Blind Stock Valuation-Results


I posted this two months ago:

Geoff Gannon of Gannon On posted this great stock valuation exercise. Everyone should talke it. Even though there are many many details missing it is still a great way to think about how you analyze stocks. As he mentions in the article you only have ten minutes to analyze.

Here is the link to the test from Geoff’s website (How Much Would You Pay for This Stock? – Blind Stock Valuation #1) which I also is posted below, I also posted my answer to the question.

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In an earlier post, about how to value a business, I said:

Here’s my advice for how to really learn to value a stock. Start with a stock that’s pretty easy to value and completely unknown to you. Don’t look at the stock price! Just try to value the whole company.

Ideally, you should be able to black out the company name, business description, and stock price on a Value Line page and still be able to come up with an approximate appraised value for the business within 10 minutes.

So here’s a blind trial I’ve prepared…

How much would you pay for this stock?

Answer by emailing me your per share appraisal. In other words, tell me how much the stock is worth. I’ll pick the best email answer I get and give the winner a copy of my favorite version of Benjamin Graham’s The Intelligent Investor.

You have until the end of January to send me your email.

Talk to Geoff About Blind Stock Valuation

Here is my response below:

Hi Geoff,

Not sure if you remember me but we have been in touch briefly in the past I
write for GF a lot. I loved your idea of a test, not doing this for the book,
I have read it numerous times, but as an exercise  to make me think.

I am trying to take your test obviously there is very limited data so I am
working off that. I do not like the fact that NI and OCF did not increase
over the entire period but since it was a very volatile time period (as
demonstrated by the financials and by not living in a cave) I am using
averages for everything.

I see subtracting Assets from equity there is almost no debt (definitely needs to
be valued as a going concern) and GM% average is ~23 I want to say this is a
tech company. Although, I have no idea why but costs went up in 08 very very
strange due to deflation during the period. I am surprised revenue went up during that period  although that confirms my suspicion this might be a tech company (definitely not bank industrial, materials or anything cyclical). Maybe they were using aggressive accounting
methods in prior years to reduce expenses (no idea).

Average Revenue ~97, avg earnings ~22.7, OCF ~32, Avg capex ~16.3, dividend
~4.2 ~FCF 11.5. Sometimes I do not include dividends

avg EPS 2.15*12=25.82, avg FCF per share 1.1*9.5=10.45. The two diverege
dramatically. I like EPS and FCF but FCF seems to indicate a diff picture I will give it a 60% weighting to be conservative to it, and earnings 40% I come up with $16.61 per share

( I added this in afterwards, Note: I am using a buy price and would apply a higher multiple to IV)


Geoff responded to me almost immediately and had positive praise for my analysis. I do not want to reveal any further information that might give hints to others. I will post Geoff’s reponse once the contest ends (assuming he agrees. I am sure he will) and will be following up with his answer when he releases it.

Geoff is out with the answer and although I was not the winner I was very close. As Geoff states below the winner picked IV of $17.25, most people picked $20-30. I on the other hand came up with $16.61.

When it came to the industry I made an error. I saw stable earnings (during financial crisis) and lots of cash so I assumed it must be tech. However, the dividend was high for a tech company. As explained below the company is a utility. This explains the high dividend and earnings stability, but most utilities carry a much higher debt load. I therefore think that tech was a good guess despite the high dividend.

See Geoff’s full post below:


Blind Stock Valuation #1 – Watlington Waterworks


A couple months ago, I posted a blind stock valuation. Basically, I just gave you 7 important financial figures for each of the last 6 years and asked you to value the stock as best you could. I didn’t give you the name of the stock.

And – although I didn’t tell you this – I multiplied all figures by 10 to eliminate any bias caused by you realizing this was a very small stock.

I promised I would give a copy of Ben Graham’s The Intelligent Investor to the reader who sent in the best email telling me how much the stock was worth.

The stock was actually a foreign microcap called Watlington Waterworks. It’s a water company on the island of Bermuda.

Bermuda is a rich island nation – actually a territory of the United Kingdom – 650 miles off the coast of South Carolina. It has a population under 70,000. Bermuda’s economy is based around insurance and American tourism. Its currency is convertible into U.S. dollars at a fixed 1-to-1 ratio.

There is no fresh water on the island. Bermuda’s water comes from removing salt from seawater and collecting rainwater.

This is an analytical exercise. Not a stock tip. In all likelihood, your broker doesn’t have the ability to buy stocks for you in Bermuda.

Here is the information I provided about the company:

And here is the best email a reader sent in:

1) Growth in sales and earnings is roughly tracking inflation.  This is a mature, roughly no-growth business so I will pay no premium for growth.

2) FCF is consistently less than earnings.  So this is a business with a significant amount of long-term assets which causes CapEx to exceed accounting depreciation due to the effect of inflation.

3) FCF in this case is a more relevant determinant of value than earnings.

4) The FCF yield on equity has averaged roughly 10% over the 6-yr period presented.

5) My hurdle rate for investment is 10%, therefore I am willing to purchase the company at 1X equity.

6) So I would be willing to pay up to 181/10.5 or approximately $17.25 per share.

7) An additional consideration: The company is carrying very little debt and has stable earnings.  As a control buyer or an activist investor, I would give strong consideration to leveraging up my equity.

The stock trades on the Bermuda Stock Exchange. Shares last traded hands at $13.95 a share.

Most readers sent in valuation estimates in the $20 to $30 a share range.

Thanks to everyone who participated.

Talk to Geoff About Blind Stock Valuation


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