Vienna Value Investing Meetup #2

PRESENTED BY MARTIN BODOCKYSUPPORTED BY

Why this meetup?BUILDING COMMUNITY TO HELP EACH OTHER

WE WANT TO BUILD THE RIGHT TOOL FOR VALUE INVESTORS

THIS IS AN OPEN DISCUSSION MEETUP, PLEASE ASK WHENEVER YOU LIKE

Who am I?

MARTIN BODOCKYCEO OF MINT ITAI AND FINTECH GEEKWE ARE HIRING!

DisclaimerWE ARE NOT INVESTMENT ADVISORS.WE DO NOT RECOMMEND TO BUY OR SELL.ANY DECISION YOU CONCLUDED FROM THIS SESSION IS YOURS NOT OURS, YOU ARE IN CONTROL.

Agenda1.) FUNDAMENTALS RULES FOR VALUATION 2.) REPRODUCTION MODEL3.) PRICE EARNINGS MULTIPLE MODEL4.) DISCOUNTED FREE CASH FLOW MODEL

Snap’s IPO

Value decomposition• WHAT THE COMPANY OWNS/OWES BALANCE SHEET

• HOW THE COMPANY MAKES MONEYINCOME STATEMENT, CASH FLOW, COMPANY VALUE DRIVER

What the company owns/owes• WE NEED TO DETERMINE THE NET VALUE

OF COMPANY ASSETS• CONCLUDE NET ASSETS VALUE PER

SHARE• THE COMPANY’S REPRODUCTION COSTS• IF YOU SELL ALL WHAT YOU GET• EXAMPLE IN SPREADSHEET

Reproduction company assets 1/3• CASH & CASH EQUIVALENT IS FULLY

REPRODUCIBLE• SHORT TERM INVESTMENT CAN BE

FULLY REPRODUCIBLE• RECEIVABLES ARE INVOICES TO BE PAID

BY EXTERNAL ENTITIES• INVENTORY IS DEPENDABLE ON

COMPANY, INDUSTRY AND INVENTORY. CAREFUL IN ESTIMATION

• PREPAID EXPENSES ARE GOOD ARE PAID FOR SHORT TERM USAGE

Reproduction company assets 2/3• OTHER CURRENT ASSETS CAN BE

SHORT-TERM INVESTMENTS, USUALLY LESS LIQUID THAT OTHER CURRENT ASSETS

• PROPERTY/PLANT/EQUIPMENT IS DEPENDABLE ON COMPANY INDUSTRY, THIS IS POTENTIAL PLACE FOR VALUE TRAP AS WELL AS HIDDEN VALUE

• GOODWILL IS HOW MUCH VALUE COMPANY HAS CREATED BY THEIR PRODUCT AND SERVICES. WE CAN SAY THE BRAND VALUE.

Reproduction company assets 3/3• INTANGIBLE ASSETS ARE PATENTS AND

TRADEMARKS. WE NEED TO ASSESS SIMILAR TO GOODWILL.

• LONG TERM INVESTMENT IS DEPENDABLE ON COMPANY VISION, IT CAN BE VENTURE CAPITAL OR RESEARCH FUNDING.

• DEFERRED TAX ASSETS ARE RETURN TAXES FOR NEXT YEAR, LIQUIDITY COST IS QUESTIONABLE

How the company makes money

• WE NEED TO UNDERSTAND WHAT DRIVES THE COMPANY VALUE PRODUCTION

• PRICE/EARNINGS MULTIPLE MODEL• DISCOUNTED FREE CASH FLOW MODEL

Margin of safety

Company value driver 1/3• YOUNG GROWTH COMPANIES –

REVENUE GROWTH, TARGET MARGIN, SURVIVAL PROBABILITY

• GROWTH COMPANIES – SCALING GROWTH, MARGIN SUSTAINABILITY

• MATURE COMPANIES – OPERATING SLACK, FINANCIAL SLACK, PROBABILITY OF MANAGEMENT CHANGE

Company value driver 2/3• DECLINING COMPANIES - GOING

CONCERN VALUE, DEFAULT PROBABILITY, DEFAULT CONSEQUENCES

• FINANCIAL SERVICE FIRMS – EQUITY RISK, QUALITY OF GROWTH (RETURN ON EQUITY), REGULATORY CAPITAL BUFFERS

Company value driver 3/3• COMMODITY AND CYCLICAL

COMPANIES – NORMALIZED EARNINGS, EXCESS RETURNS, LONG-TERM GROWTH

• INTANGIBLE ASSET COMPANIES – NATURE OF INTANGIBLE ASSETS, EFFICIENCY OF INVESTMENTS IN INTANGIBLE ASSETS

Price/earnings multiple model• DETERMINES 5 YEARS PRICE TARGET• THE MOST STRAIGHTFORWARD MODEL• USES HISTORICAL PRICE/EARNINGS

MULTIPLE• USES CURRENT EARNINGS PER SHARE• USES EXPECTED GROWTH RATE

Historical price/earning multiple• THE MODEL IS ESTIMATING VALUE ON

PAST EARNING CAPACITY OF COMPANY• THIS CAN BE COMPUTED• EASY ACCESS IN MORNINGSTAR[1] (5Y

AVG*)

Current earnings per share• THE MODEL IS INDICATING ON CURRENT

EARNING POWER• THIS CAN BE COMPUTED• EASY ACCESS IN YAHOO FINANCE[1]

(EPS –TTM)

Expected growth rate• WHAT IS PROJECT GROWTH RATE IN

EARNINGS BY ANALYSTS• EASY ACCESS IN YAHOO FINANCE[1]

(NEXT 5 YEARS PER ANNUM)• APPLY MARGIN OF SAFETY HERE

The P/E multiple model computation• DISCOUNT RATE = LONG TERM HISTORICAL

MARKET RETURN

• EXAMPLE IN SPREADSHEET

Intrinsic value

Cash VS Cash• “CASH” VS “CASH CAN BE TAKEN OUT OF

A BUSINESS”• “CASH FROM OPERATING ACTIVITIES” VS

“FREE CASH FLOW”• CAPITAL EXPENDITURES (CAPEX) –

COMPANY RUNNING COSTS• FREE CASH FLOW(FCF) – WHAT REMAINS

IN COMPANY CAN BE TAKEN OUT

Discounted Cash Flow(DCF) model• ADDS UP ALL THE EXPECTED FUTURE

CASH FLOWS DEDUCT NET VALUE PRICE TO COME THE INTRINSIC VALUE IN TODAY’S MONEY

• TAKES LAST 12 MONTHS AND PROJECT NEXT 10 YEARS BY MULTIPLYING WITH EXPECTED GROWTH RATE.

DCF data 1/3• TOTAL CASH FLOW FROM OPERATING

ACTIVITIES• CAPITAL EXPENDITURES• CASH FLOW STATEMENT• EASY ACCESS IN YAHOO FINANCE[1]

DCF data 2/3• CASH AND CASH EQUIVALENT• SHORT TERM INVESTMENT• LONG TERM DEBT• BALANCE SHEET• EASY ACCESS IN YAHOO FINANCE[1]

DCF data 3/3• EXPECTED GROWTH RATE• EASY ACCESS IN YAHOO FINANCE

ANALYSTS[1]

• NUMBER OF SHARES OUTSTANDING• EASY ACCESS IN YAHOO FINANCE

STATISTICS[2]

DCF Computation• MARGIN OF SAFETY• DISCOUNT RATE• GROWTH DECLINE RATE• LAST VALUATION OF FREE CASH FLOW IS

MULTIPLE BY 12

• EXAMPLE IN SPREADSHEET

Summary• REPRODUCTION COSTS• PRICE/EARNINGS MULTIPLE MODEL• DISCOUNT FREE CASH FLOW MODEL

Next sessions• VALUE COMPANY IN SPECIFIC STAGE –

GROWTH, MATURITY, DECLINING• SPECIFIC INDUSTRY SESSIONS(AUTO,

BIOTECH, SOFTWARE)• PLEASE PARTICIPATE