Archive for May, 2007
Sunday, May 6th, 2007
Debt is an important factor to consider when determining whether or not to invest in a company. Like the enterprise value metric, the enterprise multiple accounts for the impact of long term debt held on the balance sheet. At the same time, it serves as an “apples to apples” gauge of value for international companies. This is because it is calculated using “earnings before interest, taxes, depreciation, and amortization” (or EBITDA for short).
By definition, EBITDA excludes any taxes (which may vary significantly between countries due to differences in tax policy). This allows investors to make more reasonable comparisons between, for example, a US firm and a company based in the UK. In addition, investors on the lookout for companies which may be acquired (since the stock of the acquired company usually enjoys a nice premium) can use the enterprise multiple as a stock screen. The enterprise multiple is defined as:
EM = Enterprise Value / EBITDA
A low enterprise multiple, or a low enterprise multiple vs. industry peers, may be a sign that a company is undervalued.
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Sunday, May 6th, 2007
There are a number of ways to estimate the market value of a company. The most common approach is to consider market capitalization (which is simply share price multiplied by the number of shares outstanding). However, this approach only takes into account the equity of the firm.
Investors should also be concerned with the impact of debt on the company. Enterprise value, which is an estimate of “takeover” cost (i.e., the amount it would cost another firm to acquire the company), accounts for the offsetting effect of long term debt as well as cash reserves. The basic calculation is:
EV = Market Cap + Long Term Debt - Cash
More specifically:
EV = Market Cap + Long Term Debt + Minority Interest + Preferred Shares - Cash & Cash Equivalents
Note that minority interest and preferred shares are typically included as well (they have the same effect as Long Term Debt) along with cash equivalents (which have the same effect as cash). Long term debt would be a “cost” to the acquiring company since it would have to pay this money back. The cash component, however, offsets this cost (since the acquirer now owns these cash reserves).
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Friday, May 4th, 2007
The king of value investing, Warren Buffet, waited until after the trading session to report a stellar 12% Q1 growth in Berkshire Hathaway net income. The earnings report was released ahead of the Berkshire annual meeting, where shareholders will no doubt be beaming about the double digit run up in share price. A lack of major catastrophic events contributed to the company’s performance, while Buffett issued concerns about current and future competition in the reinsurance space.
Q1 10-Q Results (BerkshireHathaway.com)
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Friday, May 4th, 2007
Talk of a possible merger or joint venture between Microsoft and Yahoo help lift the markets in early Friday trading. Unemployment numbers came in as well, showing the jobless rate increased slightly to 4.5%. However, average hourly earnings came in at +0.3% vs. the consensus of approximately +0.2% which helped ease investor worries about inflation. The market has shown some subsequent profit taking today, but appears to be rebounding as we move into the afternoon trading session.
Employment Data (US Bureau of Labor Statistics)
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Thursday, May 3rd, 2007
The US markets open higher again today in the wake of strong productivity data from the US Department of Labor. Nonfarm productivity growth came in at 1.7% vs. the tepid 0.5% which was expected. In addition, nonfarm unit labor costs came in lower than expected at 0.6% growth vs. the 4% consensus estimate. This also boosted the market, and help offset concerns surrounding significant decreases in Q1 net income posted by General Motors (around a 90% decrease in earnings - ouch!).
Productivity & Costs Report (US Bureau of Labor Statistics)
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