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No. of Recommendations: 9
Attention K-Mart shoppers. First Marblehead (FMD) is now selling at 4x EV/EBITDA. Anyone notice? This is "take me private" land.

Too cheap, even with the 1) turmoil in the asset-backed securities market and 2) Ambac's woes.

FMD has been in the Earnings Power Box four of the last five years ending FY07, and is also forging what I'll call a "higgedly-piggedly" Earnings Power Staircase.

Christmas is 7 weeks early.


Hewitt
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No. of Recommendations: 1
forging what I'll call a "higgedly-piggedly" Earnings Power Staircase.

Somehow I missed that technical identification when I read your book. Thanks for the clarification.

:-)

Cheers,
Jim
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No. of Recommendations: 1
Hewitt:

Would you care to tell us your PIV-ER for FMD?

Do you have any concerns about the estimated residual cash flows that have yet to materialize?

Any thoughts are greatly appreciated.
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No. of Recommendations: 16
Pull -

Would you care to tell us your PIV-ER for FMD?

Show me yours' first.

:)

If you are not able to build your own PIV-ER, then you do not understand it. So now is the time to learn. Then you'll have the PIV-ER tool long after this board goes to TMF digital heaven.

Do you have any concerns about the estimated residual cash flows that have yet to materialize?

Yes. I worry about everything.

Which is why I also value First Marblehead on the basis of its defensive profits (free cash flow). The defensive income statement expenses investment in working capital, including receivables, dollar-for-dollar in the period incurred. FMD's defensive profits for the 12 months ending 9/30/07 is $110 million.

This $110 million figure a) includes a $375 million charge for the year-over-year incremental increase in receivable, and b) uses $159 million of cash taxes rather than the $274 million of GAAP taxes. (See page 62 of my book to learn more about cash taxes.)

If you think expensing receivables is too pessimistic, then use structural free cash flow. This version excludes investment in working capital. FMD's TTM structural free cash flow for the 12 months ending 9/30/07 is $374 million.

Since FMD's per-share revenue is up at a 5-year CAGR of 78%, we can assume most of its investment in receivables is growth related. If we fully expense this $375 million investment, then we are saying the receivables have no future value...that FMD will never collect its IOU's.

I do not believe the receivables are worthless. If for no other reason, insiders have 900 million reasons to make sure the assumptions used to value the receivables are reasonable. Four directors, Lelsie Alexander, Stephen Anbinder, William Berkley, and Dort Cameron, own 28 million of FMD's 93 million shares outstanding. Since the latest proxy, the only director to sell any shares is Anbinder, who sold 150,000 of his 3.5 million share position. A mote in the scheme of things.

The concerns that we all have about FMD -- e.g., its earnings quality, the turmoil in the ABS market, Ambac's woes, whether the TERI database is all that it's cracked up to be, etc. -- is offset by the growing market share/growing market double play, as well as the massive insider ownership.


Hewitt
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Sorry, you can only recommend a post to the Best of once.

Hmm... this tears it, You know I have a heck of a time reading financial books but I'm going to give yours a shot. I ordered your book today. If nothing else I can always look at the charts. It has lots of charts in it right?

-- Dennis

Incidentally I'm still hanging on to that big Garmin position I talked to you about in Vegas. When it got a bit too heady I sold some covered calls though so that took the bite out of the huge trimming we got.
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In my opinion, it is not a beginner's book and was somewhat hard for me to get a grasp on when I first read it. The book now has helped me steer clear of some real losers, like SMSI. You might want to look into some more conceptually oriented books before you get into the nitty gritty with IETC. IETC definately will require a lot of work if you dont, although I think some of the basic tests will help you weed out some bad situations regardless.
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No. of Recommendations: 1
I read IETC, and then built myself a spreadsheet to plug in various numbers from 10-Ks and generate the 4 quadrant earnings power chart. I learned as much from having to pore through the financials as from the book, but I do wish it could be more automatic to generate the chart.

I suppose if I had access to some very pricey database I could get those numbers without digging, but even then I imagine, since each company handles non-GAAP differently, etc, that there will always be a need for manual processing.

Loved the book, but I agree with rackled that it's not a beginner's book.

-joe
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No. of Recommendations: 1
"I read IETC, and then built myself a spreadsheet to plug in various numbers from 10-Ks and generate the 4 quadrant earnings power chart."

I've had a request to share the spreadsheet. This required me to clean it up a bit as it had a lot of misleading junk in it. So now that I have a decent copy, using a couple years' Simpson Manufacturing as an example, anyone who wants a copy can reply to this using "E-Mail this Reply to the Author".

I don't feel it's that fantastic, but it seems to do the job, and was a fair amount of work to make, so you may find it useful.

-joe
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No. of Recommendations: 1
Hey Joe,

When I regenerated this board I posted a version of the IETC spreadsheet that is pretty automatic (given that the dataexistson ADvFn).

Go here:

http://www.filespace.org/Sand101/

It is the IETC file. It needs a couple plugins.
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No. of Recommendations: 0
Thanks for the link. I can see that this is a pretty functional sheet. Much better than what I created.

Not for me though. I can't get the add-ins to work on excel for mac, and I'm not really comfortable with huge 3rd party excel programs running on my machine. But this should work quite well for most folks, I'd think.

-joe
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No. of Recommendations: 0
Sand,

Do you know if this sheet works with Excel 2007?

Thanks
Jerry
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No. of Recommendations: 0
Joe -

Thanks for buying the book and for your nice comments.

I also wish the process was automated. I get a free data feed from Reuters Knowledge, so I am able to copy and paste most of the numbers into my spreadsheet. But Reuters doesn't provide operating lease information, as well as other footnote items. So I end up going back to the 10-K's and 10-Q's for this information, and to double-check my work Reuter's work.

Because it takes time to build an Earnings Power Chart, screen ruthlessly. I provide some ideas for this in the book.

If you have any questions, please post on this board and I will try to answer.


Hewitt
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Hewitt, or anyone, are the any good screening tools on the internet?

-- Dennis
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Hewitt,

I wasn't aware of advFN until Sand105 pointed it out (thanks Sand!). I may write a little "scraper" to grab data off advFN pages. A cursory look seemed to provide all the basic income, cash, and balance data.

But, as you say, I fully still expect to have to dig through the financials to find other details. One area I consistently fudge is in estimating the maintenance portion of cap-ex. Do you have any advice on how to determine this? I haven't read your book in a while - I guess I should re-read soon. If the answer is "read the dang book", I understand.

And yes, while it would be nice to be able to screen FIRST for earnings power, I only apply all this digging to companies that look interesting in other ways. Lots of them end up being MF newsletter recs, go figure.

-joe
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Dennis -

I don't use it, but Morningstar is good. They have ROE numbers going back 10 years, if available. Companies that earn at least 15%-18% ROE almost always are profitable on an EVA/enterprising basis. Morningstar also has free cash flow numbers. FCF and defensive profits (see my book) are the same.


Hewitt
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No. of Recommendations: 2
Joe -

Page 298 of the second edition of Cash Flow and Security Analysis has an excellent section on maintenance capex. My spreadsheet incorporates some of the analytics cited in this book.

A simpler approach is to assume maintenance capex equals: depreciation + (depreciation x 25%). Thus, discretionary capex = total capex - (depreciation + (depreciation x 25%)). Discretionary capex is a source of cash in the defensive income statement.

The reason I use 25% is to take into account the overall rate of inflation plus the cost of maintaining fixed capital in such a way as to stay competitive with other companies in the same industry. 25% is probably conservative in most cases, but in this business it pays to play it safe.

If maintenance capex is a big number, then estimate maintenance depreciation and treat as a use of cash.


Hewitt
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So basically, is it fair to say that a company forms an earnings power staircase if FCF is increasing (defensive) and returns on equity are increasing (enterprising)? If not returns on equity, is there another simple metric for enterprising? Thanks.
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No. of Recommendations: 1
I wasn't aware of advFN until Sand105 pointed it out (thanks Sand!). I may write a little "scraper" to grab data off advFN pages. A cursory look seemed to provide all the basic income, cash, and balance data.

The add-in used by Sand105's template is open-source, so that should make it easy to do so.

I use a quick-and-dirty PHP routine to grab the data, since AdvFN has it in 5-period chunks. For example:

http://ogres-crypt.com/php/advfn-financials-all.php?per=a&get=20&wb=y&sym=MMM

"per=a" gives you annual periods; "per=q" gives you quarterly periods
"get=20" gets you 20 periods, you can get as many as they have available, but more take longer
"wb=y" places the output into EXCEL; "wb=n" displays in in the browser
"sym=" specifies the ticker symbol

The PHP code isn't all that complicated:

include 'subroutines.php';

$sym = isset($_GET['sym']) ? $_GET['sym'] : 'MMM';
$per = isset($_GET['per']) ? $_GET['per'] : 'q';
$get = isset($_GET['get']) ? $_GET['get'] : 999;
$wb = isset($_GET['wb']) ? $_GET['wb'] : 'n';
$btn = ($per == 'q') ? 'quarterly' : 'annual';
$start = ($per == 'q') ? '&istart_date=' : '&start_date=';
$url = 'http://www.advfn.com/p.php?pid=financials&btn='.$btn
. '_reports&symbol='.$sym;

$data = file_get_contents($url);
$pattern = '/value=\'(.*?)\' selected>/';
preg_match_all($pattern, $data, $matches);
$ndx = $matches[1][1] + 4;
$beg = $ndx - $get + 1;
if ($beg < 0) $beg = 0;

$html = '<b->Ticker: '.$sym.'</b-><hr><table><tr>';
for($ptr = $beg; $ptr <= $ndx; $ptr = $ptr + 5) {
$data = file_get_contents($url.$start.$ptr);
$data2 = fExtr($data, -1, '>INDICATORS<', 1, '>INDICATORS<');
$html .= '<td>'.$data2.'</td>';
}

if ($wb == 'y') header('Content-Type: application/vnd.ms-excel');
echo $html.'</tr></table>';
Note the "<b->" and "</b->" that need to be fixed because of TMF markup when I posted. I believe the fExtr() function is the only one used from the included subroutine library:


//===============================================================
//* Finds start or end of HTML table by <TABLE or </TABLE tags
//===============================================================
function fTable($data, $which, $dir, $find) {
$len = strlen($data);
$datac = strtoupper($data);
$datar = strrev($datac);
$pos = strpos($datac, strtoupper($find));
$which = strtoupper($which);
switch(TRUE) {
case ($which == "<TABLE" && $dir < 0): $offset = -6; break;
case ($which == "<TABLE" ): $offset = 0; break;
case ($which == "</TABLE" && $dir > 0): $offset = 8; break;
case ($which == "</TABLE" ): $offset = 0; break;
}
while ($dir > 0):
$pos = strpos($datac, $which, $pos) + $offset;
$dir = $dir - 1;
endwhile;
while ($dir < 0):
$pos = $len - strpos($datar, strrev($which), $len - $pos) + $offset;
$dir = $dir + 1;
endwhile;
return $pos;
}

//===============================================================
//* Extracts a table from a web page
//===============================================================
function fExtr($data, $dir1, $find1, $dir2, $find2) {
$pos1 = fTable($data, "<TABLE", $dir1, $find1);
if ($find2 == '') $find2 = $find1;
$pos2 = fTable($data, "</TABLE", $dir2, $find2);
return substr($data, $pos1, $pos2 - $pos1);
}
I had someone ask to do something similar for the financial statements on Fidelity (which they use for "Magic Formula" calculations):

http://ogres-crypt.com/php/fidelity-financials-all.php?per=a&wb=y&sym=MMM
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Hewitt,

The concerns that we all have about FMD -- e.g., its earnings quality, the turmoil in the ABS market, Ambac's woes, whether the TERI database is all that it's cracked up to be, etc. -- is offset by the growing market share/growing market double play, as well as the massive insider ownership.<i/>

Do you still think it's "take me private" land or that Christmas is early? If you thought it was a huge bargain at $32, has your thinking changed?
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Whoops. I didn't mean to italicize my questions.

Do you still think it's "take me private land" or that Christmas is early? If you thought it was a bargain at $32, has your thinking changed?
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Hi all, I am new to this thread and just bought the book but I had to say just bought this diamond at $7.75.

Now just ride the remaining storm.

Doug
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No. of Recommendations: 3
Hi all, I am new to this thread and just bought the book but I had to say just bought this diamond at $7.75.


I can't speak for Hewitt Heiserman, but FMD's business model is changing and I'm not so sure he would value it the same as he did back in November. I think with the credit markets shut down and with FMD turning into more of a lender than simply a facilitator of PSL's, it's profitability has certainly changed.

I'd love to hear his Hewitt's updated thinking on FMD if he's lurking.
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No. of Recommendations: 1
I can't speak for Hewitt Heiserman, but FMD's business model is changing and I'm not so sure he would value it the same as he did back in November. I think with the credit markets shut down and with FMD turning into more of a lender than simply a facilitator of PSL's, it's profitability has certainly changed.

I agree. This isn't just an unfairly beaten up financial. It could still be a good company, but there's so much uncertainty right now that it's priced at the level of it's residuals - as if it was to be taken over for it's assets. My instinct says it's "worth" this at a minimum, but that doesn't mean it can't go 50% lower in the near term.

As for upside, it's difficult (for me at least) to envision it's value under various scenarios, given all the uncertainty, and as has been commented by TMFRichDad recently on the IV board, don't bet on GS providing a floor around $15. Wouldn't you try to get out of that deal?

I'm all for buying uncertainty, but only when I feel more certain than the market. Right now, with FMD, I just don't know, so am holding, waiting to see, but not adding.

-joe
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No. of Recommendations: 1
I'm all for buying uncertainty, but only when I feel more certain than the market. Right now, with FMD, I just don't know, so am holding, waiting to see, but not adding.

Ditto. Adding more now is too speculative for me. However, if you don't currently own FMD and have a long time horizon, not would be a good time to bite off a small piece in a diversified portfolio. What's the worst thing that can happen? FMD goes to zero and you lose a few bucks? Or the credit markets turn around and FMD becomes a (the?) dominant player in PSLs? IMO, the situation is not binary as I suggest, but I think the risk-reward at today's price is extremely compelling.
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not would be a good time

Preview and read your post, Chris.

[sigh]

now would be a good time
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No. of Recommendations: 8
I have lost money with FMD twice. In each case I thought I was buying a company with (authentic, albeit imperfect) earnings power, a durable competitive advantage, and selling at a discount to intrinsic value. I also liked that three directors had a large ownership interest, and that the company had net cash.

And then the credit markets seized up!

I give credit to Matt Snowling (sp?) and Morningstar, both who warned us that earnings quality was suspect and the competitive advantage was tenuous.

I fear the slowdown in the housing market will spread to other credit markets, including student loans (see my Greenspan's Bubbles post, Apr. 4).

Plus, as others on this site have noted, FMD appears to be changing its business model.

I must say this company takes a lot of work, like parenthood. I have scaled back as FMD is in my "too hard" pile. When I said FMD was an early "Christmas present," I was wrong. If I caused any readers to lose money, I apologize. I thought I was buying a good business on the cheap. Statistically, buying good business on the cheap works over time. But mistakes will occur, despite best intentions.


Hewitt
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No. of Recommendations: 2
Statistically, buying good business on the cheap works over time. But mistakes will occur, despite best intentions.

That is part of what makes a person's mental makeup so important. Knowing your statement and being able to stomach it are two different things for many (most?) investors.
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