A Fistful Of Valuations

A Fistful Of Valuations In The Style Of Warren Buffett & Charlie Munger [Chapter 6]

Chapter five of A Fistful Of Valuations In The Style Of Warren Buffett & Charlie Munger by Bud Labitan

Get The Full Warren Buffett Series in PDF

Get the entire 10-part series on Warren Buffett in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

We respect your email privacy

A Fistful Of Valuations - Chapter 6: Lessons Learned

A Fistful Of Valuations In The Style Of Warren Buffett & Charlie Munger by Bud Labitan

HQB

Invest in “Higher Quality” businesses selling at a bargain price relative to its estimated intrinsic value. In this 2015 edition, I have a greater appreciation for the operating margin and net profit margin of a business than I did in 2010. Of the cases presented in this book, notice that JNJ, Johnson & Johnson has the most impressive track record of year after year profit margins. It is also the dividend and dividend yield leader of this group of businesses.

PRICE versus VALUE

Price is the market price that others pay. Value is the estimate of its true intrinsic value based on the real cash returns that it will produce. In this 2015 edition, I have proven that buying at a significant bargain worked in 4 of the 5 cases. I must also admit that I overestimated the growth potential of Jacobs Engineering, JEC, in my original estimate of 2010.

You may recall that I used an assumed FCF annual growth of 11 percent for the first 10 years and assume zero growth from years 11 to 15. I now realize that I was too optimistic in my growth assumptions. That was my mistake. At the time, I thought that global economic growth for JEC’s services would bounce back from the great recession.

MACRO FORCES

Some businesses are more prone to economic downturns. They are like ships that cannot sail through ocean storms. In the JEC example, I used an assumed FCF annual growth of 11 percent for the first 10 years and assume zero growth from years 11 to 15. I was too optimistic in my growth assumptions. I thought that global economic growth for JEC’s services would bounce back from the great recession.

On the flipside, I underestimated the business potential of UnitedHealth Group both qualitatively and quantitatively. I used an assumed FCF annual growth of 7 percent for the first 10 years and assume zero growth from years 11 to 15.

Qualitatively, I underestimated the business potential of UnitedHealth to manage the forecasted changes talked about prior to passage of the Affordable Care Act.

The Patient Protection and Affordable Care Act (PPACA), commonly called the Affordable Care Act (ACA) or colloquially Obamacare, is a United States federal statute signed into law by President Barack Obama on March 23, 2010. Together with the Health Care and Education Reconciliation Act amendment, it represents the most significant regulatory overhaul of the U.S. healthcare system since the passage of Medicare and Medicaid in 1965. As a result of these changes it is clear the healthcare industry is evolving towards more value based health care. Hospitals and primary physicians will transform their practices financially, technologically and clinically to drive better health outcomes, lower costs and improve their methods of distribution and accessibility.

COMPETITIVE FORCES ON BRANDS

Some businesses are very sensitive to competition and can have their customers taken away easily by a new version of a product or service.

Johnson & Johnson brands hold a significant share of the consumer and pharmaceutical markets. JNJ is also the world's largest developer and manufacturer of medical treatment and diagnostic devices. Johnson & Johnson owns highly successful brands such as Tylenol, Band-Aid, and Neutrogena. The acquisition of Pfizer's Consumer Healthcare division in added respected brands such as Listerine, Lubriderm, Visine, and Neosporin. This further solidified Johnson & Johnson dominance in consumer health care.

On the flip side, Molson Coors has notable brands. However, the beer industry is seeing more competition form large company global competitors as well as a proliferation of local craft beers and ciders. Molson Coors has a portfolio of more than 65 strategic and partner brands, including signature brands Coors Light, Molson Canadian and Carling. Is this a situation of having too many alternatives and substitutes?

What is the biggest threat to Molson Coors profitability? Competitive substitutes and competitor pricing. The main competitors are: The Coca-Cola Company, Pepsico, Inc. PEP, Dr Pepper Snapple Group, Inc. DPS, Groupe Danone World Water Division, Nestlé Waters Private, ITO EN, LTD. Private, Red Bull GmbH Private, Cott Corporation COT, BTVCF.PK, Ocean Spray Cranberries, Inc. Private, NSRGY.PK, Diageo plc DEO, HINKY.PK, SBMRY.PK, Anheuser-Busch InBev BUD, Suntory International Corp. Private, Kraft Foods Inc. KFT, Pernod Ricard SA Private, GPMCF.PK, Constellation Brands Inc. STZ.

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

We respect your email privacy

A Fistful Of Valuations

A Fistful Of Valuations In The Style Of Warren Buffett & Charlie Munger by Bud Labitan

LEAVE A COMMENT


X
Saved Articles
X
TextTExtLInkTextTExtLInk

The Life and Career of Charlie Munger

Charlie is more than just Warren Buffett’s friend and Berkshire Hathaway’s Vice Chairman – Buffett has actually credited him with redefining how he looks at investing. Now you can learn from Charlie firsthand via this incredible ebook and over a dozen other famous investor studies by signing up below:

  • Learn from the best and forever change your investing perspective
  • One incredible tidbit of knowledge after another in the page-turning masterpiece of a book
  • Discover the secrets to Charlie’s success and how to apply it to your investing
Never Miss A Story!
Subscribe to ValueWalk Newsletter. We respect your privacy.

Are you an intelligent investor?

ValueWalkPremium is a website and newsletter for smart investors like yourself. We focus on the latest hedge fund industry news much of which is not in the public domain and obtained via our sources.

We also have 10 years of resources on how to use this information to better your investment process.

Sign up for  today for only a few dollars a day and get a 3 day no obligation trial with a targeted 20% discount coupon code.

Cancel anytime during trial and you are never charged.

Limited time offer: For first 50 subscribers

0