The Motley Fool Discussion Boards
Investment Analysis Clubs / Foolish Collective
|Subject: ACGL : A case study on security analysis||Date: 8/25/2004 2:28 AM|
|Author: DCFNewbie||Number: 32778 of 46856|
Being new to the Foolish Community I'm very interested in understanding some of the differences beetween the several value aproaches to analysing a security.
In a recent thread I was introduced to different strategies on determining value and it has become clearer to me that the quantification of growth will always be what makes a determination of value subjective (who can argue with the historical data?).
I know that there are several posts on this board stating several methods of making that kind of analysis, however I think that in light of the recent "101A: Equity Analysis basics" initiative, I and other newbies could harvest more information out of a more recent discussion.
That said I will take the liberty of sugesting Archer Capital Group Ltd.(ACGL) for a quick (or not) valuation analysis. However, to make things a bit more interesting I will focus more on the structure of the analysis that on the content. Obviously what I'm looking for is some "elderly" guidance on this.
DISCLAIMER: I currently own only a very small (negligble) amount of stock on ACGL, but will probably take a bigger plunge if, in the following weeks, my additional analysis prove my initial instints to be right.
One of the first inputs that I would like to receive is regarding the overall structure of an analysis.
Currently I'm going for something like:
2) Operational Reality
3) Company History/Background
4) Operational Growth/Risk
5) Establishing Price Target and/or exit conditions
(the order ir important!)
In my opinion this captures some of the essence of what is advocated in most of the analysis done in MF articles, MF Newsletters (the ones I've read in past at least) and a great deal of people at the Foolish community boards. And I believe that it respects a lot of the KISS philosophy while being thorough regarding diligence.
Obviously the specific content of these categories is a lot more debatable, I currently would advocate something like:
P/E - Although its extremelly temptative to bash P/E for its clear faults, I still believe that this should be the very first notion that someone new to investing should acquire. Why? Because for a beginner an expensive stock costs 100$/share while a cheap one costs 5$/share. Its absolutelly fundamental that that myth be debunked in the very first contact someone has with analysing an investment (any investment). It is also admittedly a very important first impression that any investor has regarding the nature of a stock. P/E is one of the many visual filters an investor uses.
ACGL's trailing P/E = 7.24
Debt and Cash - I think this is very self explanatory. Although a very recent discussion in this board as alerted me to "danger signs" regarding a companies tendency to accumulate cash.
ACGL's Cash reserves = 188.12M
ACGL's Long term debt = 300.00M
Debt/Equity ratio = 0.147
Enterprise Value - This is obviously associated with the previous topic. A smaller Enterprise Value than Market Cap is something whose merits should, in my opinion, be continuously stressed.
ACGL's market cap = 2.76B
ACGL's enterprise value = 2.89B
EV > MC
(Yahoos number on Market Cap. is wrong)
Free Cash Flow - I really believe this is the more complex topic to discuss. Both due to the effort in compiling the data (you cannot trust Yahoo to give you correct values on this) and due to the need in subtracting extraordinary incomes (I personally find it very messy and I'm still very bad at it).
ACGL's Free Cash Flow = 1.76 B
ACGL's P/FCF = 1.51
ACGL's EV/FCF = 1.59
(Past FCF is missing but I will do my best to include this in the near future)
ROE / ROA - The notion of management effectiveness is very important, but not as important as its evolution time (I believe a lot of MF articles have aproached that in the recent past). Another thing that I don't think that it's stressed enough is the impact of capital expenditure on ROA. I see a lot of people failing to grasp the big diference beetween the ROE and the ROA of some companies (in the very recent past that included me).
ACGL's ROA = 6.29%
ACGL's ROE = 19.94%
(Past ROE and ROA are missing but I will do my best to include this in the near future)
Growth - Second only to FCF on complexity in grasping, growth has the problem of being too intertwined with analysts predictions. If we can't trust analysts to place price targets or outlook, how can we trust them to accurately predict growth? The company's prediction is one option, but, just like many have commented on the past, companies are more and more freightfull of making any growth outlook due to the exposure to class action suits. One possibility is offering scenarios where growth isn't that important (seems to be popular among some Fools), obviously that puts further straint on current valuation. My short experience tells me that past growth together with industry growth outlook seems to be somewhat better accepted than any other strategy to predict growth. Any ideas on this?
ACGL's Analysts Growth Est. (5yr) = 20%
ACGL's Past Growth (5yr) = 8.9%
ACGL's Sector predicted growth (5yr) = 10.95%
(1) - Optimistic growth (20%)
(2) - Pessimistic Growth (8.9%)
P/E/G (1)= 0.36
P/E/G (2)= 0.81
P/FCF/G (1)= 0.08
P/FCF/G (2)= 0.17
EV/FCF/G (1)= 0.08
EV/FCF/G (2)= 0.18
I hate long posts (specially those that don't get many recs), so i'll wait for some feedback on what I've written before venturing on.
Opinions, corrections, sugestions and criticisms are needed and welcomed. Regards,
|Copyright 1996-2015 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us|