Found a new Blog ‘buffetteer.com’ . An excellent blog with a lot of great posts. Found a very good post on DCF model. Fairly similar to the way I do it, but of course the methodology has been very well explained in the post (URL below).
http://buffetteer.com/blog/?p=56
I am book marking the blog and would be visiting it again.
As expected, infosys declared great results with q-o-q growth of 10 %. The annual guidance has been raised to Rs 90 EPS and the Total revenue guidance is 2.14 Bn USD.
The stock sells are around 2675 which equates to a forward PE of around 29.5.
I have always had a bearish opinion on the valuation from a long-term standpoint( analysing an IT services company and dollar-depreciation-will-stress-test indian offshore model ) . Some key concerns for me have been
That said, my bearish viewpoint has somewhat reduced in the recent past. I was looking the financial numbers of Accenture. Accenture sells at around 25 usd and has a trailing PE of 14. The revenue numbers are around 15 Bn usd and the ROC capital for accenture is 50 % +.
If infosys were to continue to do well and eventually grows to the size of accenture ( and this is the big question ), then the current valuations are justified or the company is slightly undervalued. But if anything were to go wrong, like dollar crash or a recession or continued increase in the salary costs in the interim then the stock price could get punished.
Maybe worth holding onto the stock. But not worth selling ?
Ps : I own infosys stock ( used to work for infosys in the past )
I was reading a research report on the sugar industry. The industry is a classical commodity industry with following characteristics
Lately the industry has been on an upswing, with demand exceeding supply and average inventories are down. As a result all the sugar companies have seen explosive profit growth (high operating leverage). Most of the sugar companies have very high debt levels ( > 2:1) and are in the process of raising equity to reduce it to manageable levels or working down the debt. At the same time as the capacity utilization is high, new capacity will have to be added through fresh equity or debt.
The industry is fairly cyclical with last few years being unprofitable for most of the companies. Lately however there is being a turnaround and most of the companies are selling at a PE of 6-7. The research report are bullish and predict a re-rating. I disagree with this analysis as it is simplistic and ignores the cyclical nature of a commodity business. Typically a cyclically business sells at a low PE at the peak of the commodity cycle and high PE at the bottom of the cycle .
I have simulated a commodity business cash flow and done a DCF analysis and the results the DCF model throws up confirms the above analysis ( the analysis can be downloaded here. The analysis has several assumption, but depicts a commodity business and shows inter-relationship between the cyclical earnings and PE).
I think the market is valuing these commodity businesses (sugar, cement) correctly and the analyst are being too optimistic in their appraisal and simplistic in their analysis. A few odd companies like balarampur chini or Ambuja cement may be different (due to a sustainable low cost position) , but the rest of the industry seems to be fairly priced
I keep checking on bruce’s blog regularly. He is a frequent poster on fool.com and writes fairly well on topics related to investing. He has a post on mistakes he has made in the past.
The following comment resonated with me a lot. I have had the same experience on my mistakes and agree completely with what he says ( once bitten twice shy ??)
Which leads to ACLN. In hindsight, I probably lost more money in missed opportunities from a loss of confidence by making a mistake in ACLN than the money I actually lost in ACLN. And I think that’s a more important lesson. It was easy to learn how to avoid another ACLN. It was much harder to avoid seeing ACLNs everywhere I looked. As someone said about Barrons (Bearons): the bearish case always looks more intelligent and more responsible.If there’s anything for certain, I’ll continue to make mistakes. If Buffett keeps making mistakes even lately, what chance do I have? I believe the answer is to apply the methodology and rely on experience and do whatever is possible to have a higher batting average.
Bruce has also added a reading list to his blog. Definitely worth noting down the recommended books.