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Mystery Companies Valuation

July 03, 2012
It has been over a month since there has been a blind valuation exercise at GuruFocus. So, I thought I would share a case I have been studying lately.

Company A and Company B are two U.S. companies. Below I have tried to give you summary information for them for the 10 years leading to the crisis without revealing too much about the companies. After all, the point of the exercise is to think about these two companies, try to value them and choose the better investment, not to guess the names. If you are so familiar with the industry that the names pop right at you, then it will be well worth it to share your expertise in an article about the two companies. Otherwise, don't get preoccupied with the names. It's the practice that counts, and it's not knowing the names that makes it valuable.

Here is the data. The numbers are in millions USD and have been rounded. The tax rate is the normal U.S. corporate tax rate.

Company A 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Sales 8,900 10,800 12,600 10,300 9,500 10,100 9,900 10,400 11,500 12,400
Gross 2,000 2,500 2,900 2,500 2,300 2,400 2,300 2,600 2,800 2,900
Operating 230 370 550 190 110 - - 90 210 (10)
Net 100 140 200 160 200 80 (90) 60 140 (10)


Cash 120 270 640 450 1,250 880 780 1,000 840 740
Receivables 600 570 590 590 160 140 170 230 220 380
Inventory 1,400 1,500 1,700 1,800 1,200 1,400 1,500 1,500 1,700 1,600
PP&E 1,000 1,000 1,000 1,000 700 600 700 700 800 900
Total assets 3,200 3,400 4,000 3,900 4,500 3,800 3,700 3,800 4,100 4,000
Payables 800 800 1,000 900 1,000 1,100 1,000 800 1,100 1,200
LT debt 420 430 250 120 10 10 20 20 50 50
Total liabilities 1,500 1,500 1,800 1,500 1,800 1,500 1,500 1,800 2,100 2,200
Equity 1,700 1,900 2,100 2,400 2,700 2,400 2,200 2,100 2,000 1,800


Company B 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Sales 8,300 10,100 12,500 15,200 17,700 20,900 24,500 27,400 30,800 35,900
Gross 1,300 1,800 2,400 3,000 3,800 4,900 5,900 6,500 7,700 8,800
Operating 170 350 540 610 910 1,010 1,300 1,440 1,640 2,000
Net 80 220 350 400 570 100 710 980 1,140 1,380


Cash 520 790 750 750 1,860 1,910 2,600 3,350 3,790 3,790
Receiables 100 130 190 210 220 310 340 380 450 550
Inventory 1,060 1,050 1,180 1,770 1,880 2,080 2,610 2,850 3,340 4,030
PP&E 330 420 700 1,440 1,660 2,060 2,240 2,460 2,710 2,940
Total assets 2,100 2,500 3,000 4,800 7,400 7,700 8,700 10,300 11,900 13,600
Payables 760 1,010 1,310 1,770 2,200 2,200 2,460 2,820 3,230 3,930
LT debt 210 30 20 180 810 830 480 530 180 590
Total liabilities 1,500 1,500 1,900 3,000 4,800 5,000 5,200 5,800 6,600 7,400
Equity 600 1,000 1,100 1,800 2,500 2,700 3,400 4,400 5,300 6,200


At the end of the period, Company A had 171 million shares outstanding. Company B had 481 million shares outstanding.

You can email, tweet, or post your thoughts in the comments. My account at both Twitter and Gmail is dgenchev.

In a week, I will give you a summary of the replies and my thoughts on the companies.

About the author:

dgenchev
Dimitar Genchev is a student of value.

Visit dgenchev's Website


Rating: 3.6/5 (12 votes)

Comments

Seanickson
Seanickson - 2 years ago
deleted
johnheiderscheit
Johnheiderscheit - 2 years ago


$15 for company A and $35 for B
jtpin
Jtpin - 2 years ago
I love this valuation exercise and thought I would give it a shot. Its just a stab in the dark, but we'll see...

Company A I valued at 4.72-5.92 a share. I took the 3y and 5y avg. net income/share (.36 and .21 respectively) and assigned an 8 multiple since equity has been shrinking and the last 5 years are much worse from a net income view than the first 5. However, it has a strong balance sheet with positive net current assets/share of 3.00. So I basically gave a small PE multiple and added it to the net current assets.

Company B I valued at 24.42-32.34 a share using the same methodology as above. 3y and 5y avg earnings are 2.43 and 1.79, net current assets are 2.02 I used a 12.5 multiple since it is growing and ROE has averaged 20%.

However, since this company is growing quickly and slightly increasing margins (both net and operating) there is probably a better way to value it, but I'm not sure what else to try.

jpraschnik
Jpraschnik - 2 years ago


There are a few things that strike me as a little odd with respect to online retailing and Amazon specifically. There is no doubt that Amazon is a formidable retailer, but at some point saturation must be reached. Not all retailing will go the way of online retailing; the US of Amazon is not plausible. So, at the very least, bricks and mortar retailers will be able to scale their businesses to complete once the dust settles. Secondly, the tide should turn at some point. What does Amazon have that these retailers don't? Scale. However, they don't have scale in all categories and specifically not in electronics. In addition, at some point bricks and mortar stores will be able to compete with Amazon in the online space. Has anyone ever thought about Williams and Sonoma and Best Buy and perhaps some other hard goods stores teaming up to compete against Amazon? By the way, Williams and Sonoma has done pretty well by itself against Amazon, why can't any purveyor of hard goods do the same?

Secondly, the differentiator between Amazon and other retailers is service. BBY has the Geek Squad and once they figure out how to fully leverage this advantage, Amazon and BBY will be in different businesses. Has anyone ever experienced the hassle of returning goods back to Amazon? Furthermore, BBY has a presence in China and Mexico, which should provide it with a jumping off point for the fast growing markets of southeast Asia and Latin America.

I agree that BBY has its work cut out for it and not too mention that they still don't have a permanent CEO, but the stock is very cheap and their balance sheet is quite clean. In my opinion, the jury is still out.

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