I came upon these great notes. I assume they are okay to post, but if I am asked to move them, I will obviously comply right away. Lecture #1 can be found here-http://www.valuewalk.com/value-investing-philosophy/lecture-1-introduction-investing/. I disabled downloading/printing etc. not to be mean, but for other reasons, please do not email me for a copy. Names had to be removed but should be clear to any value investor.

This 33 page document can be found here:

64698012 Class Notes 2 Intro and Duff and Phelps Case Study
This post responds to a reader’s question from Lecture #1:

I’ve been wondering more about the estimate of Maintenance Capex Greenwald gives on slides 13-14 and its reliance on revenue.  A company could theoretically grow revenue, but due to higher costs, end up with about the same EBITDA.  In that case, I’d want to assume that all was Maintenance Capex despite the revenue growth.  So I’m wondering if it might be better to estimate Growth Capex from the delta in EBITDA that CapEx produces, not the delta in revenue.


From page 96, fn. 1: Value Investing: From Graham to Buffett and Beyond

Companies generally report capex in their statement of cash flows. We assume that each year, a part of this outlay supports the business at its sales level for the prior year, and part is needed for whatever increase e in sales it has achieved. Companies generally have a stable relationship between the level of sales and the amount of plant, property, and equipment (PPE) it takes to support each dollar of sales. We then multiply this ratio by the growth (or decrease) in sales dollars the company has achieved in the current year. The result of that calculation is capex. We then subtract it from total capex to arrive at maintenance capex.

Also, you can simply ask the company’s CFO what amount of total capex goes to maintenance capital expenditures.  Certain companies like Iron Mountain “IRM”(Document Storage-physical and digital) will specifically break out the two type of capital expenditures.  In IRM’s case, its maintenance capital expenditures are low compared to revenues or any other accounting metrics because their storage facilities have long lives with minimal upkeep.

To: Lumilog, you do not want to assume in your example (A company could theoretically grow revenue, but due to higher costs, end up with about the same EBITDA.  In that case, I’d want to assume that all CapEx was Maintenance Capex despite the revenue growth) that all capex is maintenance capital expenditures (“MCX”) because you want to segment the company’s capital spending. You could have non-productive growth capex with stable MCX.   For example, what does it cost to maintain old stores at their current sales level vs. the cost to build and develop new stores?   


Another point, you have to understand the industry and competitive forces to calculate/estimate true MCX.  Take, Iridium, the satellite company that is launching new satellites into orbit, for example. That company may need to replace their new satellites sooner than expected due to new technology in competing telecom industries.  Investors who own Iridium could be vastly underestimating MCX and therefore, overestimating normalized earnings. Earning power value and thus asset value may be lower than what current investors estimate.

H/T to http://csinvesting.wordpress.com/