Valuations, Quality & Implied Expectations.
(thread)
(thread)
2/n
What does a 60 times forward PE mean?
For a company with 50% ROIC, 5% terminal growth and 11% WACC the attached table gives the implied growth expectations for a 60 times PE multiple.
Assuming earnings ex capex are passed on to shareholders without tax leakages.
What does a 60 times forward PE mean?
For a company with 50% ROIC, 5% terminal growth and 11% WACC the attached table gives the implied growth expectations for a 60 times PE multiple.
Assuming earnings ex capex are passed on to shareholders without tax leakages.
3/n
What can we benchmark this to?
The attached table gives last 10/20 year sales growth for some of the best companies in India. Note the margins can’t keep expanding for ever (in fact they behave in a somewhat cyclical fashion) and CFs eventually have to track sales.
What can we benchmark this to?
The attached table gives last 10/20 year sales growth for some of the best companies in India. Note the margins can’t keep expanding for ever (in fact they behave in a somewhat cyclical fashion) and CFs eventually have to track sales.
4/n
What about interest rate?
Lower interest rates indeed benefit companies with longevity of growth and moat (ROIC) disproportionately.
But....
What about interest rate?
Lower interest rates indeed benefit companies with longevity of growth and moat (ROIC) disproportionately.
But....
5/n
If we bring down interest rates by 3% we ideally should also bring down terminal growth rates and growth in high growth phase due to lower inflation. (ROICs also may compress but let’s ignore it for a bit)
If we bring down interest rates by 3% we ideally should also bring down terminal growth rates and growth in high growth phase due to lower inflation. (ROICs also may compress but let’s ignore it for a bit)
6/n
In DCFs WACC is not actually cost of capital but the opportunity cost of your next best idea. If interest rates go to zero you don’t start valuing companies at 2% WACC. Indexes in zero rate countries are not trading at infinity.
In DCFs WACC is not actually cost of capital but the opportunity cost of your next best idea. If interest rates go to zero you don’t start valuing companies at 2% WACC. Indexes in zero rate countries are not trading at infinity.
7/n
Isn’t PE a pathetic valuation parameter?
Usually yes. But you might also want to look at EV/Ebitda and most importantly EV/Sales. Low EV/Sales doesn’t imply undervaluation but a high figure, more often than not does.
Isn’t PE a pathetic valuation parameter?
Usually yes. But you might also want to look at EV/Ebitda and most importantly EV/Sales. Low EV/Sales doesn’t imply undervaluation but a high figure, more often than not does.
8/n
But quality has always been so expensive...
Not it hasn’t. Lots of stocks trading in 60s and 70s were in there 20s a decade ago. Even in 90s they might have been trading at high PEs because of lower ROICs. But 10 sales was rare even then.
But quality has always been so expensive...
Not it hasn’t. Lots of stocks trading in 60s and 70s were in there 20s a decade ago. Even in 90s they might have been trading at high PEs because of lower ROICs. But 10 sales was rare even then.
9/n
Runway >> 20 years...
Could be. But then where is the margin of safety.
Online advertising and organised retail could reduce the distribution and marketing advantages of incumbents. Niche brands never before had the ability to chip away market share as they do today.
Runway >> 20 years...
Could be. But then where is the margin of safety.
Online advertising and organised retail could reduce the distribution and marketing advantages of incumbents. Niche brands never before had the ability to chip away market share as they do today.
10/n
FANG stocks for comparison.
Quality deserves a high price. But not any price.
FANG stocks for comparison.
Quality deserves a high price. But not any price.
