Manlobbi

Pls weigh in with the massive decline in the STEADFAST stocks

Need help

BRKB at 1.18x known peak BV

Over the the last year, all of the businesses discussed here have performed pretty well, with intrinsic value in all cases rising, and quotes conversely falling, resulting in access to some great investments today. IV10/price ratios available around 4.0 are better than they have generally been for a few years.

To value Alibaba, Phil Fisher would typically not just project current earnings, but to separately estimate what their sales and margins might be after many years, and understand the source of those sales. Alibaba make most of their money from a mixture of advertising (customers wanting to be seen above other customers in searches) and transaction costs. Sales rose 41% last 12 months but much of that is purchases of lower margin business. The income statement also shows that the main hit to earnings, over the last 12 months, is temporary:
https://www.macrotrends.net/stocks/charts/BABA/alibaba/finan…
Notice in the income statement above that operating income has actually risen over the last 12 months, whilst net income has fallen. The discrepancy is found in the “non-operating income/expense” line, which was usually around $8b but was -$6n over the last year. This line includes unrealized gains or losses from investments, and as valuations have fallen for the various investments they own on China, despite having no economic meaning, this has been marked on their income statement. The declining margins also relate to the purchase of logistic firms (allowing high revenue per dollar invested, but not receiving great earnings) but the purpose of these purchases are not capital efficiency but rather trying to build a long-term competitive moat for their main operations. Margins have also fallen, furthermore, with Alibaba wanting to aggressively starve the competition. Which of these are temporary and which are permanent? Regulation is continually cited as a deeply profound, massive, problem, but it impacts the quote far more than the value, and in fact probably just about no effect on the value ten years away. What has been hurting sales growth of the core business is, rather, the effect of good old-fashioned business competition, something that the news hardly even reported the last year. Management found that younger customers spend 3x in their fifth year of using Alibaba than their first year. Income will further rise in China over the next decade, as measured in US dollar (GDP per capita rising about 6% on-trend, normalized for Covid distraction). Regarding regulation, read the actual requirements rather than the evil-China news. You’ll find that what is being asked is benign and sensible. Their equity portfolio should be about break-even over the the April-June quarter (Chinese stocks up 6%) so the earnings report should look a lot better even in the coming quarter for trigger-sensitive speculators, but it doesn’t matter to investors - what we care about is what they’ll be reporting in 2032. Here’s a proxy to work out what their earnings power is today. Their EPS in 2021 was $8.35 (and $7.90 the previous year). In the next year, 2022, their operating earnings grew 9%. So is their normalized EPS lower or higher in 2022 than $8.35? With their reporting earnings in 2022 of only $3.59, it is hard to see the forest for the trees, but I would say their earnings power is at least $8 per share today. I am using $8 as the basis for my last year’s IV10 calculation, assuming similar margins, with earnings a little over 3x this $8 per share in 2032. This gives us a thunderous IV10/price ratio today of 5.9.


Alibaba        
  Earnings per Share 2022   	8 (normalized to 2021, when operating earnings were 9% *lower*)
  Earnings per Share 2026   	12.17
  Earnings per Share 2032 	26.9
  Earnings multiple at year 10 	24
  IV10           		645.54
  Price today   		110
  IV10/Price      		5.9

Numerous posters here have been updating the IV10/price ratios occasionally, sensibly changing just the denominator (‘price’). Indeed IV10 is rather stable with these Steadast firms, but keep in mind though that it also changes, and in this case it has risen significantly for some firms such as BAM and less so for Google and Alibaba.

Right now, BAM (IV10/price 4.2) and Google (IV10/price 3.9) - both with IV increases and quote decreases - have recently become fantastic investments. Alibaba’s quote has not fallen year to date so much, so it’s relative merit hasn’t improved (relative to the start of the year) as much as these other two.

As for other Steadfast candidates owned in the past, I thought that MKL might have returned to being a very good investment, owing to recent strong book value gains, and the quotation having languished, however after updating my spreadsheet with the latest reports, the IV10/price is still not that exciting at 2.4. Apple remains priced quite reasonably - not especially cheaply - and has an IV10/price of only 2.2. So I’ll skip them in discussion until they become more “competitive” (to an investor) again.


Google
	Earnings per Share normalized on-trend		110
	Average earnings growth rate			13.00% *
	Earnings per Share at year 10			373.4
	Earnings multiple at year 10			25
	IV10   						9335.06
	Price today					2386
	IV10/Price					3.9
  • Trend rate of last 3 years: earnings grew 15% per year on trend (revenue growing on trend at 18%). Advertising spend still in early days. The spending today will look pretty small compared to what is being spent on online advertising in 2032. Although we feel we are immune to advertising, it is dead wrong. If you introduce a product unknown to the market, then advertise aggressively so millions are buying it, when you run surveys asking every customer how they found out about the product, virtually no-one will cite the advertising (despite it being nearly 100% causal) instead citing their own personal initiatives and preferences. If you know a little about the industry, advertising works better than most understand.

Brookfield Asset Management	
	Shares outstanding					1628
	Book value per share today				25.32
	Fee business (25 x “Fee related earnings” excl. carry)	30.71
	IV0. Total value, 1.0 x book, plus fee business		56.04
	Accumulated annual value generation including dividends: 13.00%
	IV10   							190.22
	Price today						45.75
	IV10/price						4.2

With Brookfield Asset Management’s imminent separation of the fee business from the physical assets (the latter remaining as main parent company), which is now virtually certain to go ahead, this involves a public float of only 25% of the fee business. It was a cunning idea. The remaining 75% of the fee business is kept by BAM. Think about this for a moment. The 25% that is floated will involve greedy investors bidding the price to a multiple comparable to the competition (and I believe higher, as BAM has been growing fees faster than just about every asset manager out there). That is fine, but remember BAM still owns 75% of the new public firm. IFRS marks investments on the books at ‘fair value’ (as I understand, this is usually not mark-to-market value but rather capitalising the cash flow, correct me if I’m wrong). But whatever method they use to do the fair value calculation, is it not true that BAM should see a huge asset value from the 75% stake in the fee business, added to their book value? (Presently the fee business is not capitalised, which is why we add it separately on top of the book value itself when calculating BAM’s intrinsic value). If that is the case, there would an enormous boost to BAM’s book value after the public float. Can anyone confirm if BAM will mark the 75% stake in the floated fee business at market value, or at a fee earnings cash flow multiple? I’d rather the latter, probably, as it would make it easier to track BAM’s value - we’d just look at book value alone as a pretty good proxy for the whole business value, which would be highly independent to the stock price.

Berkshire Hathaway also is not a bad investment from here, though it does not match up to Google or BAM. It trades closer to book value, but the rate of increase in observable IV being a little lower really has a large effect over ten years. If you want to make a shorter-term bet, perhaps Berkshire is better than it looks over ten years, but most investors don’t do as well as they anticipate/hope when strategizing in that way.

Berkshire Hathaway				
	Book Value per Share				230
	10 year increase in Book Value per Share	8.00%
	Book Value per Share 10 years away		496.55
	Intrinsic Value = BV per Share * 1.5		744.83
	Price today					278
	IV10/Price					2.7

Looking good with these IV10/price ratios. I also like the generally pessimistic feeling in the air (from the perspective of favoring purchasing over selling) these days. But most importantly look further ahead than others (in those very few spots where the sky happens to be clear) to compare what we are buying now in 2022 compared to what we are getting in 2032, then sit back (and read mostly non-investing subjects, preferably having an aesthetic dimension) and be ludicrously patient.

  • Manlobbi
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Manlobbi, I will add baba also owns 1/3 of Ants which is valued at least USD 100B ($17/share), it also has $18/share of net cash, and both listed and unlisted investments($24/share). That’s a total of $59/share. If you exclude these out, it’s trading at an even lower valuation.

From BoA/Merrill:
“We use a multi-year DCF to capture the long-term growth profile of the company’s business portfolio, capex, and investment. Our SOTP PO is US$162 (HK$159/HK share): 1) US$121 from our DCF valuation of the Alibaba operations (already reflecting cash outflow for new initiatives such as Ele.Me, Kaola and Cloud, net cash & liquid assets of US$18, discount rate of 9%, mid-term FY20-26E FCF CAGR of 3%, 4% terminal growth), 2) US$24 from its LT investments consisting of listed entities on market value (US$9) and unlisted entities on value reported on B/S (US$15), 3) US$17 from Ali’s stake in Ant Group, with an updated asset value at PV of roughly US$140b based on 18x 21E, comparable to major fintech companies including A-share listed ones and fintech software providers.”

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Manlobbi,
After reading your post again, I think you might have overstated BABA’s normalized earning.
The $8 eps include the “ non-operating income/expense” which I think is largely from earnings of Ants and listed securities.
So it’s better to use EPS without them, which is roughly $4 EPS and then add back these investments ($50/share) to the IV.

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Most will never buy BABA due to VIE structure and lack of trust in Chinese Co.'s

BRKB may have the least upside but can sleep VERY well at night.

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