March 9, 2010
Here’s a presentation I gave yesterday at the New Jersey Institute of Technology. It’s an introduction to value investing with a case study on Tarpon Folio holding Neutral Tandem, whose CEO is an alum of NJIT. Thoroughly enjoyed it, and sounds like the folks in attendance did, too.
Video of the speech will be posted once edited.
And a special thanks to the gracious Gil Bento for setting it all up!
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Cale,
Great presentation — looking forward to seeing the video!
Three questions:
1. Re DCF slide: Why 12% (seems arbitrary)? Have you ever considered the benefit of using a Reverse DCF methodology instead of DCF (with its inherently highly dubious future growth guesstimates)?
2. Great detail on ROIC spreadsheet. For your consideration:
I prefer Free Cash Flow instead of EBIT in ROIC calculations. For example, Enron looked like a great investment in 1998 and 1999 via EBIT ROIC whereas FCF ROIC revealed their inherent deceptiveness.
Side note: TNDM is strong on both the EBIT basis as you showed as well as on a FCF basis.
3. Just curious: Where did you obtain the historical data on #switches, # routes, and phone #s?
Best Regards,
Jeff
And a special thanks to Cale for being so generous with his time! You are welcome back to NJIT anytime.
Hi Jeff,
In this case, 12% was just where I stopped walking the model down. Owner’s earnings have grown at about 110% a year the last three years, so wanted to be sure things were conservative. So, yep, I stopped at an arbitrary point, but a suitably conservative one. As I mentioned to the group in attendance, DCF’s are notoriously fickle, so can’t put too much emphasis on the results in and of themselves. It’s a hint, not an answer.
I use EBIT in general because I think it’s a better proxy for earnings power, and it’s just easier to scan a lot of companies quickly using EBIT than FCF….meaning easier to auto-plug into a spreadsheet, and it doesn’t vary year to year as much as most versions of FCF. Not the be all-end all, obviously, but I do use a variation of FCF (owner’s earnings) in the DCF should it come to that. So, will still pick up those Enrons. :) And, like you said, not a lot of qualitative difference between the two in TNDM’s case.
All data comes from 10-K’s. Buried in there, but worth digging it out…particularly to validate those network effects, ya know?
Hope that helps!
Cale
EBITDA adjusted for capital leases – (capex + relevant acquisitions)/Net Working Capital + Net Fixed Assets
Where in the denominator
Net working capital = (current assets – liquidity on hand + funds from sale of receivables) – (current liabilities – short term borrowings)
and
Net fixed assets = tangible fixed assets adjusted for use of operating leases & throughput agreements- construction in progress.
Really enjoyed it, Gil. Thanks again!
That was great Cale. If only TNDM were in my circle of competence. Nice ROIC and increasing with economies of scale. Just from the numbers and their results when they started, it sure looks difficult for a new entrant.
Thank you. And yes, good advice for other readers…if something isn’t in your circle of competence, do not invest!