Author Topic: MDT - Medtronic  (Read 9831 times)

beerbaron

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Re: MDT - Medtronic
« Reply #10 on: November 30, 2010, 04:16:18 PM »
Biaggio, I like the list. It's going to be a nice addition on mine :)

BeerBaron


tombgrt

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Re: MDT - Medtronic
« Reply #11 on: November 30, 2010, 04:30:12 PM »

1.

2.

3.


Thanks Myth! Really liked the story too, even made me laugh.  :D

About FCF : I was just assuming that if ROIC is strong, it is logical that the allocation of the FCF is being taken care of.

Point 2 and 3 make sense, thanks. But what do you mean with the abbreviation "FV"?


Btw, I am sorry for any stupid/simple remarks or questions, as I have told I am just really new to this (but very eager) and the fact that English isn't my first language doesn't make it easier of course.

Myth465

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Re: MDT - Medtronic
« Reply #12 on: November 30, 2010, 04:39:49 PM »
Thanks for the comments Biaggio - This is my biggest problem, Beware of wanting to just buy and study later.

I cant speak to MDT. I am fairly ignorant when it comes to them. I can speak of some companies I own as an example. Here is some detail from my stock tracker about 2 companies I own - ESV and ATSG. Both have no FCF due to investments in Capex. Similar to MDT.

ATSG is more straight forward.

http://www.atsginc.com/ir/8k2010-08-10.pdf
http://www.google.com/finance?q=NASDAQ:ATSG&fstype=ii

They fly planes and lease them out. Long term contracts with not too much risk at this point. They make quite a bit in EBITDA. Around $150 million each year. Its growing but they have little FCF. All of this cash flow goes to buy planes.

Page 15 gives you a great breakdown. They tell you whats Maintenance capex and whats growth. It looks like they need to keep about $35 million of that cash to maintain the planes. We also have to pay some Interest, and a tiny bit of taxes. That leaves about $100 million. So with most of that going to planes, how do we look at that. Its not too smart to just assume all $100 is going to good uses.

Page 11 - Tells you that if we let Management keep the cash and reinvest it (lol not much choice here) we can get 11.7% return. Now this is on a dry lease. They can sell services - (the people to fly the plane or maintenance) and can increase the return. They could also lever it a bit. Ignoring all that, Management can make us $100 million a year, and if we leave the cash with them can make us $111 million next year, and $124 or so million the next year. Thats great. They are growing the business and doing it in a smart low risk way. IF you listen to them, they are in a growth industry and have alot of demand. They can just keep buying and leasing planes.

Given that I am quite happy to let them keep the cash, and will pay a bit more for this cash compounding machine. This is how I valued them as of 8/2010. Now that I know a bit more about them, I will likely move that multiple up to 10x. I understand the business more, see a few less risks, a few more growth prospects, and the debt is less and less an issue for me.

ATSG should probably be valued at 8 - 10 x FCF - Debt, due to the fact that revenues and earnings are both largely locked. ATSG also has significant built in growth, and its industry is also growing. If we took the estimated 2011 FCF of $150 million, placed an 8x multiple (not 10 due to debt and eventual required tax payments), and subtracted out debt ATSG would have a value of $913 million vs. a current market cap of $327 million.

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ESV has about $1 billion in cash and generates around $1 billion (give or take a few $100 million) in CF per year. You can buy the company for $6.5 billion. Sounds good, but thats a lot of cash. What is Management doing with that?

http://www.google.com/finance?q=NYSE:ESV&fstype=ii

Well it looks like most of it is going towards capex. OK, thats not so great if ESV requires that much reinvestment so we need more detail.

http://www.enscous.com/Investors/PresentationsWebcasts/default.aspx

Page 12 - They are building rigs, and contracting them at set day rates. Now its O&G related so things could go south fairly quickly. A rig at $500k a day is quite expensive with $40 oil, and they cant make enough of them at $90 oil. These guys have been spending the last few years building deep water rigs. They are almost done and have paid for all of it out of cash flow.

Page 22 - Details where that cash has gone. THe newbuild is great if they are getting a good return on the rigs, and sucks if they are not. Its tied to a commodity so things move around quite a bit. In early presentations they projected something around Mid - High teens ROIC on the investment. My guess is they get that on the first few rigs (contracted at high rates) and may not get it on the last 2 (not contracted). Rates have gone down. I am comfortable holding ESV but am glad I had the MOS available to protect me. I could probably call Management to get the maintenance capex, but at the end of the day its not that important. They are focused on ROIC, and things will move around quite a bit.

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ATPG which is listed in the investment ideas, has 0 FCF and I dont think they have ever had any. They invest money every year and so far have had nothing to show for it. I am fine with that. I know the company. They are bringing wells online which should make up for all of the losses and at some point they will be FCF positive.

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FV = Fair Value.
FCF and ROIC = Its a safe assumption, though one has to be careful with acquisitions. They could be overpaying, buying low margin low ROIC businesses, buying declining businesses, or investing in new product lines which will not have the same ROIC prospects. Plenty of ways to win, and unfortunately lose.

The questions are fine, I find I am growing by trying to find a logical way to explain things.  
« Last Edit: November 30, 2010, 05:34:08 PM by Myth465 »

Myth465

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Re: MDT - Medtronic
« Reply #13 on: November 30, 2010, 04:51:45 PM »
Good point about margin of safety, but wouldn't the duration until reflation also provid a good growth in earnings in the meanwhile? Maybe I am just a know-it-all and I should truly look for that 50% regardless of the company's strength. ;x

This is from my allocation plan. Stolen from Pabrai of course.

Primary Asset Allocation Strategy (Plan A & B)

Monish Pabrai - "Plan A is always to buy the Coke and Moody's of the world at 50% off. If you buy these type of businesses at that discount and it takes 2-3 years to trade at intrinsic value, you'll do very well. Intrinsic value will be much higher in 2 to 3 years. So 50 cents may be worth $1.30 or $1.40. This is always Plan A. But plan A is virtually impossible to execute across the entire portfolio because they are so very very rare. (Work Horse Positions)

When plan A fails, we go to plan B. Plan B is to buy at half off, regardless of business quality (as long as you're pretty sure intrinsic value is very unlikely to decline). Most of Pabrai Funds investments over the years have been Plan B.

----

You are following Plan A, hoping to buy at 80 cents of IV, and to sell in a few years at $1.3 or so. The question is do you have a Coke or a Moody's? (you may notice that wouldnt have worked so well with Moody's). I will need to find another company for my notes lol. For me Plan A has to feature a skilled capital allocator with skin in the game - L, BRK, FFH, or a host of other names. Either that or a government sanctioned Monopoly / Duopoly.

Plan A lets me sleep comfortably. I have about half my portfolio here.
Plan B keeps me up some nights, but has generated most of my returns.

Im young and poor, I can afford to lose some nights of sleep.
« Last Edit: November 30, 2010, 05:36:00 PM by Myth465 »

Myth465

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Re: MDT - Medtronic
« Reply #14 on: November 30, 2010, 05:15:40 PM »
I have never read Greenwald (and probably never will unless I get into Columbia lol). With that said I really liked this lecture about 2 years ago and its the core of my framework (in terms of how I set it up).

The quality sucks, but the Knowledge is there lol -

1. This video is a very good introduction to value investors for newbies.

http://www.gurufocus.com/news.php?id=97636

2.Regarding valuation methods, Greenwald advises investors to avoid recklessly using complicated DCF models which involves combining the bad information with good information, and ultimately the bad information dominates. Instead of projecting growth rates investors must try to ascertain the viability of the industry. For industries which are not viable one must consider the liquidation value. For a viable industry with no competitive advantages a reproduction value of the assets would be a more reliable method of valuation. For companies that are viable and have a moat, the franchise value will be a more correct estimate of value. - This is why I use multiples, and focus on the qualitative aspects of the investment.

http://www.gurufocus.com/news.php?id=97805

tombgrt

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Re: MDT - Medtronic
« Reply #15 on: December 20, 2010, 06:54:36 AM »
Kinda a late response but thanks for the information Myth, I'll look into it.


MDT turned out to be one of those others (read : biases) the last couple of months : lousy analysis on my part but short term amazing stock performance anyway.  ;D

About 2. : Reading "Value Investing from graham to buffett and beyond" (from Greenwald etc) atm and it is definitly giving me new insights about the order of importance on equity, earnings power and growth.  :)