2021-04-15

“What is happening here
Something's going on that's not quite clear
Somebody turn on the lights
We're gonna have a party
It's starting tonight
Oh, what a feeling 
When we're dancing on the ceiling”
Lionel Richie 

6 stocks in our portfolio moved up more than 10% in March.

Secondly, you’ll notice that a more-than-6% monthly performance is a rare event. Over the last 10 years, this is the fifth time it has happened, which means a once-every-2-year occurrence. In plain talk, it was a pretty good month, both for Mr. Market, and for the Fund.  And thirdly, you will discover that the Fund reached its intrinsic value for the second time since its launch 13 years ago. Indeed, out of our portfolio composed of 18 Swiss corporates, 3 raised above the mark, 9 are on the mark and 6 still lie 15-20% below the magic mark.

So, Lionel, we aren’t dancing on the ceiling yet, but there’s a crowd shaking the booty on the dance floor and the music is loud!

Now let me turn down the volume, take you off the dance floor, sober you up a bit and let’s define “intrinsic value” and how I calculate “intrinsic value”.  It is the measure of what an asset (a company, for instance) is worth. The measure is arrived at by means of an objective calculation, or sometimes a complex financial model, rather than using the current trading price thrown at you by Mr. Market. I myself take an average EBITDA (earnings before interest, taxes, depreciation and amortization, also called gross operating cash flow) over the last 2 to 3 fiscal years. I include the current year and take out the maintenance CAPEX. The result is what I’d like to call “owner earning”. The concept of owner earning, popularized by Warren Buffett, works along the following assumption: “If you own 100% of a business, how much cash from operations will this business generate and then how much cash will you pocket at the end of the year?” That’s the figure I’m trying to calculate. It’s not rocket science, EBITDA is a key figure, easily found in the financial statements. But to find your maintenance CAPEX, which you need to take out, you need to study the cash flow statement & find the capital expenditures for the year, and the amount of depreciation in PPE (property, plant & equipment) and depreciation in intangibles, which you can find in the income statement. Your maintenance CAPEX lies between these two figures, but for a pedestrian growing business, closer to the latter. An easier way of doing this is to call the CFO and ask him.

Let’s take the practical example of Mystery Co., a corporate I like a lot, that generates CHF 300mn owner earning. Let’s assume, for the sake of valuation, that Mystery Co. will generate this amount each year forever (in reality, Mystery Co. has done better than that, which is reassuring). The only remaining question is: “How much are you ready to pay to get your CHF 300mn, year in, year out? This has nothing to do with the DJ’s age, just a matter of the owner earning’s capitalised yield you are ready to accept: 10% you’d be ready to pay CHF 3bn EV (enterprise value) for the biz, 6% you’d pay CHF 5bn or for 4% you’d have to fork out CHF 7.5bn. You can compare the EV to what Mr. (Swiss) Market’s throwing at you every second.  Ergo, with ultralow interest rates, my educated conservative guess for a reasonable owner earning yield for Emmi (of course it is!) is 5%, or CHF 1,120 intrinsic value per share, some 15% above Mr. Market’s current price. 

I rest my case!

What’s next? Well, I let you go back to the dance floor! With the ZIRC (Zero Interest Rate Capitalism) environment, there is little doubt now that prices of productive assets could skyrocket & spiral to new highs, with the spectre of plunging currencies. A grotesque example is the dizzying climb of the Caracas stock exchange, a 2-bagger YTD, but a 2800-bagger over the last 2 years.

So will the music stop completely or are the Central Bankers’ DJ’s going to pump up the volume (keep interest rates ultralow), provide plenty of booze (permanent financial stimulus) and make us dance the “joropo” on the ceiling?