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Author: nonzerosum One star, 50 posts Old School Fool CAPS All Star Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1071  
Subject: NTE Date: 2/14/2011 2:57 PM
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Jim,
With all its cash this one should make your 15% cut. Its another long time fool rec that I've followed for years. The key thing here is that it appears to be re bounding (look at Q2 and especially Q3 2010), and as revenues increase almost all the gain will drop to the bottom line, so you could see a big earnings surprise next week.
tj
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Author: TMFGebinr Big gold star, 5000 posts Top Recommended Fools Old School Fool Supernova Phoenix 1
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Subject: Re: NTE Date: 2/15/2011 8:53 AM
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With all its cash this one should make your 15% cut. Its another long time fool rec that I've followed for years.

Hi tj,

What the heck is Nam Tai doing with all that cash? It's tangible book value per share ($7.20) is higher than the share price. That surprises me. It stopped paying dividends in Q3 2009, and between Q2 2008 and Q3 2009 it cut back on its dividend payments twice before eliminating it in Q2 2009. I would want to know why, and why after doing that (if it was to preserve cash), it went ahead and bought something in Q3 2009, paying out nearly $42 million in cash. It has no debt, which is good. Hmm, seems to have reinstated the dividend according to Global Gains coverage of Q3.

Without backing out cash, I get a growth pattern off of last night's $7.02 price and $25.9 million ttm FCF of 12.3% / 6.2% / 0% (at 15% discount).


This is the second time that I can quickly recall that you've implied that you back out cash from the share price. If that's not what you're doing, then I'd be interested in seeing the math where you get such low implied growth rates. :-) But I'm curious as to why you back out cash when determining a company's value.

It's not something I usually do and here's why. Yes, equity has a claim upon that cash, or at least a portion of it, assuming some has to remain in the firm as part of working capital. If a company has a history of returning cash to equity holders -- either through dividends or share buybacks above and beyond stock-based compensation dilution -- then one could be justified in either backing that out from the share price or adding it to the intrinsic value calculated from FCFE (FCF to equity). But until a company shows a steady commitment to return cash to shareholders, those shareholders shouldn't depend upon receiving it when building valuation models.

Maybe I'm being too conservative. I'd be most interested in exploring this further with you.

Cheers,
Jim

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Author: nonzerosum One star, 50 posts Old School Fool CAPS All Star Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 214 of 1071
Subject: Re: NTE Date: 2/15/2011 4:59 PM
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This is the second time that I can quickly recall that you've implied that you back out cash from the share price. ... But I'm curious as to why you back out cash when determining a company's value.

Yes, I backed out some 80%-90% of the cash for the NTE valuation (for AGP I wasn't really sure whether the actuaries have assigned that $700M+ float, so I considered both cases). However, I don't always back out cash. It depends.

If the company is burning cash then I do _not_ back out the cash because I have no idea how long they will keep burning. I generally avoid negative cash flow value investments anyway, so this doesn't come up often. Also if the company is debt heavy then I don't give them much credit for cash.

If the company is FCF positive, like NTE or INTC, then I look at the difference between current assets and current liabilities. If there is negligible debt or excellent interest coverage, then I back out about 80%-90% of the cash.

Why?

Well first, I must acknowledge that you are right - you can't count 100% on the company returning cash. But in general, over a diversified portfolio, I believe the company will have to do something with that cash eventually (assuming decent management, western governance philosophy and all that... this is not a science after all :-)). Dividends, buybacks, and non-dilutive acquisitions are all fine with me. Investor pressure (pension funds), or the Carl Icahns of this world will force this somehow.

I think NTE will be able to return the cash once its turnaround is more sure footed. NTE's revenues got slashed by more than 50% in the downturn, and they've been much slower to recover. They must be shell shocked and I speculate that this has caused them to be ultra conservative. The good thing is that they cut costs and were always CFFO positive, even in their darkest hours. One or two more good quarters will make everyone realize that they are out of the woods. Then that cash will have to do some work.

Bottom line is that if you give them even partial credit for that cash, they are in the deep value camp.

tj

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