Subject: Re: OT: S&P 500
Jim, your last post might be for me the perfect opportunity to learn and to find out where my thinking when trying to evaluate a company might be very wrong.
You say: before taking into account future prospects (which is of paramount importance), the big 7 tech do seem to be very richly valued compared to the rest of the crowd: over twice the price for each dollar of current earnings.
"richly valued ..." measured on "... current earnings". Does that matter at all? Or does it only distract from what counts if trying to compare? As you here and always point out it's about future earnings and we are talking about very different historical and probably future growth rates for "tech" vs. "old fashioned".
Let me try to explain my thoughts about valuation. The goal is to express "Cheapness/Expensiveness" as the Multiple of a companies future earnings you have to pay now to buy a share (so it's actually based on a certain guy in Monaco (on Manlobbi too, but without his "Steadfastness")).
For earnings in 5 years I estimate RevenueGrowth% and OperatingMargin%. For OperatingMargin% I look at the last 10+ years. If steady in the past, I use that same number for the future, if not a bit lower one.
The difficult part is to estimate 5 year RevenueGrowth%. Methodology: I look at RevenueGrowth% for
A) the last 10 years (2012-2022)
B) the last 5 years (2017-2012)
C) the last 5 years (2012-2017)
Reason for looking not only at A, but separately at B and C too: To get a feel whether RevenueGrowth% is slowing (and if so, how fast) the last years compared with before.
To avoid start/end point effects I do the same shifted by 3 years, looking for 2009-2019, 2009-2014 and 2014-2019. This also excludes eventual temporary Covid19 effects.
This smoothed historical RevenueGrowth% becomes my future 5y-RevenueGrowth%:
- If historically steady I project it unchanged into the future (Examples: KMX, VZ)
- If unsteady/slowing I project it conservatively, using lower numbers than the 10-year average (applying for example to BRK because of the last years)
With this methodology I get the following numbers for a maybe representative "Tech-Non-Tech" pair:
BRK META
5y-RevenueGrowth%: 7% 15%
5y-Op.Margin%: 15% 35%
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CurrentRevenue: $286B $117B
CurrentEarnings: $43B $41B (Using my longterm OpMargin%)
Earnings in 5 years: $63B $125B
CurrentMarketCap: $784 $773
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Price/5y-Earnings MULTIPLE: 13x 6.2x
Resulting in META with the above assumptions being only half as expensive as BRK and a far better buy. So much so that even if their Growth slowed to 10% they would still be a better buy than BRK.
Some other interesting results from this exercise:
- By FAR the lowest Multiple has BABA: 1.4x
- The next best thing is not META or another fast growing Tech Company, but instead KMX with a Multiple of 4.4x (Assumptions: 5y-RevGrowth%=12% / 5y-Op.Margin%=6%) and VZ with 5.6x (Assumptions: 5y-RevGrowth%=4% / 5y-Op.Margin%=15%). Only then comes META with 6.2x
- The here so much hyped GOOGL on the other hand with a Multiple of 9.3x is just "interesting", in the middle between META and BRK, the same as old fashioned WRB with 9.9x (which here is seen as too expensive), worse than PYPL with 7x.
- From the companies on my list the most steady earners/growers, with the greatest consistency over the years are KMX, VZ, GOOGL, WRB, MKL, DG and AMZN.
- AAPL and BRK on the other hand are less steady. With BRK's numbers additionally not looking that great the last years, which very much surprised me, and with AAPL's Multiple of 15.3x being very expensive, not far from AMZN with 21x (Btw: COSTCO and NESTLE are equally expensive).
Critique, please.
I know I am an amateur. Surely there are many points where I am partly or totally wrong. No offense taken if you tell me "Better don't try to value companies" :-)