In 2015, Anheuser-Busch stock hit a high of $130. This year, Anheuser-Busch hit a high of $136. The valuation of the stock was between 25x and 27x earnings, which made no sense to me given that the core brands were either stagnating or in decline (for example, Bud Light in 2016 ships out 10% less than it did in 2008). Even with 3G management taking aggressive action to raise the profit margin from 8% to 18%, the lack of organic sales growth meant that Anheuser-Busch didn’t deserve the type of premium you might pay for Visa, Alphabet, or Nike.
If you bought Anheuser-Busch at those valuation, you were probably setting yourself up for mid single digit returns. Nothing wrong with that–as long as you’re above 3.5% or so the decision to delay gratification still ends up making you richer–but I like to aim the bow a little higher and aim … Read the rest of this article!
In theory, buybacks can create more aggregate wealth than dividend payments because ordinary dividends get taxed at income tax rates while stock repurchases evade the reach of Uncle Sam. And the effectiveness of a stock buyback program is contingent upon the corporate management team getting the valuation. If you buy back stock when it’s cheap, you create value. If the stock is expensive and you repurchase stock, then you destroy value. That is why I have a special respect for Warren Buffett’s commitment to only repurchase Berkshire shares when it trades 1.2x book value or less–it is an implementation of the valuation requirement that is a necessary prerequisite for stock buybacks to create wealth.
Generally, the corporations that are most naturally suited to run successful buyback programs are those with large cash hoards, cheap access to borrowing, and/or stable cash flows even at the low points of the business cycle. … Read the rest of this article!
The balance sheet at Wynn Resorts (WYNN) is so terrible that, as a threshold matter, it precludes me from ever considering an investment in this casino stock.
Last August, Wynn Resorts opened its $4 billion ode to excess in Macau. The expenses were obscene, with the lake alone costing over $100 million. The best-case analyst scenario calls for this resort to contribute $210 million in annual profits to the bottom-line for Wynn shareholders. The pessimistic forecasts are not even sure that this resort will be profitable over the long term.
The problem is that the Macau Wynn Resort has been funded entirely with debt. This radically altered Wynn stock’s risk profile for the worse.
In its early days, Wynn Resorts used leverage responsibly. From its IPO until the Macau project, Wynn’s balance sheet was never leveraged more than ten to one. Even as recently as five … Read the rest of this article!
I never caught the bug to write glowing reviews about Sodastream (SODA) stock when it became fashionable during the 2011-2013 stretch that saw the price of its stock rise from $23 to $79. At the time, it had quickly grown its annual profits from $13 million to $43 million by selling $80 beverage carbonation systems that turn tap water into a carbonated soft drink that gives you about a dozen choices to mimic the soda offerings of Coca-Cola, PepsiCo, and Dr. Pepper.
Just three years later, the price of the stock has come down $36 and the $43 million profits have come down to the $23 million range. What insight would have made it possible to determine, in advance, that Sodastream was a passing fad rather than a rising insurgent capable of challenging the tri-opoly of Big Soda?
For me, the ex ante insights are two-fold:
First, you should be … Read the rest of this article!
In an old letter to shareholders of Berkshire Hathaway, Warren Buffett offered his opinion that tech stocks made poor candidates for long-term investments because:
“A business that must deal with fast-moving technology is not going to lend itself to reliable evaluations of its long-term economics. Did we foresee thirty years ago what would transpire in the television-manufacturing or computer industries? Of course not. Nor did most investors and corporate managers who enthusiastically entered those industries. Why, then, should Charlie and I now think we can predict the future of other rapidly evolving businesses?”
It is a correct observation that the price you decide to pay for a stock is determined, in large part, by your estimation of the corporation’s future cash flows.
However, I would modify Buffett’s ideas about the fast-changing nature of the tech industry to note that corporations with high cash balances insulate themselves from the traditional vicissitudes … Read the rest of this article!