of Sales/Revenue results in portion of Profit.
     e.g. MXI (FY06) 9313 / 244960 = 3.8%  - hence in this case, every dollar of revenue results in nearly 4 cents of sales - quite low c.f. CSR (FY06) which is 305/2866 = 10.6 cents

7. 1. By Operating Income

Look at the Cash Flow Statement. Here you will find the Interest Payment figure.
Add the (Cash Flow By Operations + Interest Paid) / Interest Paid

Should be at least 6 to 10
All things being equal, the higher the interest cover the better. As this example shows, a company with an interest cover of 10 times could sustain a 90% fall in operating cash flow and still cover its interest obligations. But a company with interest cover of 1.5 times could be in trouble if operating cash flow fell by just 33%. You should also bear in mind that operating cash flow can be reasonably stable in some businesses and highly variable in others.
https://www.etradeaustralia.com.au/Products/IndustryResearch/IntelligentInvestor.asp?Page=BASICS&Issue=27363

2. By Profit

In the profit statement, there should be an entry for Interest Paid.
Add the (profit made + interest paid) / interest paid

Tells us how much profit can cover interest calls.
Should be at least 4.


ROC and ROE

Return on Capital

DTE (Debt to Equity = Long Term Debt (Total Debt) / Equity))

ROC = ROE / (1 + DTE)

MXI
2006
DTE = 37m / 76m = .48
ROE = profit / equity = 9 / 76 = .11
ROC = .11 / (1 + .48) = 7.4%

2005
DTE = 6 / 72 = .083
ROE = 11 / 72 = 0.15
ROC = 0.15 / (1 + .083) = 13%!!!!

GUD
2006
DTE =71m/141m = .50
ROE =40m/141m = .28
ROC =.28 / (1 + .50) = 18%!

AHS
2005
DTE = 111m/70m = 1.58
ROE = 13m / 70m = .18
ROC = .18 / (1 + 1.58) = 6.9% ** THINK about it - if AHS can produce a paltry 7% return on capital in one of their best years what would happen in a medicore year?? Compare this to MXI, for 2005!!

2004
DTE = 106m / 48m= 2.2
ROE = 10m / 48m = .208
ROC = .208 / (1 + 2.2) = 6.5% again a paltry 6.5% return on capital

GTP
2006
DTE = 407m / 756m = .538
ROE = 133 / 756 = .175
ROC = .175 / (1 + .538) = 11%

2005
DTE = 135m / 732 = .18
ROE = 126 / 732 = .17
ROC = .17 / (1 + .18) = 14%!!

SOME ROC Figures for BUFETTS Holdings
Coca Cola 39.12%
American Express 13.68%
Gillette 25.93%


The following is a selection of the answers given by this twosome fairly much taken straight from my notes. Enjoy!
Avoid stocks with low returns on equity and capital.
Time is the enemy of poor businesses, the friend of good businesses.
With a poor business you may be lucky in that you pick the time that it gets taken over. However, it is no fun to own stock in a company in which you hope it liquidates before it goes bankrupt.
Avoid "cigar butts," but we have a had a lot of soggy butts in our time.
When presented with a new company, we can say "no" within 10 seconds. Technology does not get through our filter.
Our central role is (1) to motivate the chairmen of our companies to keep working even though they are already very rich, and (2) to allocate capital.
Buy stocks that you never want to sell; when you get a good business, buy for life.
Ideal purchase: buy more of what you already like and have because the price is right.
Insurance is the most important business at Berkshire Hathaway.
Political campaign spending is an underpriced commodity, it needs legislation to limit it.
Berkshire Hathaway gets a 20 to 30% return on equity.
Jack Welch (CEO of General Electric) gave his secret of life—go where the competition is weak. How do you beat Bobby Fischer? Play him at anything but chess.
Fannie Mae and Freddie Mac could be hurt by rising interest rates but not nearly as much as people might think.
Q. What keeps you awake at night? I don’t worry. We do the best we can. We don’t predict currents—just how different fish will swim in different currents.
Coca Cola is the best large business in the world; amongst other things, it set the trend for a company to buy back its own stock.
Is there a danger of Japan selling the U.S. Treasuries that it owns? When you ask such questions, always follow up with "and then what?" If Japan sold a billion dollars of U.S. Treasuries, what would they do with the money? They would have to invest in other U.S. securities.
There are two questions managers of public companies must ask. (1) Do you keep the earnings or return them to the shareholders. (2) With the portion that you keep, what do you do with it?
Not many analysts recommend Berkshire Hathaway—perhaps because it is not the stock for them to get rich on.
Steps to selecting companies. (1) We start by only looking at companies we understand. (2) We observe whether or not the management is telling us the truth in the Annual Report and other publications. Are they the things we would want to know if we were buying 100% of the company. We avoid companies with annual reports full of PR gobbledygook. We want to be able to read the report and know the company better at the end.
The Annual Report of Coca Cola is an enormously informative document. We first bought Coca Cola on the basis of its Reports and had no discussions with its management.
Look for candid, clear, coherent prose. If a business has a problem, we would like to know about it. Honesty and openness is the best policy. We would like to see announcements at board meetings along the lines of "this is a very serious problem and we have no idea how to solve it."
Because of the use of options and warrants, we estimate earnings for many companies could be 10% or more lower than what they state.
Benjamin Graham was a wonderful teacher and said that you don’t have to be right about every company. If I [Munger] taught a course on company evaluation, I would ask the following question on the exam, "Evaluate the following internet company." Anyone who gave an answer would be flunked.
Current factors influencing market prices: (1) return on equity, (2) low interest rates, (3) market perceptions.
A valid criticism is that we should have bought more shares of the companies we already own; perhaps we missed the boat in some cases. Also probably we have issued shares that we shouldn’t have.
Definitely think that the demand for silver exceeds the supply by approximately 150 million ounces per year.
Intrinsic value: present value of future cash that can be taken out of the business. It easy to calculate for Coca Cola, but very difficult for Intel.
Need various internal models to deal with reality. One model is not enough: "To a man with a hammer, every problem looks like a nail." [Munger]
We try to assess managers as to whether they love the business or the money.
Do not mind paying a manager a lot of money for good performance but I am bothered by mediocre managers getting large sums of money. Unfortunately the system feeds on itself and there is not much that you can do to correct this problem. The original Vanderbilt didn’t take any salary. These high management salaries have a pernicious effect.
Can have a circle of competence for a particular industry, but not a circle of competence for individual companies within the industry. It easy to say that the manufacturing of PCs will grow enormously over the next decade, but hard to say which company will dominate.
We have decentralized Berkshire Hathaway to the point of abdication. The only thing we have centralized is money.
Discount future cash flows at the long treasury rate. Businesses get credit for free cash. With the best businesses, you don’t need to keep putting in cash.
Investing is the art of putting in cash now to get more cash later on.
EBITDA [earnings before interest, taxes, depreciation and amortization] is a nonsense figure; it is absolute folly to take any notice of it.
To understand a company, understand its products, its competition, and its earning power.
The best way to teach finance is to focus on easy cases. For example, in 1904 anyone could see that NCR was a wonderful company.
We like homey, Norman Rockwell types of companies.
Learn all the accounting you can.
The best book on my investment methods is by Larry Cunningham. He has done a first class job of organizing my letters to shareholders. If I had to pick a single book, this would probably be the one.
I would be worried if I sold a stock at the top of the market because it would mean that I would be practicing the "greater fool" theory.
It is instructive to do post-mortems, but don’t get too carried away.
My principle is to leave enough money for your children that they can do anything they want, but not enough so that they can do nothing.
Volume, price actions, RSI have no place in our calculations.
Deprecation charges are a good indication of the required capital expenditures. Avoid companies that have to spend like crazy just to stay in competition.
Good businesses throw up easy questions for the managers and the board, bad businesses throw up tough questions.
We are willing to wait indefinitely for the right price for the right stock.
Scuttlebutt—you can’t do too much, but you should be interested in the company in the first place. It might form the last 10-20 per cent of the analysis. If it looks like a seven foot hurdle to start with, don’t touch it.
Don’t worry about risk the way it is taught at Wharton. Risk is a go/no go signal for us—if it has risk, we just don’t go ahead. We don’t discount the future cash flows a 9% or 10%; we use the U.S. treasury rate. We try to deal with things about which we are quite certain. You can’t compensate for risk by using a high discount rate.
We don’t worry about volatility, if we are confident about the business. For example, Washington Post went down by 50% after we bought it; it was a volatile stock, but not a volatile business.
The best criterion is to buy businesses on the assumption that you will hold them for life.
Dairy Queen [recently purchased by Berkshire Hathaway] is a lot different than McDonalds. For example, it employs a lot less capital. Nevertheless, McDonald’s still gets a good return on its capital.
I don’t mind paying taxes. It is much better on this side than to be on the other side receiving government assistance.