Chapter five of A Fistful Of Valuations In The Style Of Warren Buffett & Charlie Munger by Bud Labitan
A Fistful Of Valuations - Chapter 6: Lessons Learned
Invest in “Higher Quality” businesses selling at a bargain price relative to its estimated intrinsic value. In this 2015 edition, I have a greater appreciation for the operating margin and net profit margin of a business than I did in 2010. Of the cases presented in this book, notice that JNJ, Johnson & Johnson has the most impressive track record of year after year profit margins. It is also the dividend and dividend yield leader of this group of businesses.
PRICE versus VALUE
Price is the market price that others pay. Value is the estimate of its true intrinsic value based on the real cash returns that it will produce. In this 2015 edition, I have proven that buying at a significant bargain worked in 4 of the 5 cases. I must also admit that I overestimated the growth potential of Jacobs Engineering, JEC, in my original estimate of 2010.
You may recall that I used an assumed FCF annual growth of 11 percent for the first 10 years and assume zero growth from years 11 to 15. I now realize that I was too optimistic in my growth assumptions. That was my mistake. At the time, I thought that global economic growth for JEC’s services would bounce back from the great recession.
Some businesses are more prone to economic downturns. They are like ships that cannot sail through ocean storms. In the JEC example, I used an assumed FCF annual growth of 11 percent for the first 10 years and assume zero growth from years 11 to 15. I was too optimistic in my growth assumptions. I thought that global economic growth for JEC’s services would bounce back from the great recession.
On the flipside, I underestimated the business potential of UnitedHealth Group both qualitatively and quantitatively. I used an assumed FCF annual growth of 7 percent for the first 10 years and assume zero growth from years 11 to 15.
Qualitatively, I underestimated the business potential of UnitedHealth to manage the forecasted changes talked about prior to passage of the Affordable Care Act.
The Patient Protection and Affordable Care Act (PPACA), commonly called the Affordable Care Act (ACA) or colloquially Obamacare, is a United States federal statute signed into law by President Barack Obama on March 23, 2010. Together with the Health Care and Education Reconciliation Act amendment, it represents the most significant regulatory overhaul of the U.S. healthcare system since the passage of Medicare and Medicaid in 1965. As a result of these changes it is clear the healthcare industry is evolving towards more value based health care. Hospitals and primary physicians will transform their practices financially, technologically and clinically to drive better health outcomes, lower costs and improve their methods of distribution and accessibility.
COMPETITIVE FORCES ON BRANDS
Some businesses are very sensitive to competition and can have their customers taken away easily by a new version of a product or service.
Johnson & Johnson brands hold a significant share of the consumer and pharmaceutical markets. JNJ is also the world's largest developer and manufacturer of medical treatment and diagnostic devices. Johnson & Johnson owns highly successful brands such as Tylenol, Band-Aid, and Neutrogena. The acquisition of Pfizer's Consumer Healthcare division in added respected brands such as Listerine, Lubriderm, Visine, and Neosporin. This further solidified Johnson & Johnson dominance in consumer health care.
On the flip side, Molson Coors has notable brands. However, the beer industry is seeing more competition form large company global competitors as well as a proliferation of local craft beers and ciders. Molson Coors has a portfolio of more than 65 strategic and partner brands, including signature brands Coors Light, Molson Canadian and Carling. Is this a situation of having too many alternatives and substitutes?
What is the biggest threat to Molson Coors profitability? Competitive substitutes and competitor pricing. The main competitors are: The Coca-Cola Company, Pepsico, Inc. PEP, Dr Pepper Snapple Group, Inc. DPS, Groupe Danone World Water Division, Nestlé Waters Private, ITO EN, LTD. Private, Red Bull GmbH Private, Cott Corporation COT, BTVCF.PK, Ocean Spray Cranberries, Inc. Private, NSRGY.PK, Diageo plc DEO, HINKY.PK, SBMRY.PK, Anheuser-Busch InBev BUD, Suntory International Corp. Private, Kraft Foods Inc. KFT, Pernod Ricard SA Private, GPMCF.PK, Constellation Brands Inc. STZ.