Saturday, March 31, 2012

Fake it till you Make it

As a value investor we are always looking for a reflection  of the quality of management. Do the executives have the shareholders' interest in mind when they make decisions? I am really intrigued by what is happening at Research in Motion (RIMM). A new CEO, Thorsten Heins, has recently taken the reins after being hand-picked by the two original co-founders of the technology company. The two co-founders, originally acting as co-CEO, moved to the board of directors.

The new directive from Mr. Heins seems confusing. If you listen to the latest conference call, the audience can seek whatever message their viewpoint supports. Of course, Mr. Heins has only been on the job for 10 weeks now. So his insistence that he is reviewing everything that would be in the best interest of the company has wisdom. He does seem to have cleaned house and forced several top executive to depart. One of the co-founders, Jim Balsillie will retire, either by force or design.
I hope Mr. Heins has the fortitude to carry-through the needed changes.

Research in Motion new directive in his words are {or at least my interpretation, and call me on it if I'm wrong}
  • BlackBerry Enterprise Service Business - Enterprise services
  • Prosumer market - which is characterized by users who use the device for personal and business
  • Consumer market - "bring your own device/phone" end user market
No, can't differentiate their new strategy from that..... Let's try to differentiate by revenue then:
  • Services
  • Software
  • Hardware
  • Other
{my interpretation, and call me on it if I'm wrong}
Mr Heins was talking about reducing the broad array of phones from the 7 new BlackBerry Smartphones to 3 or 4. He was talking about a possibility of licensing the software,  reducing or eliminating the hardware & accessories, repair, maintenance and warranty programs to a strategic partner. Maybe a joint venture? That's a big chunk of the current revenue. It will be interesting to see the evolution in the next 6 months and in the release of BB10.

Here is the elevator speech from the rim website:
RIM is the leading designer, manufacturer and marketer of innovative wireless solutions for the worldwide mobile communications market. Through the development of integrated hardware, software and service that support multiple wireless network standards, RIM provides platforms and solutions for seamless access to information, including email, voice, instant messaging, short message services(SMS), internet and intranet-based application and browsing. RIM technology also enables a broad array of third party developers and manufacturers to enhance their products and services through software development kits, wireless connectivity to data and third-party support programs.

What are RIM's Competitor's Strategy?
A quick glance at the top competitors strategies in the field:
Apple - Hardware & accessories, Software for the consumer; Just branching out to the Enterprise
Google - Software for the consumer - (Android )
Windows/Nokia - Hardware Partnership and Software (Window 7)

RIM - what is next?
Mr Heins was heard to say in the conference call:
"with BB10 we are getting ready not just for the smartphone, ...getting ready for mobile platform for the next decade"

Wednesday, March 28, 2012

Facebook cash horde

If you were Facebook(FB) with a new pot of cash from your initial public offering (IPO), how would you spend that new found resource? What company would you acquire?

Facebook may want to add
  • a source of revenue from a social networking company
  • a social search engine company
  • an internet security/anti-virus company
  • a mobile advertising company
It's fun to guess.
You could even use the spread analyser from Bigger Capital  to anticipate the perfect risk-less arbitrage strategy in which the stocks of two merging companies are simultaneously bought and sold.

Sunday, March 25, 2012

Disruptive Technology

[originally posted April 2011]
Deb Roy showed a video on the development of language in his 5 year old son. Link here. It showed how we are all hooked up in  a social matrix. A cloud of connections and interactions of people that grows and feeds on itself.

We reinforce our ideas in conversations with our friends, social circle and work. This is a method of confirmation bias based on our thoughts and who we interact with.

The Black Swan Theory is described in this link. These events are considered to have negative consequences. Similar in its rarity and impact, but having a positive powerful outcome, a company or idea that appears without warning and is growing exponentially would be a disruptive technology force.

This made me start to look for disruptive technologies in a couple of search engines. Made me start to look for phrases in Facebook and on Twitter; My conclusion was that it will not be on Twitter or Google Trends that you find these events. It will not be in the social matrix.

Reading from the Black Swan Theory wiki:
The theory was developed by Nassim Nicholas Taleb to explain:
  1. The disproportionate role of high-impact, hard to predict, and rare events that are beyond the realm of normal expectations in history, science, finance and technology
  2. The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities)
  3. The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs

The best we can do is to try to find the trends that are least prevalent. Maybe we should reverse the order of  a popular idea or item in a search, starting at the least relevant criteria.  Rethink trusted assumptions. The people who know that the disruptive event is coming are not going to tell you it's coming.

Do you have any comments or ideas on where to find these events?

Saturday, March 24, 2012

Benjamin Graham Fair Value Calculator

Hi guys. I'm frantically working on a Benjamin Graham Fair Value Calculator so you guys can evaluate your stocks using the bottom-line and the top-line figures.

Try what I have so far

Tuesday, March 20, 2012

A second look at Research in Motion

With all the apple news lately, what has Research In Motion (RIMM) been up to?

Here is the latest ComScore Report for the last 3 months. It shows that RIMM is still losing market share in subscribers but as an OEM device manufacturer has stabilized.

Maybe they have already ceded a segment of the Smartphone platform market share. Maybe they know what they're doing with the QNX acquisition. How big is the QNX CAR Application Platform market segment?

A quick tour of the QNX CAR 2 application platform

from the QNX community blog:

If year-over-year earnings could stabilize the bleeding and bad press would cease.
Research in Motion(RIMM) will announce year-end and fourth quarter fiscal 2012 results on March 29, 2012.

Monday, March 19, 2012

L-3 Communication's New spin-off

Check out L-3 Communications (NYSE:LLL). They are in the middle of executing a publicly traded spin-off called Engility. Since L-3 considers itself a 1st-tier defense contractor and has an investment grade rating, it will spin-off a subsidiary that is to be a 2nd/3rd tier company. Therefore the new spin-off will carry a debt rating equivalent to a BB+ enterprise. A lot of debt & goodwill will be transferred to the resultant subsidiary.

In contrast, the parent company will retain all the revenues, dividends and cash-flow. It will reduce capital expenditures, and possibly R&D. Long term debt will be spun-off as L-3 will maintain its excellent credit ratings. The margins are expected to grow in the parent company and decrease in the spin-off. However, the synergies and cost savings are expected to help both companies. How will all the re-alignments of business units wash-out? 

L-3 Annual meeting is April 24th. If everything goes according to plan, the deal is to be finished by June 30th, 2012.

Engility website:

Saturday, March 17, 2012

OmniVision OV5650 & OV297AA - $OVTI $AAPL confirmed on new iPad

It was confirmed on two teardown assessments sites that the camera used on the new iPad (iPad 3) is OmniVision's.

On the site:
"....says that the 5 Mp back illuminated CMOS image sensor in the new iPad is the same, it is the Omnivision OV5650 (die markings OV290BF). Yet again, Apple is recycling as many devices as they can to produce this new iPad."
"The secondary CMOS image sensor inside the new iPad is also a design win for Omnivision. This camera, the OV297AA, is a 0.3 Mp, 3.0 ┬Ám pixel pitch CMOS image sensor. Chipworks has seen this on the iPod Nano and the iPad 2."

On the iSuppli teardown site:

"The new iPad camera module design and cost is the same as in the iPhone 4 camera module. The two camera modules cost a combined $12.35, representing 3.4 percent of the BOM."

Wednesday, March 14, 2012

Fair Value Measures

There are many ways to be a "Value Investor". There are people who uses deep quantitative statistical methods. There are people who use qualitative methods only. There are people who use a mixture of both.

Using a Relative Analysis
I use fair value as a way to feel more confident about the selection I have made. It is an arbitrary, relative measure best looked at as a range of price values; Not a line in the sand, hard black or white number used to trigger actions, but as an estimation of relative value to the sector. I use Benjamin Graham's Number to measure the bottom-line. The P/E is the current S&P average P/E and the P/Bv is the top 20% percentile. Currently that's an average P/E of 14.8. Other metric can be employed. You can experiment. For example, use Shiller's 10 year historical average P/E as the average metric.

Stocks that have no earnings or that have negative book value are not measurable. You can take a historic 5 year average earnings. The negative book value is hard to get around. Skip down to the next experiment below.

Benjamin Graham never intended his formula to be used as a gauge to measure how valuable a stock has become. It was to be a guide, which he actually abandoned later. But the one thing Graham had was an adaptable, flexible outlook that changed with time. He loved to experiment.

Expanding your scope
What if you wanted to expand this small universe of stocks.
How does your stock stand-up compared to its peers in revenues? Does your company not have any earnings for the last few years?

Let's use the same principle on the top-line figure. Using P/S and P/Bv. I am using the top 20% percentile of both P/S & P/Bv as the top-line fair value figure.

Now you have the bottom-line and  top-line figures covered.

No revenues? What about EBITDA? EBIT? enterprise value?

Sometimes the Value is Still Unknown
OK. Take the housing sector. The earnings are terrible and the book values have been decimated. But you know there is value there because the housing market volume is at historical 50 year lows.
OK. Back to the other value analysis methods. Statistically, the relative financial values don't stack up with the potential value.

Monday, March 12, 2012

Housing is finally receiving love again

PulteGroup (NYSE:PHM) was upgraded recently. Several home builders are at their 52-week highs.
Maybe its time to start looking in the housing market again.

Sunday, March 11, 2012

L-3 and the coming Budget Sequester

L-3 Communications (NYSE:LLL) stands out among pure defense players by virtue of its non-platform focus on shorter-cycle contracts. It has prospered the last few years because of the discretionary non-platform emphasis. Now with the looming defense budget cuts it may work against them.

"In the past the short-cycle business was favorable because of the constant increases in DoD budget; now with declining budget it works against them."

"So far the Pentagon has not actually reduced spending, but it has terminated programs deemed unnecessary or too costly and shifted the funds elsewhere." L-3's  pipeline of work is full but usually consist of 3 years or longer contracts cycle so the cuts haven’t been fully realized. A shorter cycle works against L-3.

L-3 has anticipated the budget cuts and debt crisis and has done a lot of adjustments last year; However, the  FY 2013 Budget has more cuts as the sequester threat continues.  In September, if the budget is not past again, sequester could make the cuts worse.

Budget cuts are in the Defense Department (DoD), but Homeland (DHS) & CIA/Intelligence Agencies monies have increased or remain the same.

Cyber and C3ISR  are divisions expected to prosper.

Spin-off  to be completed June 30th 2012.

L-3 is a good company in a bad sector.

L-3 is a serial acquirer with BIG goodwill - will probably be written-off next quarter or at spin-off?
p/e=7.52,p/bv=1.02, cash intensive in fixed asset, spin-off to reduce debt?, div increased
not favored by analysts - only 1 buy out 17 brokers in current month
10K - price=68.19, eps=9.07, fair value=201.89, long term potential 195%, bv=67.03
est earnings 1.88 vs 1.85 → eps=9.10, rev will go down, spin-off will break even?, earnings will break even?

Thursday, March 8, 2012

L-3 spinoff

From the L-3 Communications Holdings (LLL) 10K filed 2/29/2012
On July 28, 2011, the Company announced that its Board of Directors approved a plan to spin-off a new, independent government services company that will be publicly traded. The new public company will be named Engility Holdings, Inc. (Engility). The spin-off, which is intended to be tax-free to L-3 and its shareholders, is expected to be completed in the first half of 2012. Upon completion, L-3 shareholders will own 100% of the shares of both L-3 and Engility. The spin-off is not subject to a shareholder vote.

Monday, March 5, 2012

OmniVision and OV8830

From the latest 10Q from OmniVision (OVTI)
In February 2011, we also introduced the OV8830, our most advanced 8-megapixel image sensor to date, and the first to use our second generation OmniBSI-2 pixel architecture. Implementing the latest developments in BSI pixel technology, the OV8830 combines low power consumption, small die size and best-in-class pixel performance with advanced image processing features. This combination allows the OV8830 to support enhanced, fast frame rate image capture and 1080p or 720p HD video recording, making it highly suitable for feature rich smart phones. OmniBSI-2 technology is our first pixel architecture built on 300 mm wafers using a copper process with 65 nm design rules, which enables a number of improvements over OmniBSI technology’s performance, including improved pixel layout, better isolation, and reduced crosstalk.

It continues with the following:
We also experienced a recent and unanticipated extension in the product development cycle of our OV8830 product. This delayed the production ramp up of this new sensor. Towards the end of our second quarter of fiscal 2012, we started to ship this product in very limited quantities. 
I feel the OV8830 is a perfect match for the iPhone 5. It would set the tone for the next generation of better quality video in the next couple of product introductions from Apple (AAPL). The iPhone 5 is rumored to be released in September. Even if it is released at the end of the year, with a 5 to 6 month ramp-up, production of the 0V830 line could begin as soon as May.

It could even have been squeezed into the iPad 3 production, rumored due on March 7th.

Thursday, March 1, 2012

How do you know how Capital intensive a company is from the financial statements?

Hi Professor,

Thanks for taking the time to show us how to value a company. I am not a student,
but have used your on-line course and website to learn how to invest. You have blessed
us with great opportunities and a very valuable tool. Thanks so much for your generosity.

First I guess I need to define what I mean by a capital intensive company.
Is it the money required to get into a business?
Is it a mathematical way to measure how large a protective "moat" a company has?
Is it the amount of money required for a company to continue to generate income without putting in additional capital?

Method (1)
From the financial statements I can figure out Capital expenses(CapEx) from the cash flow statement. If depreciation is the maintenance capital expenditures, CapEx - depreciation would be the new capital expense.
The total reported 5 year average CapEx would be the upper bound of reported expenses. Either the depreciation or the maintenance capEx would be the lower bound.

R&D can be considered an expense.
Add in 5 year average R&D.

You don't have to do your own research and development. You can buy it.
Acquisition could be considered "investing in existing R&D".
Add in all acquisitions and minority interests.

Add in change in working capital.
Add in leases, net long-term debt and net buy-backs.

Equivalent to cash-flow calculation and the equity reinvestment rate.

Method (2)
But wait. There are three types of R&D, a)Basic research, b)Applied Research and c)Design and/or prototype. What about capitalizing all the costs associated with designing a new product?
What about fixed assets needed to run the production? What about inventory turn-over?
What about cash levels? What about write-off?

Shouldn't net intangibles be included as reinvestment capital? At least the patents that pertain to the products.

Does the amount of long term debt have to be accounted for? Maybe  a capital debt structure with anything over 40% is too much and should be adjusted for.
Aren't pensions to be included?

Aren't design cost to be included? Should not marketing costs be included in capital expense.

Where do you stop? Aren't all operating expenses part of the cost?
Use total operating expenses and operation margin + cash flow (including acquisitions+minority interest) + intangibles

Method (3)
Use COGS and gross margin + cash flow (including acquisitions+minority interest) + intangibles.

However, service oriented industries would come out ahead of manufacturer industries.

Is the concept of equity reinvestment rate the same as how capital intensive a firm is?
If I experiment with the examples above, I end up with industries that appear to be equivalent but that in my gut I know are vastly different in required cash. I still don't see how I can differentiate industries that should be different but are not.

So that leads me back to the original question. If my assumption is to buy a company and not add any additional capital to run it,  what calculations should I use? Where can I find this information on the financial statements?

Thanks you for your time and patience.