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Is CSL a master of share buy backs?

Companies, Health Care, Investing Education | Comments (58)

Is CSL a master of share buy backs?

When a company buys back its shares, the announcement is often accompanied by reports suggesting either 1) the company has no other growth options towards which it can employ equity capital or, 2) the company has great confidence in its future and other shareholders should be following its lead rather than selling out to the company itself.

Back in 1984, in his Chairman’s Letter to Shareholders (a source of information I have quoted frequently here and in Value.able), Warren Buffett observed:

“When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases.”

Note to CFOs and CEOs: “shares selling far below intrinsic value in the marketplace.”

It is just as important for the CEO of a public company to be buying shares only when they are below intrinsic value, as it is for Value.able Graduates building a portfolio.

Buying shares above intrinsic value will destroy value as surely as buying high and selling low – something many Australian companies became all to expert at during the GFC as they issued shares in their millions at prices not only below intrinsic value, but below equity per share.

One question to ask is if companies are engaging in buy backs today, why weren’t they when their shares were much, much lower? The answer of course may be that they may not have had the capital back then. A recovery from the lows of the GFC has not only occurred in the prices of shares trading in the market place, but also in the cash-generating performance of the underlying businesses themselves.

Irrespective of the circumstances, a company now buying back shares that had previously issued them at the depths of the GFC is having a second crack at wealth destruction.

I am pleased to report that not all companies are following the crowd. Some larger companies, including BHP, RIO and Woolworths, have announced buy backs at or slightly below my estimate of their Value.able intrinsic values.

Webjet, Customers, Coventry Group and Charter Hall Retail REIT have all announced buy backs and Bendigo/Adelaide Bank is engaging in one to reverse the impact of shares issued through their DRP.

As I wrote yesterday (Is there any value around?), value is becoming much harder to find. Companies are expensive, even my A1s. Whilst any Value.able valuation is merely an estimate, the absence of a large Margin of Safety, combined with the announcements of buy backs, does not inspire my confidence.

In the US, share buy backs historically peak at market highs. Think back to the first half of 2007 and in 1999 and 2000 – two periods that investors may have wished they’d sold shares back to the companies – are also periods during which buy backs peaked.

Share buy backs are a very public demonstration of management’s capital allocation ability, or lack thereof.

Whilst Warren Buffett is regarded as the master of share buy backs, he has often sited another capital allocator as the real genius – the late Dr. Henry Singleton, the founder and CEO of Teledyne.

When the inflation-devastated stock market of the 1970s had pushed shares to the point that some suggested ‘equities were dead’, Henry Singleton bought back so many shares that by the mid 1980s there were 90% less Teledyne shares on issue. Here’s a para from the web: “In 1976, the company attempted, for the sixth time since 1972, to buy back its stock in order to eliminate the possibility of a takeover attempt by someone eager for the cash reserves the company had accumulated. Altogether, Teledyne spent $450 million buying back its stock, leaving $12 million outstanding, compared to $37.4 million at the close of 1972. With many of the company’s divisions showing stronger results and fewer shares outstanding, Teledyne’s stock increased from a low of $9.50 per share to $45 per share, becoming the largest gainer on the New York Stock Exchange.”

Who is Teledyne’s Australian equivalent?

One iconic Aussie business (it achieves my second highest MQR – A2) immediately springs to mind. In 2009 this business issued shares at a high price to fund a $A3.5 billion acquisition. But things didn’t quite go to plan… the US Federal Trade Commission intervened and the shares slumped. What did management do? They used the cash raised from the share issue to buy them back. Amazing!

Fast-forward twelve months and this business has nearly $1 billion in cash in the bank and no debt. If it keeps using its own cash and that being generated, and buying back shares at the present rate (and assuming the share price doesn’t change of course), it will have bought back all its shares in seven years. A Value.able business… what do you think?

Yes, if not for management’s decision to buy back shares ABOVE intrinsic value.

Unfortunately CSL’s share price may not be as high in seven years as it could have been, had management chosen to buy back its shares below intrinsic value.

If you own shares in a company engaging in a buy back, ask yourself whether value is being added to the company? Value is generated when the shares being purchased are available at prices below your estimate of its Value.able intrinsic value.

If management are overpaying, inappropriate capital allocation practices may be the only addition to the future prospects of the business.

Posted by Roger Montgomery, author and fund manager, 1 March 2011.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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58 Comments

  1. Cain
    :

    Hi Roger,

    What are your thoughts on CSL buyback at current prices?

    It seems to me like the share buy backs are causing the companies book value to retreat, and the debt to rise, which makes the ROE figure look good, But is such a high return on equity still a good thing when the “equity” is in decline?

  2. Paul
    :

    Hi Roger,

    I just bought your book and try to learn something about how to determine which share to buy or sell. Based on my calculation and research, i think TPM is worth to buy for the price around $1.4, isn’t it? Please advise.

    I bought SKI at $1.075, should i continue to hold till $2? Please advise.

    • Roger Montgomery
      :

      Hi Paul,

      We don’t provide any advice here. You can however find out other investor’s views and opinions about something but you must conduct your own research and seek and take personal professional advice.

  3. Michael C
    :

    Roger

    In light of the above discussion on “good” buybacks and “bad” buybacks, do you have any thoughts on the present BHP offer. It would seem at first glance that it could be a “good” buyback as they will be buying at between 10% and 14% discount to the market. Is it as simple as this or are there other “gotchas” to be wary of.

    • Ashl
      :

      Hi Michael C

      So long as the IV is not significantly below the share price these buybacks can have a nice boost to IV.

      That is the only gotcha

  4. George A
    :

    So Roger I’d like to know how my numbers compare to yours (and others) – are these IV’s ballpark??

    with a 10% RRR and using a 22.5% ROE (after subtracting $2b from equity in 09 and $500m in ’10. I get future IV’s of:

    30 June 11 – $29 – 530m shares outstanding
    30 June 12 – $34 – 523m shares outstanding

    Conclusion: While the buy back has been attacked by most on this site, it is hardly the disaster some of you are making out.

  5. Michael
    :

    Roger

    Your CSL commentary overlooks that when the Talecris-related buy back began, the share price was about $29, for which see the relevant company announcement. Clearly buying back shares for $29 up to $36, below the Talecris issue price seems entirely sensible.

    The latest $900 million buyback, which appears quite distinct from the failed Talecris acquisition, may be more debatable. However, if the company has nothing better to do with funds currently surplus to its own requirements, then it’s either a special dividend or a buyback. Even assuming CSL is currently overvalued, then reducing the stock on issue necessarily reduces that level of over-valuation, even if it does not cure it. Moreover how long should a company reasonably keep the surplus cash (assuming that’s a genuinely held view) in the bank waiting till its shares became undervalued enough to buy?

    • Roger Montgomery
      :

      Hi Michael,

      I don’t see the source of any disagreement but with regards to this comment of yours: “Even assuming CSL is currently overvalued, then reducing the stock on issue necessarily reduces that level of over-valuation”, try modelling it up and see.

      • Roger Montgomery
        :

        Buying back shares above intrinsic value, is inferior to paying out dividends from the point of view of the shareholder who will receive at least bank interest on their cash. Paying out extra dividends BTW is not something I am against either, its just that my valuation doesn’t rise by as much as it would if the practice did not occur.

        And just to clarify, selling shares high (issued for acquisition) and buying back low (failed acquisition attempt) is precisely what companies should be doing. But buying back below intrinsic value (even lower) is first prize. Hope that clears things up.

      • Roger Montgomery
        :

        And here are the Eureka comments you may have been referring to:

        I can be a little more specific than that because the company raised a net $1.73 billion at (the majority at $36.75 per share) in 2009, for the ultimately failed acquisition of Talecris. This significantly increased the company’s equity but it is now returning the money to shareholders through a $1.6 billion buyback and at the time of writing has purchased just under $1 billion worth of shares, for which it is currently paying $31.80.

        Selling something for a high price and buying it for a low price always has financial benefits. In this case the benefits can be estimated to increase the returns on equity and the intrinsic value of CSL meaningfully over the next few years.

        As always, the focus by the majority of investors is on the price and on the short term, but Ben Graham’s reminder that in the long run the market is a weighing machine suggests there is a very good reason CSL’s share price is 3700% higher than it was 15 years ago.”

  6. Mike
    :

    Howdy group,

    For all of those still calculating Intrinsic value to the nearest cent, remember what Warren Buffett said, “Its better to be vaguely right than precisely wrong”.

    As other people have suggested, CSL’s long term return on equity is much higher than its most recent reported figures suggest. You also need to consider how much growth CSL will do over the coming years, and its entirely possible that CSL’s ROE in a couple of years will be back around its long term returns, in which case anyone using the current ROE will have intrinsic value too low.

    Cheers
    Mike

  7. LukeS
    :

    You are a hard man Roger.

    We would at least hope the decision makers are doing buybacks at a price they consider is at or below value. You have often said your method is unique and so you can’t expect mere mortals to arrive at your IV without help.
    I can forgive you as you are young. However I believe your youth may have led to an error in your calculation of IV.

    You left out dripping.

    Those of us called boomers grew up with a magnificent saucepan of congealed animal fat parked on our stoves. Mum called it dripping. We had it with everything. Sometime in my youth the Women’s Weekly must have told Mum to stop using it because it just disappeared overnight. I am at the bottom end of the boomers but all those 15 or so years ahead must have lapped up dripping for lots of years. From about now the boomers are starting to retire.

    Over the next decade or so most of us are about to become customers of CSL.

    If we add the healthgiving benefits of alcohol, cigarettes, drugs, free love, too much sun, a lifetime of take-away, excess in practically everything we do, the the maths says CSL needs to get ready to ramp up.

    The CSL management have been pretty good with running things. They appear to be intelligent people and in the main have been good custodians of their shareholders funds. They must understand the principle you are discussing here.They must believe the current price is fair by their calculations.

    Why don’t you do us all a favour and give them a call for us. They are likely to take your call and give you a considered answer. Ask them why.

  8. Stuart
    :

    Great interview with Aaron Begley (Matrix Composites and Engineering CEO) on Switzer. I can see why Roger was impressed.

  9. Manny
    :

    How does one measure the effectiveness of these buy backs? I mean is there a lag factor from the time the entire buy back cycle is completed to potentially seeing the share price going up.

    In my expereince BHP (share buy back currently in progress) and CSL (in the past) both have not really responded with gains in Share price during and after the buy back cycle. Does that mean if the buy back would not have happened the share price would have fallen and hence it supported a fall in their share price.

    Not sure.. Would be good to understand the whole dynamics and success rate of previous buy backs.

    Cheers
    Manny

  10. Es
    :

    Roger, I am not sure as to why my post from yesterday night has not been published, I believe that I was reasonable in my arguements ?.

    • Ash Little
      :

      Hi Bk,

      If this is your CSL valuation then I would recommend you watch The Castle (A great icon australian movie)

      There is a segment in that movie were Dale Kerrigan and his son talk about jousting sticks at $250.

      Dale says tell him he is dreaming.

      Just my view but CSL IV at $40 in 2012.

      Dreaming

      Just my view and I am know to be wrong often

  12. michael
    :

    Interested to hear what people think about Structural Systems (STS). It’s a mining services slash construction company on the turn around.

    Bottom line numbers are not very impressive at the moment mainly due to losses incurred by the formwork division that they’ve sold and with losses in their concreting business (Meridian). The losses to Meridian they’ve explained was due as a result of the closure of the formwork business – they have since scaled this business down to stop the bleeding.

    Their mining services has been doing very well.

    Assuming zero growth, and that the company stems their bleeding as per the forecasts provided in their last few announcements, I’m coming up with an EPS for 23c for FY12. With a RR of 12%, 20% ROE, 50% divi payout ratio… this is translating to an IV of $2.00+. I think this still is very conservative since I’ve assumed zero growth. At the moment the stock is trading around 80c.

    Not sure if it would classify as an A1, but there are definitely A1 divisions within the company. I think they’re doing exactly the right thing by cutting loose the weeds.

    • ron shamgar
      :

      i think ur a bit optimistic on fy12 earnings…but one thing is for sure, if ur EPS estimate is correct their share price will double!

      good luck.

  13. Robyn Clancy
    :

    Hi Roger and All,

    I have a question and if anyone can answer I would really appreciate it. I have noticed that I get announcements from the companies I have on my watchlists when major shareholders sell off significant amounts of shares but is it possible to track exactly what individuals and companies buy and sell their shares in the companies I am interested in even if they are small amounts?

    I love reading everyone’s comments and named my watchlist of companies you all talk about – Graduates.

    Cheers,
    Robyn.

    • Andrew
      :

      I doubt it Robyn. this would probably be in breach of various privacy issues. I think the brokers can see what brokers are buying and selling but not the individual that it is for, The only time we will see reference to a particular company or person buying shares is if they are a substantial holder.

  14. Es
    :

    I find it hard to agree with your comments re CSL and RIO in this report. CSL sold shares to its shareholders at about the current price and have bought the vast majority back at a price below the price they sold their shares at for the Telecris acquisition. In addition your comments supporting RIO’s share purchases fail to acknowledge that this same company sold shares at the bottom of the GFC after a terrible acquisition and now are buying back those shares at multiples of that price. I know which team I would back!.

    I find this performance of both managements as being more important than companies buying below YOUR estimate of IV, which is just one of many methods for measuring value. Your entire position here relies on your measure of IV as being THE measurement. Buffet, himself has stated that if he and Munger were asked to calculate the IV of Berkshire they would come up with different values (this is Buffet and Munger we are talking about and trying to value their own company).

    From their history in managing their companies, who does one think would have a better understanding of their companies valuation Dr McNamee or Mr Albanese ?.

    Regards
    Es

    • Greg Mc
      :

      I agree with you Es that CSL have a better history in this regard than RIO, which has done an excellent job of turning a great macro situation into an average situation for shareholders in the past couple of years. In my opinion, CSL’s earlier buyback after the acquisition was blocked was a great move, buying back shares for $31 that they had just sold for $36. Very smart move, but also the most blindingly obvious so let’s not get too carried away with it.

      Buying back more shares some 15-20% higher is obviously not so beneficial for shareholders. Even if you come up with a higher valuation than Roger for CSL, it goes without saying that buybacks at higher rather than lower prices are not desirable. CSL has recently been trading at levels not seen since 2008 which is perhaps not the time to be indiscriminately buying back shares for something to do. Now this *might* be acceptable if their IV is rising rapidly, leaving the share price behind, but I do not believe this is the case.

      I sold my CSL in November as:
      a) I thought the share price was well above my estimate of IV which was around $29-$30 at the time from memory.
      b) I felt that spending my money to buy back shares 20% what I thought they were worth was not a good move and perhaps was a sign that they were running out of options. Sure – whether or not that was a good move on my part depends entirely upon whether my estimate of IV was remotely close, but I’m not regretting the move yet.

      • Ash Little
        :

        Hi Greg,

        We know you wont regret it because you probably put the money into MACA or ORL or ARP or even some of the other 2 that we can’t name.

        I sold my CSL in August and despite the price rise have no regrets as well

      • Greg Mc
        :

        Yes, Ash,
        As it happens, I bought a few more of everybody’s favourite maker of oil rig floaties at that time. Certainly not regretting it $4 or $5/share later.

  15. Paul Rehill
    :

    CSL’s incremental rate of return on equity over a long period of time is around 29% which is somewhat higher than its current return on equity that has increased from 14% to about 22% over the last eight years. My IV at 6/10 was $32.85 rising to $38.18 in 2011, and to $44.38 2012. I have not adjusted my calculations for the most recent financial information. On balance, I would say the CSL buyback was reasonable when announced and still remains reasonable.

    The Value.Able approach appears to produce conservative intrinsic value calculations that I thoroughly applaud for use for all Value.Able graduates as it introduces an extra margin of safety.

    For example, if I look at Table 11.2 in Value.Able for the multiplier selection when a company retains 100% of its earnings with a required rate of return of 10% and company’s return on equity of 30%, the multiplier is 7.225. If I compound $1 for 11.84 years at 30% and discount it back using 10% I get

    $1 x (1 + 30%)^11.84 / (1 + 10%) ^ 11.84 = 7.227 (approximately 7.225)

    So Roger’s table for this figure is like a bank account that compounds money at 30% for 11.84 years discounted to the present at a 10% required rate of return.

    CSL is likely to be in business for more than 12 years so I think a best estimate valuation is in order for the buyback. If we know what CSL will earn on its retained earnings over the next decade, we know if the buyback is worthwhile. It looks OK to me now.

    I do not own CSL shares.

  16. Craig
    :

    Hi Roger,

    Sometimes I think the truest test of a CEO/CFO is what they do when their company is quite mature and generating loads of cash. Do they acquire, reinvest, buy back, do nothing (this can be under-rated), etc. From what I’ve learnt from your book and blog, I’d love to be a fly on the wall in the boardroom.

    Regards,
    Craig.

    • Matt
      :

      Doing nothing is potentially as risky as the other options. Bags of money sitting around with no debt can make a nice target too.

  17. RobertD
    :

    Nothing to do with buy-backs but an interesting article that I came across regarding JB Hi-Fi

    “Controversial Australian entrepreneur Ruslan Kogan today labeled bricks and mortar retailers like JB Hi-Fi “Apple’s b—h””

    http://www.itwire.com/it-industry-news/strategy/45488-aussie-retailers-are-apples-bitch-claims-kogan

    Kogan aside – he does have an interesting point if JB Hi-Fi are in fact getting 30% of their sales from Apple products. That is a significant dependence on a vendor. While I don’t hold JB Hi-Fi anymore – it would make me want to do a little more research into the validity of this.

    • Roger Montgomery
      :

      In retrospect these comments might not have been made, even by the most successful internet CEO’s. The relationship may be more symbiotic than it first appears. JB Hi-Fi sells Apples cheaper than Apple itself. That alone, of course, doesn’t make JB Hi-Fi’s future blindingly bright, its just hints at less of a one-way relationship.

  18. John M
    :

    Hi Roger and all,

    Illogical capital allocation seems to be a financial disease. You had better do some Advisory /R&D work with CSL so they can come up with a Montgomery Capital Allocation Vaccination (MCAV) shot for CEO’s. Maybe you could use a Webinar format for Executives of listed companies.

    I was trying to get my head around the concept of operating leverage. Can anyone confirm if my line of thought is correct or have I got muddled up. Using CSL as an example, I am guessing that it has a high operating leverage because of all the CAPEX needed to produce its products. If I have that correct, I am guessing that because they have high operating leverage, the greater the volume that they sell, they make a higher percentage profit because of the high proportion of fixed costs. I am also assuming that because of the higher leverage, that because of the fixed cost component that the opposite is also true, ie when volumes drop off the loss is much greater. Does anyone out there have any feedback/comments please.

  19. Paul Middleton
    :

    Poignant post Roger on CSL. You must have taught us well, as the first thing I did when CSL reported was to recalculate intrinsic value. Upon realising that the company is engaged in buying back shares well above intrinsic value, I promptly exited the register. It appears that the currency headwinds are too onerous, and boosting EPS through the buyback is a vain attempt to prop up the share price.

  20. Mike
    :

    Hi Roger,

    Another issue to look out for when calculating intrinsic value for CSL. Given it has $1Bn in cash sitting on its balance sheet, ROE will be affected, as it can only earn maybe a maximum of 5-6% on that $1Bn.
    As Debt on the balance sheet can artificially push up ROE, Cash on the balance sheet can pull ROE down.

    cheers
    mike

  21. fred
    :

    Hi Roger,

    For a company with plenty of cash you would think that they would raise there pay out ratio. Buy backs above intrinsic value lowers intrinsic value. Iss group ( iss ) which I do have some shares in are also doing a buy back but below intrinsic value which is good! I have CSL Limited intrinsic value at below $ 25.00 for 2011

    • Mike
      :

      Your intrinsic value is too low, more than likely because you dont adjust your equity to account for the large amount of cash on the balance sheet. Companies have many means of increasing shareholder value through increased payout ratios, buybacks, acquisitions or investing the excess cash in organic growth. The problem with increasing payout ratios is that they may not have enough franking credits to fully frank the payout, which means an adverse tax issue for shareholders. By buying back shares, the value of the remaining shares increases, with no adverse effect on shareholders.

      • Ashl
        :

        Hi Mike,

        My biggest concern is that they are using the cash is to purchase something that is worth 80c and are paying a dollar for it.

        IE the buy back.

        I would prefer it if the spent a dollar buying back something that was worth $1.20

        Just my thoughts

      • Mike
        :

        Hey Ash,

        How exactly do you know that they are worth 80c? Because your IV calc says so? What if its wrong?
        I’d suggest that CSL is an extremely well managed company, and I’d give the directors the benefit of the doubt and assume that they know the worth of their shares better than anyone.

        Cheers
        Mike

      • Peter
        :

        The main point which I believe may have been brushed over is whether the valuation method used is appropriate for CSL.

        What exactly are the earnings driver for this company? Is it driven by the line item called Equity in the balance sheet?

        If your answer is no, not quite, then you cannot compare it with a bank account of cash of which the interest rate earnings is totally dependent on the bank balance.

      • Matthew R
        :

        Hi Peter, I understand what you are getting at….

        But if CSL has an earnings driver that is not represented in the balance sheet equity (ie IP, processes, reputation) then that will outsize their return on equity or allow them to increase their return on equity each yr. CSL does in fact have many of these, & hence it’s sustained high return on equity.

        But it’s not the only company with these factors. Therefore, to compare businesses, ROE is still a good yardstick when consideration is given to what future returns on equity are likely to be

      • Peter
        :

        The problem is we are not comparing businesses in this current exercise.

        We are attempting to use ROE as the holy grail.

        ROE is only one factor to be considered. And it is only relevant if there is a link between the R and the E.

      • mike
        :

        Good point Peter,
        Totally agree that ROE is only one factor to consider. Roger’s IV also uses Book Value Per Share and who’s to say that CSL’s equity per share is valued correctly. Due to its IP, competitive advantage, future market conditions (e.g. surge in older aged people), its book value may be very different to what is recorded as an accounting measure in the annual reports.

        Cheers
        Mike

      • Matthew R
        :

        I agree – in almost all cases accounting book value has no relation to the market value of the business’s assets

        but a company with a very high return on equity which is sustained for many years almost certainly is understating it’s book value. Otherwise, at some point another company would have come along and bought whatever tangible assets the company had and got the same return or competed returns down until they matched returns available elsewhere (such as cash). It is the intangible assets which are what increase and maintain the ROE. These intangibles are in many cases unquantifiable and mostly unobtainable assets, or put simple they are a competitive advantage.

        Therefore, as an ROE investor I have no need to estimate the value of those intangible assets for two reasons: (1) in most cases they can’t be sold and (2) their value is represented in the high ROE

      • Matthew R
        :

        Sure, if ROE investing does not chime with your internal clock then estimating the value of assets for sale (like Graham did) is another very reliable value investing method. Do what ever works best for you.

        When considering an ROE investing methodology however it is important to have a track record of high sustained ROE. This is because not all intangible assets can be added to (for example you might not be able to add to the expiration date of a pharmaceutical patent). Therefore, for a competitive advantage to make a difference, it has to every year allow the company to raise it’s margins or increase it’s sales while maintaining margins.

      • Matthew R
        :

        The competitive advantage that Coca-Cola has can be added to forever through more marketing (or until it reaches worldwide saturation). But Via-gra’s patent will run out eventually. Sure they can market Via-gra in the short term, but eventually the revenues and margins will enter a decline or at the very least stabilise/grow slower than the market. See the difference? I know which product I’d prefer to own if I had to own one forever.

        If the competitive advantage can not be added to then retained earnings will either go in to lower return investments or in to developing another competitive advantage (another drug for example).

        See the benefit of a competitive advantage that is self-saucing?

        This is where ROE plays such an important part. Look at ROE over an extended period and it can tell you a lot about how good the business is.

      • Matthew R
        :

        apologies for the multiple posts!

        It kept saying my post looked like spam, so initially I just posted it in smaller bites, that is until it wouldn’t let me post in bites that were any smaller….

        I was frustrated that I couldn’t post the rest until I realised it wouldn’t allow me to post the word “V i a g r a”

        :)

        just as well I don’t use profanities Roger!

  22. Mike
    :

    Thats all well and good as long as your estimate of intrinsic value is entirely accurate. Given its an estimate of the companies value, its possible that your intrinsic value is wrong, and the company knows the true worth of its shares, in which case they are entirely justified in buying back their shares.

    Cheers
    Mike

    • Matt
      :

      The point is more, if the company buys below what you think the IV is; IV goes up. If the company buys above what you think the IV is, IV goes down. Of course IV is an estimate and some people estimates are better than others ;)

      • Mike
        :

        If you calculate IV for CSL without adjusting for the large amount of cash on their balance sheet, your ROE will be too low, and your IV calculation will be low. The same way companies can boost their ROE by having debt on their balance sheet, cash on the balance sheet artifically lowers the ROE.

      • Mike King
        :

        Yep, so you would need to take off the Interest Income from Net profit to give a truer result.

        cheers
        mike

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