Valuations

1

Valuations

30 Intrinsic Value Estimations

in the style of

Warren Buffett and Charlie Munger

By Bud Labitan

ABRIDGED VERSION CHAPTERS 1=3 / 30

Copyright © 2010

All rights reserved.

Printed in the United States of America.

No part of this book may be used or reproduced

in any manner without permission.

ISBN 978-0-557-48333-4

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TABLE OF CONTENTS

INTRODUCTION

Chapter 1 : AAPL, An estimated valuation of Apple Inc. 5/6/2010

Chapter 2 : ABC, AmerisourceBergen Corp 5/11/2010

Chapter 3 : APOL, Apollo Group Inc. 5/5/2010

…end of abridged version

Chapter 4 : BDX, Becton Dickinson & Co. 5/8/2010

Chapter 5 : BUD, Anheuser Busch Inbev ADR 5/11/2010

Chapter 6 : CMCSA, Comcast Corp. 5/6/2010

Chapter 7 : CSCO, Systems Inc. 5/6/2010

Chapter 8 : CX, of Cemex ADR 5/6/2010

Chapter 9 : DIS, Walt Disney Co. 5/11/2010

Chapter 10 : DOW, Dow Chemical. 5/9/2010

Chapter 11 : EBAY, eBay Inc. 5/9/2010

Chapter 12 : FO, Fortune Brands Inc. 5/13/2010

Chapter 13 : GCI, Gannett Co Inc. 5/6/2010

Chapter 14 : GD, General Dynamics Corp. 5/12/2010

Chapter 15 : GE, General Electric Co. 5/7/2010

Chapter 16 : HD, Home Depot Inc. 5/12/2010

Chapter 17 : INTC, Intel Corp. 5/6/2010

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Chapter 18 : IRM, Iron Mountain Inc. 5/6/2010

Chapter 19 : JEC, Jacobs Engineering Group Inc. 5/6/2010

Chapter 20 : JNJ, Johnson & Johnson 5/6/2010

Chapter 21 : KO, Coca-Cola Co. 5/9/2010

Chapter 22 : LOW, Lowe's Companies Inc. 5/12/2010

Chapter 23 : MCK, McKesson Corp. 5/10/2010

Chapter 24 : MMM, 3M Co. 5/9/2010

Chapter 25 : MSFT, Microsoft 5/6/2010

Chapter 26 : PEP, Pepsico Inc. 5/9/2010

Chapter 27 : PG, Procter & Gamble Co. 5/9/2010

Chapter 28 : TAP, Molson Coors Brewing Co. 5/9/2010

Chapter 29 : UNH, UnitedHealth Group Inc. 5/4/2010

Chapter 30 : YUM, YUM! BRANDS INC. 5/11/2010

APPENDIX

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ACKNOWLEDGMENTS

This book is dedicated to my mother Rae Mikels Labitan. I am also grateful to

my family and friends for their support in the writing of this manuscript.

Much of what I have learned has come from the letters of Warren Buffett to the

shareholders of Berkshire Hathaway Inc. and the letters and speeches of Charlie

Munger. In addition to each company‟s SEC filings, additional data used for

these valuation cases came from multiple online sources. These included:

moneycentral.msn.com, finance.yahoo.com, wikinvest.com,

google.com/finance, and morningstar.com

I have tried to approach each valuation estimation without emotional bias. Any

errors, assumptions, or omissions are my own. In reality, these businesses may

outperform or they may underperform any of my projections.

Bud Labitan

[email protected]

mailto:[email protected]

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INTRODUCTION

This book offers 30 sample “intrinsic value per share” business valuations in

the style that Warren Buffett and Charlie Munger may use. In each case I tried

to simulate an approach that they would take to valuing a business, based on

what they have written and talked about. However, all of the growth

assumptions used are my own. No consultation nor endorsement was sought

with Mr. Buffett or his business partner Mr. Munger. The examples given here

are chosen for educational and illustrative purposes only. The valuation cases

are estimations written in a style that emphasizes a focus on free cash flow

and the number of shares outstanding. Readers are also repeatedly encouraged

to think about the business‟ competitive position. In reality, these businesses

may outperform or they may underperform any of my projections.

As a book, “Valuations” came about in my mind after I had posted a few

example valuations at seekingalpha.com. I wanted a book that showed cases on

how to sensibly value a business. Previously, I had designed software for myself

that captures data and generates a template report that reads like a

conservatively written document. The reports are full of warnings and

admonitions. For example, take a look at this statement: “More importantly,

before we make a purchase decision, we must decide ( filter #1 ) if XYZ

business is a high quality business with good economics. Does XYZ business

have ( filter #2 ) enduring competitive advantages, and does XYZ business

have ( filter #3 ) honest and able management.”

My first book, "The Four Filters Invention of Warren Buffett and Charlie Munger"

talked about the thinking steps they perform in "framing and making" an

investment decision. I came to the conclusion that the genius of Buffett and

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Munger's filtering process was to "capture all the important stakeholders" in a

"multi-variable" equation or process. Their rational approach captures Products,

Enduring Customers, Managers, and Margin-of-Safety... all in one mixed

"qualitative + quantitative" process. In my view, their “decision framing

process” was a remarkable advance in Behavioral Finance.

While you will find a lot of repetition of these warning phrases in this book, I

have since gone back and added some material about competitive

advantages and competitive disadvantages, as well as their competitors.

As far as the ability and trustworthiness of each businesses managers, I must

leave this component of evaluation to you the reader. There are hints into their

abilities and trustworthiness hidden in the past performance records and in their

compensation numbers.

Finally, thank you to the folks who run “seekingalpha.com” for allowing me to

post my ideas in Bud Labitan‟s Instablog. I hope you enjoy this unconventional

book, and benefit from the attempts made to advance our knowledge.

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Chapter 1

An estimated valuation of Apple Inc. AAPL 5/6/2010

Apple Inc. (Apple) designs, manufactures, and markets personal computers,

mobile communication devices, and portable digital music and video players, and

sells a variety of related software, services, peripherals, and networking

solutions. The Company sells its products worldwide through its online stores, its

retail stores, its direct sales force, and third-party wholesalers, resellers, and

value-added resellers. In addition, the Company sells a variety of third-party

Macintosh (Mac), iPhone and iPod compatible products, including application

software, printers, storage devices, speakers, headphones, and various other

accessories and peripherals through its online and retail stores, and digital

content and applications through the iTunes Store. The Company sells to

consumer, small and mid-sized business (SMB), education, enterprise,

government and creative customers. In December 2009, the Company acquired

digital music service Lala.

Last Price $255.99

Does Apple Computer make for an intelligent investment or intelligent

speculation today? Let us do a rough estimation of intrinsic value per share.

Starting with a base estimate of annual Free Cash Flow at a value of

approximately $9,500,000,000 and the number of shares outstanding at

909,900,000 shares; I used an assumed FCF annual growth of 13 percent for the

first 10 years and assume zero growth from years 11 to 15. Review the Free

Cash Flow record here, and think about its sustainability:

http://quicktake.morningstar.com/stocknet/CashFlowRatios10.aspx?Country=US

A&Symbol=AAPL

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The resulting estimated intrinsic value per share (discounted back to the

present) is approximately $243.12.

Market Price = $255.9 Intrinsic Value = $243.12 (estimated) Keep in mind,

and compare that Coca Cola‟s Debt/Equity ratio is .47 or 47 percent; the

Debt/Equity ratio here = 0 Price To Value (P/V) ratio = 1.05 No bargain

appears present at this time.

More importantly, before we make a purchase decision, we must decide ( filter

#1 ) if AAPL is a high quality business with good economics. Does AAPL have (

filter #2 ) enduring competitive advantages, and does AAPL have ( filter #3

) honest and able management. The current price/earnings ratio = 21.7 It „s

current return on capital = 29.12

Using a debt to equity ratio near 0, Apple Computer shows a 5-year average

return on equity = 29.2

The biggest threat to profitability is: Cheaper substitutes and cloned

products. The main competitors are: Microsoft, Hewlett-Packard, Dell, Cell phone

makers, and other small device manufacturers.

The Main Competitive Advantage currently is: Leadership in designing

aesthetically pleasing tech devices like the iPhone, Mac personal computers, and

the new iPad.

Further discussions on competitive pressures can be viewed here:

http://www.wikinvest.com/stock/AAPL

You the reader can insert your notes about management here:

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Some industries have higher ROE because they require no assets, such as

consulting firms. Other industries require large infrastructure builds before they

generate a penny of profit, such as oil refiners. Generally, capital-intensive

businesses have higher barriers to entry, which limit competition. But, high-

ROE firms with small asset bases have lower barriers to entry. Thus, such firms

face more business risk because competitors can replicate their success without

having to obtain much outside funding.

Growth benefits investors only when the business in point can invest at

incremental returns that are enticing; only when each dollar used to finance the

growth creates over a dollar of long-term market value. In the case of a low-

return business requiring incremental funds, growth hurts the investor. The

wonderful companies sustain a competitive advantage, produce free cash

flow, and use debt wisely.

Does Apple Computer make for an intelligent investment or speculation today?

Time is said to be the friend of the wonderful company and the enemy of the

mediocre one. Before making an investment decision, seek understanding about

the company, its products, and its sustainable competitive advantages over

competitors. Next, look for able and trustworthy managers who are focused

more on value than just growth. Finally ask: Is there a bargain relative to its

intrinsic value per share today?

Great investment opportunities come around when excellent companies are

surrounded by unusual circumstances that cause the stock to be misappraised.

In terms of Opportunity Cost, is AAPL the best place to invest our money today?

Or, are there better alternatives? How will Apple Computer compete going

forward? Technologies change and new technology can emerge. Keep in mind

that a financial report like this is a reflection of the past and present. It may be

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used to project a future, but it may not account for factors yet unseen.

Therefore, pay attention to competitive and market factors that may affect

changes in profitability.

From the Form 10-Q for the quarterly period ended March 27, 2010, Apple

stated: Although most components essential to the Company‟s business are

generally available from multiple sources, certain key components including but

not limited to microprocessors, enclosures, certain liquid crystal displays

(“LCDs”), certain optical drives and application-specific integrated circuits

(“ASICs”) are currently obtained by the Company from single or limited sources,

which subjects the Company to significant supply and pricing risks. Many of

these and other key components that are available from multiple sources

including but not limited to NAND flash memory, dynamic random access

memory (“DRAM”) and certain LCDs, are subject at times to industry-wide

shortages and significant commodity pricing fluctuations. In addition, the

Company has entered into certain agreements for the supply of key components

including but not limited to microprocessors, NAND flash memory, DRAM and

LCDs at favorable pricing, but there is no guarantee that the Company will be

able to extend or renew these agreements on similar favorable terms, or at all,

upon expiration or otherwise obtain favorable pricing in the future. Therefore,

the Company remains subject to significant risks of supply shortages and/or

price increases that can materially adversely affect its financial condition and

operating results.

Apple and other participants in the personal computer, mobile communication

and consumer electronics industries also compete for various components with

other industries that have experienced increased demand for their products. In

addition, the Company uses some custom components that are not common to

the rest of the personal computer, mobile communication and consumer

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electronics industries, and new products introduced by Apple often utilize custom

components available from only one source until the Company has evaluated

whether there is a need for, and subsequently qualifies, additional suppliers.

When a component or product uses new technologies, initial capacity constraints

may exist until the suppliers‟ yields have matured or manufacturing capacity has

increased.

In summary, using a debt to equity ratio near 0, Apple Computer shows a 5-

year average return on equity = 29.2 . Based on a holding and compounding

period of 10 years, and it is not currently a bargain relative to our intrinsic

value estimation, and a relative FCF growth of 13 percent, then the estimated

effective annual yield on this investment may be greater than 12.5%. Going

forward, are there any transformational catalysts or condition indicators

imaginable on the horizon? Technologies change and new technologies will

appear on the scene. Would brand loyalty keep customers buying here?

SEC Filings online:

http://www.sec.gov/cgi-bin/browse-

edgar?company=&CIK=AAPL&filenum=&State=&SIC=&owner=include&action=

getcompany

Bud Labitan, Author of the new book „Price To Value.‟ Author of 'The Four Filters

Invention of Warren Buffett and Charlie Munger‟

Disclosure: No current positions

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Chapter 2

An estimated valuation of ABC, AmerisourceBergen Corp 5/11/2010

AmerisourceBergen Corporation (AmerisourceBergen) is a pharmaceutical

services company, with operations in the United States and Canada. Servicing

both healthcare providers and pharmaceutical manufacturers in the

pharmaceutical supply channel, the Company provides drug distribution and

related services. It distributes an offering of brand name and generic

pharmaceuticals, over-the-counter healthcare products, home healthcare

supplies and equipment, and related services to a variety of healthcare

providers, including acute care hospitals and health systems, independent and

chain retail pharmacies, mail order pharmacies, medical and dialysis clinics,

physicians, long-term care and other alternate site pharmacies, and other

customers. The Company operates in the pharmaceutical distribution segment.

In October 2008, the Company completed the divestiture of its former workers‟

compensation business, PMSI. On May 29, 2009, the Company acquired

Innomar Strategies Inc. a Canadian specialty pharmaceutical services company,

for approximately $15 million CDN ($13.8 million USD) in cash. The company

believes AmerisourceBergen now has the largest and broadest commercialization

service offerings to pharmaceutical and biotechnology manufacturers in Canada

Does ABC make for an intelligent investment or intelligent speculation today?

Let us do a rough estimation of intrinsic value per share. Starting with a base

estimate of annual Free Cash Flow at a value of approximately $900,000,000

and the number of shares outstanding at 283,000,000 shares; I used an

assumed FCF annual growth of 5 percent for the first 10 years and assume zero

growth from years 11 to 15. Review the Free Cash Flow record here, and

think about its sustainability:

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A&Symbol=ABC





Debt/Equity ratio here = .48 Price To Value (P/V) ratio = .72 and the estimated

bargain = 28. percent.


#1 ) if ABC is a high quality business with good economics. Does ABC have (

filter #2 ) enduring competitive advantages, and does ABC have ( filter #3 )

honest and able management. The current price/earnings ratio = 15.5 It „s

current return on capital = 13.91 Using a debt to equity ratio of .48, ABC

shows a 5-year average return on equity = 12.3

The biggest threat to profitability is: Suppliers and Distribution Competitors

like Wal-Mart and the pharmaceutical distribution services of McKesson (MCK)

and Cardinal Health (CAH). The main competitors are: Wal-Mart (WMT),

McKesson (MCK) and Cardinal Health (CAH).

The Main Competitive Advantage currently is:

The AmerisourceBergen RFID system can monitor product placed in shipping

totes as they move through the picking, packing, and shipping processes. As

each tote leaves the distribution center their EPCIS software will record the time

and location of each unit leaving the premises as well as its intended destination

so that AmerisourceBergen has a complete record of the history of all RFID

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tagged drugs. This is a temporary advantage that ABC competitors can easily

copy.

Further discussions on competitive pressures can be viewed here:

http://www.wikinvest.com/stock/ABC















Does ABC make for an intelligent investment or speculation today? Time is said

to be the friend of the wonderful company and the enemy of the mediocre one.

Before making an investment decision, seek understanding about the company,

its products, and its sustainable competitive advantages over competitors.

Next, look for able and trustworthy managers who are focused more on value

18

than just growth. Finally ask: Is there a bargain relative to its intrinsic

value per share today?



In terms of Opportunity Cost, is ABC the best place to invest our money today?

Or, are there better alternatives? How will ABC compete going forward?

Technologies change and new technology can emerge. Keep in mind that a

financial report like this is a reflection of the past and present. It may be used to

project a future, but it may not account for factors yet unseen. Therefore, pay

attention to competitive and market factors that may affect changes in

profitability.

From an interesting article about Long-term care pharmacy Chem Rx

Corporation on financierworldwide.com on May 12, 2010:

http://www.financierworldwide.com/article.php?id=6690

Long-term care pharmacy Chem Rx Corporation filed for Chapter 11 bankruptcy

protection on Tuesday along with certain operating subsidiaries. In court

documents, the US company listed assets of $169.7m and debt of $178.3m as of

28 February. “Although the debtors‟ businesses remain strong, the debtors are

too highly leveraged and lack adequate liquidity to sustain operations long term

without a restructuring,” Gary Jacobs, Chem Rx chief financial officer, explained

in court papers. Among the company‟s largest unsecured creditors are

AmerisourceBergen, owed $9.55m, and Anda Generics Inc., owed $6.17m,

according to the court petition. “This restructuring process will provide us with

the court protection necessary to ensure that Chem Rx continues to provide its

services. We expect to reach an agreement with our lenders that will allow us to

http://www.financierworldwide.com/article.php?id=6690

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facilitate a reorganization and position us strongly for the future,” said Jerry

Silva, Chem Rx CEO, in a statement.

In summary, using a debt to equity ratio of .48, ABC shows a 5-year average

return on equity = 12.3 . Based on a holding and compounding period of 10

years, and a purchase price bargain of 28. percent, and a relative FCF growth of

5 percent, then the estimated effective annual yield on this investment may be

greater than 8.3%. Going forward, are there any transformational catalysts or

condition indicators imaginable on the horizon? Technologies change and new

technologies will appear on the scene. Would brand loyalty keep customers

buying here?

SEC Filings online:


edgar?company=&CIK=ABC&filenum=&State=&SIC=&owner=include&action=g

etcompany

Bud Labitan, Author of the new book „Price To Value.‟ Author of 'The Four Filters

Invention of Warren Buffett and Charlie Munger‟

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Chapter 3

An estimated valuation of Apollo Group Inc. APOL 5/5/2010

Apollo Group, Inc. (Apollo Group) is a private education provider. The Company

offers educational programs and services both online and on-campus at the

undergraduate, graduate and doctoral levels through its wholly-owned

subsidiaries, The University of Phoenix, Inc. (University of Phoenix), Western

International University, Inc. (Western International University), Institute for

Professional Development (IPD), The College for Financial Planning Institutes

Corporation (CFFP), and Meritus University, Inc. (Meritus). The Company has a

joint venture with The Carlyle Group (Carlyle), called Apollo Global, Inc. (Apollo

Global), to pursue investments primarily in the international education services

industry. During the fiscal year ended August 31, 2009 (fiscal 2009), Apollo

Global completed the acquisitions of BPP Holdings plc (BPP) in the United

Kingdom, Universidad de Artes, Ciencias y Comunicacion (UNIACC) in Chile, and

Universidad Latinoamericana (ULA) in Mexico.

Does Apollo Group make for an intelligent investment or intelligent speculation

today? Let us do a rough estimation of intrinsic value per share. Starting with a

base estimate of annual Free Cash Flow at a value of approximately

$800,000,000 and the number of shares outstanding at 152,000,000 shares; I

used an assumed FCF annual growth of 10 percent for the first 10 years and

assume zero growth from years 11 to 15. Review the Free Cash Flow record

here, and think about its sustainability:


A&Symbol=APOL

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Debt/Equity ratio here = .13 Price To Value (P/V) ratio = .57 and the estimated

bargain = 43. percent.


#1 ) if APOL is a high quality business with good economics. Does APOL have (

filter #2 ) enduring competitive advantages, and does APOL have ( filter #3

) honest and able management. The current price/earnings ratio = 13.8 It „s

current return on capital = 41.33

Using a debt to equity ratio of .13, Apollo Group À' shows a 5-year average

return on equity = 61.8

The biggest threat to profitability is: Competition from major universities

and technical colleges who offer online educational services at competitive

pricing. There is also the possibility of competition from international colleges

competing in this space when internet speeds increase.

The main competitors are: CECO = Career Education Corp. DV = DeVry, Inc.

ESI = ITT Educational Services Inc. (Industry = Education & Training Services.)

The Main Competitive Advantage currently is: They are a first mover in

leading the transformation of educational service delivery. Further discussions

on competitive pressures can be viewed here:

http://www.wikinvest.com/stock/APOL


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Does Apollo Group À' make for an intelligent investment or speculation today?

Time is said to be the friend of the wonderful company and the enemy of the

mediocre one. Before making an investment decision, seek understanding about

the company, its products, and its sustainable competitive advantages over

competitors. Next, look for able and trustworthy managers who are focused

more on value than just growth. Finally ask: Is there a bargain relative to its

intrinsic value per share today?



In terms of Opportunity Cost, is APOL the best place to invest our money today?

Or, are there better alternatives? How will Apollo Group À' compete going

forward? Technologies change and new technology can emerge. Keep in mind

24

that a financial report like this is a reflection of the past and present. It may be

used to project a future, but it may not account for factors yet unseen.

Therefore, pay attention to competitive and market factors that may affect

changes in profitability.

From the Form 10-Q of 3/29/10, the University of Phoenix and Western

International University are institutionally accredited by The Higher Learning

Commission (“HLC”), one of the six regional accrediting agencies recognized by

the U.S. Department of Education. Accreditation by an accrediting agency

recognized by the U.S. Department of Education is required in order for an

institution to become and remain eligible to participate in Title IV programs. If

the U.S. Department of Education ceased to recognize HLC for any reason,

University of Phoenix and Western International University would not be eligible

to participate in Title IV programs beginning 18 months after the date such

recognition ceased unless HLC was again recognized or APOL institutions were

accredited by another accrediting body recognized by the U.S. Department of

Education. APOL cannot predict the outcome of the U.S. Department of

Education‟s review of HLC‟s recognition. HLC accredits over 1,000 colleges and

universities, including some of the most highly regarded universities in the U.S.

Regardless of the outcome of the U.S. Department of Education‟s review of HLC,

the focus by the OIG and the U.S. Department of Education on the process

pursuant to which HLC accredited a non-traditional, for-profit postsecondary

educational institution may make the accreditation review process more

challenging for University of Phoenix and Western International University when

they undergo their normal HLC accreditation review process in the future. In

addition, programmatic or location expansion by University of Phoenix and/or

Western International University may result in increased scrutiny or additional

requirements. If this occurred, APOL may have to incur additional costs and/or

25

curtail or modify certain program offerings or new locations at which APOL offer

programs in order to maintain APOL accreditation, which could increase costs,

reduce APOL enrollment and materially and adversely affect APOL business. The

loss of accreditation for any reason would, among other things, render APOL

schools and programs ineligible to participate in Title IV programs.

In summary, using a debt to equity ratio of .13, Apollo Group À' shows a 5-

year average return on equity = 61.8 . Based on a holding and compounding

period of 10 years, and a purchase price bargain of 43. percent, and a relative

FCF growth of 10 percent, then the estimated effective annual yield on this

investment may be greater than 15.8%.

Going forward, are there any transformational catalysts or condition indicators

imaginable on the horizon? Technologies change and new technologies will

appear on the scene. Would brand loyalty keep customers buying here?

SEC Filings online:


edgar?company=&CIK=APOL&filenum=&State=&SIC=&owner=include&action=

getcompany

Bud Labitan, Author of the new book "Price To Value." Author of "The Four

Filters Invention of Warren Buffett and Charlie Munger"

26

27

APPENDIX

Effective Yield of a Bargain Purchase after 10-years.

(Chart designed by Mr. Bakul Lalla )

This yield/bargain chart is a teaser that is included here to encourage

readers to read my first book, “The Four Filters Invention of Warren Buffett

and Charlie Munger.” The book is available on Amazon.com.

It is also included to encourage careful sensible investing. How can one use

the chart in long term investing? Once you have a suitable investment

candidate that fulfills the first three filters, estimate the intrinsic value.

Then, using your “estimated discount” ( intrinsic value minus market price

), look to where the discount intersects with a reasonable growth rate.

There you will find an estimate for an effective annual yield on your

investment if it is held for ten years.

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