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IFB104: Intrinsic Value Warren Buffett Style

Announcer:                        00:00                     You’re tuned in to the Investing for Beginners podcasts. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern. To decode industry jargon, silence crippling confusion and help you overcome emotions by looking at the numbers, your path to financial freedom starts now.

Dave:                                    00:36                     All right folks, we’ll welcome Investing for Beginners podcast, this is episode 104 tonight, Andrew and I are going to talk about in terms of Warren buffet style. So I recently wrote a post, I had this idea and I ran it by Andrew to see what his thoughts were. So I kind of, and he liked it. So I kind of flushed it out and posted a blog post on his website. It’ll probably be up sometime next week and Andrew and I thought we could talk a little bit about it and I could kind of go through my idea and my thesis and then Andrew can try to pick it apart. Ala Charlie Munger style.

Andrew:                              01:08                     So, um, can I say, yeah, of course. I just want to, um, I’m excited for this. First off, um, be, I think it’s very important that we talk about this and we haven’t really, I don’t think we’ve really talked about DCF at all. So I’m excited for this and I guess, see, I’m going to interrupt you at times just because I think we need to think about the beginners who don’t know some of these terms at you and I are so familiar with. Right. So if you don’t mind, I’m uh, I’m going to interrupt you here and there to hopefully give context and help people understand better because I think if there could be a podcast episode that like makes DCF easy. I know for me, I try to learn DCF many times and vitality’s book, um, we had the telly on several episodes ago, his book, something about it just made it so simple that it all made sense to me. So maybe this episode can be that way for some other people. Plus it’s just a fascinating idea on topic. So I’m just really, really excited. Thanks. Yeah, I agree with you. Yes, of course. You can interrupt me at any time. Uh, and it is, you know, it is something that can be very daunting and hopefully I can shed a little light on kind of how this works and, and make it a little bit easier for everybody.

Dave:                                    02:32                     So, uh, we’re talking about intrinsic value. So intrinsic value is obviously a very important concept that we need to embrace if we’re going to try to find the value of a company before were interested in buying it. And as Andrew and I always like to say in our little tagline, invest with a margin of safety, emphasis on the safety of this is one of the ways that I go about trying to find a company’s value and determining whether I could have to build in a margin of safety or if it’s already there for me. And I’m going to read you a quote from a blog that I follow called basin investing. And uh, it’s, it’s comes right from Warren Buffet’s owner’s manual. And if you’ve not read that, Eh, I do have a link to that in the, in the blog. And it’s very, very interesting.

Dave:                                    03:22                     So Warren Buffet says intrinsic value is an all important concept that offers only the logical approach to evaluating the relative attractiveness, attractiveness of investments and businesses. Intrinsic value can be defined simply. It is the discounted value of the cash that can be taken out of the business during its remaining life. And I think, for instance, great. Yeah. Can you explain why he says discount the value, what that means? Yes. So the reason why he’s talking about discount of value is we’ll go through this a little bit as we talk through this, uh, this process. But a discount of cash value of the cash is what you’re doing is you have to look at $10 today is not worth $10 10 years from now. And so you have to figure out logically because of inflation, because the changes in interest rates and just the simple fact of, you know, the d value of money as time goes along, you have to look at that $10 as a different value 10 years from now or five years from now.

Dave:                                    04:28                     It won’t buy the same stuff that it can today. And so when you’re looking at valuing a business, typically you look at longer periods of time, five years, 10 years, 1520 I generally try to look at 10 because that’s a nice easy number to look at. You can do five as well, but when you’re doing that, you have to look at the business, the value that the cash is being produced from that company is not going to be able to be reinvested or buy or use the same as it will today. And so when, when Warren Buffet’s talking about that, he’s looking at figuring out a discount rate that will talk about that you can use to discount that money. So the $10 that you have today, maybe we’re $7 five years from now and it may be worth five 50 10 years from now. And so what he does is he looks at a rate that he, he uses that he thinks would be a good rate to discount that money at, and we’ll use that ratio to discount the money over the remaining time that he’s looking at value in the company.

Dave:                                    05:32                     Does that make sense? 100% thank you. Oh yeah, you’re welcome. All right, so let’s talk a little bit about Warren Buffet and kind of where, where I kind of came up with this idea, so we’ve talked several times about this and I’ve written several blog posts about this, but Warren Buffett is a very huge proponent of owner earnings versus earnings and the main reason for that is he feels like the earnings has a, the ability to be in a manipulative on the income statement and when you’re looking at the cashflow statement, which is where you’re going to find most of the information that you use to calculate an owner earnings. It also includes depreciation and amortization and buffet feels like that those have a very real cash cost to them that is not utilized when you just look at an earnings report or an earning statement. And so for him, he has to look at the cost of the capital of the, of the company and he also has to look at depreciation or amortization of the company and how those will affect the money that he as an owner of that business will receive.

Dave:                                    06:41                     Because there there are very real cost associated to that. Whether it’s money that’s paid up front for the depreciation or whether it’s you know, itemized, not itemized I guess discounted over the years, whether it’s a 10 10 year amortization table or however they do that. And so there are real money costs to that and that has an effect of how much money you get into your quote unquote checking account. And so for him he feels like that owner earnings are a much more real number as opposed to just an earnings number. And so I came up with this idea and the stuff that you’re looking at. Okay.

Andrew:                              07:17                     All right, let’s, let’s do depreciation for dummies because amortization, depreciation is like kind of two sides of the, of a similar coin. Um, how would you describe depreciation? Because we don’t appreciate things in personal finance, right? Or maybe there’s a good personal finance metaphor.

Andrew:                              07:37                     I can’t think of one of the top of my head, but you know, the way companies, the way they spend cash versus how they, they put it on their financial statements. A lot of that has to do with depreciation. And, uh, that’s why that’s exactly why Buffett uses owner’s earnings because he’s trying to get a better picture of actually what’s the cash versus what’s showing up on the income statements. So can you shed light on that?

Dave:                                    08:05                     Yeah. For me, I think the easiest way to think of it is depreciation is something that you’re going to utilize when you’re acquiring or dealing with a physical asset, I. E. A couch in your house or a TV or a car. Uh, in a business it could be, you know, a whole lot bigger items like building a plant or buying, you know, printing press equipment or if you work in a winery, Bahrain buying stainless steel tanks or any of those kinds of things because you have to, there is actual cash cost to those.

Dave:                                    08:40                     But how you pay that off has a different aspects. So you, when you buy the plant or you build the plant, you obviously are not going to be paying all the money up front. You may be paying it over time if you’re borrowing money to pay it from back to a bank or whether you have cash on hand that you’re using to pay for things as they come up. It depends on how, how the company wants to do that, but for me, that’s how I look at depreciation. And so that’s why he thinks of it as a necessary item because again, it does affect the actual money that you receive, the free cash flow that you get from the company. Uh, when you look at just earning statements that is not included in an income statement when they’re calculating earnings at the bottom of the income statement, depreciation or amortization or not on there, no amortization.

Dave:                                    09:29                     Uh, the, I guess the easiest way that I look at it as it’s more of an intellectual idea. So it could be patents, it could be software, it could be ideas or things of that nature that do have a, a benefit to your business and there is a cost to them. But the cost is not necessarily a physical cash, outgoing costs. It’s something that you may have paid up front, IEF, you create software that you know, revolutionizes accounting, for example. Uh, you’ve already spent all the money on that, but you can amortize it, amortize it over a longer period of time to help smooth out your earnings. Um, and that’s, you know, but again, it’s still has a physical aspect or it has a physical impact on the money that you receive at the end of the month, but it’s not going to be, accounted for the same way. Does that make sense?

Andrew:                              10:24                     Yeah, it does. I would just add, um, in defense of depreciation, right? The reason why, uh, the FCC wants these things depreciated is because, let’s say we were a winery and we buy this big expensive, I dunno, piece of equipment that makes our grapes into wines. I don’t work in the winery. Um, so you know, let’s say we’re putting, I don’t know, 50% down payment on this, on this thing. Um, the FCC and the accounting rules say that we’re going to depreciate it. Because if you were to just take, let’s say he, they spent $3 million, uh, on this piece of equipment, if you are the just say, oh, well that’s $300 we lost. Now you have a business where, let’s say it was they made $500,000 for the year, but because they added this new piece of equipment that costs them 3 million, you know, you do the math that would say that your business took a two point $5 million loss, right?

Andrew:                              11:25                     So if you didn’t, but instead we depreciate it. So we don’t take that whole 300, that whole 3 million is a loss. We, we spread it out over the years. So when you look at the profit and loss, um, it gives a better picture for how the business is actually profitable. Uh, it’s not all like just for the business to obviously the government benefits because then they can tax you, right. Right. On profits. But that’s why depreciation is there. Now, the reason why, uh, Warren Buffet wants to add it back in and for all the reasons that Dave said, plus it’s, you know, the way he sees it is, well, this is still, you know, if he’s looking over a long period of time, then it doesn’t matter if we’re talking about you took the money out, you, you paid 3 million down payment on this piece of equipment, doesn’t matter if you did it in year one or in years six. It doesn’t matter if we count that over six years or over one year, that’s still cash. I had to come out of the business. So that’s why I think he, he includes it in owner’s earnings because again, if we’re thinking of intrinsic value as the sum of all your cash that you get out of the business as an owner, um, that’s a cash loss. And so we need to make sure we include it when we’re looking at owner’s earnings. Is that, that sounded good in my brain. Does that sound?

Dave:                                    12:56                     yeah. No, it does. Definitely it does. No, that’s a, that’s a very good point. Now. I like that you expanded on that very well. All right, so let’s talk. So there, there are three main categories I guess that we’re going to talk a little bit about as we talk about discounted cash flows and using owner earnings with this. So the next one is going to be discount rates. So when we’re, when we’re calculating discounted cashflows, uh, the three main items that we’re going to need are going to be earnings, whether it’s whether you use regular earnings or whether you use owner earnings, a discount rate and a terminal rate. And we’ll get to the terminal right here in just a moment.

Dave:                                    13:39                     So the discounted, the discount rate is the rate that we’re going to use to discount the owner earnings that we’ve calculated over a long period of time. And like we talked about at the beginning, the reason why we do this is because the $10 you make today is not going to be worth the same as you will do in the future. And discount rates have a very, very, very big impact on discounted cash flows when you do them. And they can make a huge impact on what the final number is going to be. And I want to preface all of this that we’re talking about is, and I get this question a lot from people when they’re reading through some of my blog posts and asking me about in terms intrinsic value and trying to calculate some of these numbers, we always have to remember that these are all estimates.

Dave:                                    14:25                     We are never ever going to have an exact perfect number. It is impossible to come up with that. A meundies provide put her the best I think. And when he said he’s always looking for a range and we have to use our intellect and our judgment to decide whether that range is going to be appropriate or not. And as Warren and Charlie like to say when they’re talking about these kinds of calculations, it’s better to be precisely right that or I’m sorry, approximately right than precisely wrong. And so when we’re talking about a discount rate, we’re talking about a rate of that you are ultimately are going to be looking for to get from your investment. And there’s two ways to look at this. One is you can look at, you know, you can say, I’m only going to invest in a company if I’m going to be able to get a 15% rate return on my investment.

Dave:                                    15:18                     And so if that’s what you’re always going to look for, then that would be the number that you would plug into this kind of formula, a discounted cash flow formula. The other way to look at it is, and this is the way the buffet looks at it, as he’s looking at it from a, from a viewpoint of he’s going to look at a discount rate as a way of this is the minimum that he would accept to invest in this company. In essence, what he’s doing, he’s, he’s building in a, a margin of safety into his calculations. Now up. You’re good. Okay. Um, so obviously it’s, it’s like it’s a complex formula, um, to give us like a very cliff notes on discount rate, which I think will help us understand. So a higher discount rate means a lower intrinsic value calculation at the end or a lower discount rate means a higher, um, intrinsic value.

Dave:                                    16:12                     A lower discount rate is going to, generally, it’s going to run to a lower number because it’s going to just, it’s, it’s going to naturally force the calculations down a higher, a higher discount rate. Could we to a higher number? Um, it, it depends, you know, it, it really depends on the terminal rate, the discount rate and the growth rate of the company. So any of those things are going to have, you know, varying impacts on the company. If you have a company that’s only growing at 2% a year and you’re looking at a 15% discount rate and then you have a very low terminal rate, then the number is going to be kind of skewed because I guess it’s unrealistic to expect a 50% return on a company that’s only goring at 2%. Uh, that’s just, that’s just not logical.

Andrew:                              17:07                     So the discount rate is what, what they want and minimum on this returns.

Dave:                                    17:15                     Yes. Now most, yes, that’s exactly right. So most people, when they calculate a discounted cash flow, they use Beta, the use, uh, Cape, um, uh, they use all these copy con complicated formulas to try to calculate the discount rate and they’ll use a basing it on earnings and tax rates. And they’ll also use debt and longterm debt, short term debt, cash on hand, lots and lots of numbers. But buffet is, you know, the thing that I really like about him is he believes and simplicity. And so by using the 30 year bond rate, the interest rate of that, which generally tends to be closer to the growth rate of the economy, he’s going to get a much easier number to calculate it. And it’s also going to be a far more conservative number to calculate because if you have a company that’s growing, uh, the example that I use it, here’s Hormel.

Dave:                                    18:10                     So the company has been growing over according to the owner earnings, it’s been growing at a little over 10% a year. Uh, and so when you take a lower discount rate and combine that with a higher growth rate, that you’re going to naturally get a more conservative number. But if you have higher discount rate then, and the growth rate is higher than you’re going to have a higher number. Um, and that to me doesn’t build in necessarily a margin of safety. Does that make sense?

Andrew:                              18:39                     Uh, no. So I guess I’m not putting two and two together. So I know the discount rate, basically the reasoning behind it and the reason he uses the 30 year bond, uh, government rate is because that’s, that’s essentially what they’re, what he’s thinking of as a risk free rate. Right? So it’s like yes.

Dave:                                    18:58                     Yup, Yup. Exactly.

Andrew:                              18:59                     Well, if I were to just take this money instead, put it in a long term bond, then you know that that’s free. So why would I risk all this money on the stock if it’s not going to make me at least that much?

Dave:                                    19:09                     The, exactly. No, that’s it. That’s, you said that much better than I did. Okay. But I still don’t understand why that would make the intrinsic value higher. Cause then it’s like, well, if I want, let’s just say I’m going to be super optimistic. I want this company that has 20% discount rate, then all of a sudden when I’m looking at Hormel for example, because I want 20% right. Why, why, why does that, why is Hormel more valuable now? Because I want 20% it’d be the other way around. No, I didn’t, I didn’t say that correctly. It has, uh, as uh, the, the growth rate has a, a larger bearing on that. The interest, the discount rate is really what you just said. It’s more, it is exactly the minimum that you would expect to invest your money at and get it get so, oh, sorry. Yeah. So it, it, I was not saying that correctly. So yeah, you said it much better. So the interest rate, the, I’m sorry, the discount rate is going to indicate this is the risk free rate that I am willing to plop my a hundred hours on and invest in. And if I can get 3% on a bond rate, why would I invest in this company if I can at least get 3% from this company?

Dave:                                    20:27                     And then now that, sorry, I’m going to try to connect it now. So now I know you’re getting to this part, but um, or projecting the growth rate, which would be the second part of this. So when you compare like the growth, the growth rate that you expect versus the discount rate, which is the risk free rate, then you’re basically getting like whatever is above that, right? So it’s like taking the difference. And so it’s like, well, I expect because of what I can see with what’s going on with the company, uh, I think it’s going to grow at 10%. Um, and the discount rate is like the, the risk free rate that I would have gotten if I, if I then take any risks. So that combination is, is the difference. And that’s, that’s why, um, that’s why the intrinsic value goes higher because you have this idea that this is how much kind of a of an advantage over, it’s like above average growth for them expecting from the company.

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Dave:                                    21:40                     Yes. Yeah. You’re looking at, you know, so you’re working at the, I guess, you know, Hormel’s case, you’re looking at the difference of around 7%, uh, because the, the margin of safety or I guess the risk free rate is 3% and the growth rate is 10%. So you’re looking at a kind of a 7% difference. Uh, and every company is going to be completely different. You know, if you look at Facebook or you look at, uh, you know, anybody else, it’s going to be completely different and that’s why you always have to use the risk free rate as your lowest rate. The are willing to bet your money on. As you know, if I can’t make more than this, why am I investing in this? Right. And so I guess I think the next logical thing is how did you come up with 10% for Hormel, uh, for, for, for Hormel, I came up with the 10% based on, I looked at every year of, I compare it every year of owner earnings and average those out over 10 years in a candidate came to 10.8%.

Dave:                                    22:39                     So if I looked at the growth rate from 2009 to 2010 and 2010 to 2011 and he just kind of looked at every year and then average those out, it came out to a little over 10% for the year, for those 10 years, for the last 10 years. And so I’m projecting, um, um, based on the 10 year past 10 years, I’m projecting that they’ll continue to grow at a 10% rate over the next 10 years. But again, that’s just an estimate. Uh, if you work online at different estimates of what the company would grow at, you see analysts projecting anywhere from 6% to 20%. So, you know, it’s, it’s, you know, again, it’s just an estimate and I’m, I’m using historical numbers to base my projected on because I, you know, if the company has done that over the past 10 years and I don’t see anything on the broad horizon that will change much of that.

Dave:                                    23:33                     And a, and a reason why I looked at Hormel versus some other companies was because by and large, they did fairly well through the last great recession. And, um, so I figured that they were a fairly stable company to look at. Whereas if I looked at a financial company like wells Fargo or something like that, it would, would have been much more, um, volatile during that period. Um, and so that would be logically for me, it would be harder for me to project that into the future. Does that make sense?

Andrew:                              24:04                     Yeah. And I agree with the 10%. I think that’s a reasonable projection. Just, I guess to come full circle and then we move on to terminal value. Obviously the higher that this project, I think it should be stated because I’ve done DCFS. Um, and you know, you, you just start, sometimes you plug in numbers and you know, really understand what’s going on.

Dave:                                    24:25                     But what I’ve learned from doing some DCFS is what you project, like you said, analysts can project anywhere from like six to 20% growth that they expect. That’s going to have a huge impact on that final intrinsic value number you’re gonna get. And because that’s tied with the discount rate, what you pick for the discount rate or your risk free rate is also going to have a huge impact on that final number. So it’s important to be careful with those and be very conservative. So I guess Monish Pabrai, he’s, he wants at least 15% discount rate because he you want, no, I’m sorry. He wants a 15% growth rate. Oh, he wants a 15% growth rate.

Andrew:                              25:09                     Yeah. Okay. So yeah, that’s, that’s pretty conservative I would say. Right. So if a company’s not even growing, if he doesn’t think it’ll grow more than 15% a year, he’d rather just take a risk free government bond essentially.

Dave:                                    25:20                     Is what you’re saying then buffet buffet you’re saying uses, they can serve the discount rate or the he has, he doesn’t really talk about much how he comes up with the growth rate. Is that, no, no, he doesn’t talk about that at all. And some of the, you know, so when I’m plugging some of these numbers and some of his thoughts into this, he has never ever said, uh, to my knowledge and native his speeches and eve is annual meetings, any of his letters to the shareholders, he has never come out and said that this is the way that he calculates a discounted cashflow. This is just something that came to me, uh, in a dream, if you will. It was at work. I was at work and one day and I just, it just kind of struck me that hey, maybe this might be an interesting way to look at, uh, how to calculate a disk kind of cashflow.

Dave:                                    26:09                     And to me one of the nice things about doing it this way is it eliminates a lot of the more higher math, you’re really having to calculate a lot of stuff. This is more easy the way he’s doing it is a little easier to look at quickly and to determine more, uh, I guess conservatively what you think accompany is worth and to decide, you know, whether this is something you want to put in your too hard basket and move on or if you have something you want to dig into further without having go through a lot, a lot of hoops to, to really dig into it. I remember last summer, Oh, I read the Warren Buffet Way by Robert Hagstrom and I remember just like you said, like he, he never says exactly how he calculated the formula. He doesn’t even say which formula he uses, but he kind of gives a framework and based on the framework and you’re kind of putting pieces together on what he says, he does use some sort of DCF.

Dave:                                    27:08                     He does use owner earnings and he is conservative with his discount rate, which, which will make his final intrinsic value value’s lower. But that’s because he wants to be safe rather than sorry. Right? Yeah, exactly. And the last, I guess a variable that he talks about, his terminal is the terminal value or the terminal rate. So the, the terminal rate is pretty simple. He’s going to use the, uh, the growth rate of the, of the GDP of the United States. And that’s what he’s always felt like. There’s probably the, the easiest way to do this. Now, what is a terminal rate? Uh, the terminal rate is the number that we’re going to use to discount our total value of the cash flows that we have estimated over the last, over the next 10 years. So when we’re, this is all weighed out in a blog posts.

Dave:                                    28:05                     So when you’re, when you’re reading through this, this is good. This will all start to make some sense, but as we’re talking about this, when you, when you do a discounted cash flow, you take the owner earnings and you look at a growth rate for those. And you project those over a 10 year period and then once you do that, you discount those by the discount rate that we’re looking at. And because we’re discounting, the reason why we’re discounting those is because we’re, again looking at the $10 today is going to be different than 10 years, 10 years from now. And so we’re discounting those that what we think is inappropriate rate at the end of those 10 years. We have to figure out what that dollar amount is worth and we have to look at the that dollar amount as something different than our discount rate.

Dave:                                    28:51                     Because when you’re looking at in valuing a company, one of the reasons why we come up with a terminal value and use the terminal rate is the terminal rate helps us determine what the company will be worth in 10 years based on the growth of the economy. Because it is impossible for a company to grow at 10% 15% and you know in 19.2% whatever it may be to infinity. You ha ha, they all eventually we’ll have to come back to earth. They will all come back to, you know, the, the growth rate of the economy because that’s where they operate. And that’s just the way the economy works. And that’s just the way that companies work as they, they go through life cycles and professor Damodaran talks about this all the time, is, you know, they have a growth period. They have a, you know, a maturing period and then they have a declining period.

Dave:                                    29:47                     And so when we’re calculating these numbers, we have to kind of think about that. Now the 10 years may not be the declining period, but to try to be more on the conservative side, you have to look at a, a end value of the company after those 10 years. And so the, the rate that you use to discount that number is going to be the growth rate of the GDP. And that changes from time to time or a currently as of March, it was 2.2% I believe when the last time I read about buffet it was 2.73% so that would be the number that we would use in the way that we use this is we take all those discounted cash flows for every single year and you add those all up and that’s going to be considered, there’s a term that’s called net present value is very easy.

Dave:                                    30:34                     You just take all the 10 years of discounted cash flows that we’ve calculated and you add those all up and then that’s gonna be considered the net present value. And that when you would do is you would take this 2.2% rate and discount to that net present value and that would give you the terminal value of the total cash flows that you think that that would be worth over a 10 year period. And this is again where having all those estimates and having that mindset of this is not a final number comes into play because there was no way that you and I can know that 10 years from now, this is what Hormel we’ll be producing as a cash flow rate in 10 years from now. It could be a lot higher or it could be a lot lower. We don’t know w you know, we just, we’re estimating. And so once we have that all done, then we can figure out the intrinsic value of the company. So those are the really the basic three components that we have to, to have, we have to have the owner earnings and the growth rate of those. We have to have the discount rate and we have to have the terminal rate. And once we have all those, we can start plugging that into the formulas and start calculating all the numbers.

Dave:                                    31:47                     Okay. So now that we’ve taken all those numbers and we figured out a terminal value and we’re gonna figure out it intrinsic value, I’ve laid out all the numbers for Hormel as I’ve walked, worked through the calculations for this. So as all laid out there for you on the blog posts, you can see all the formulas and you can see where the numbers are and where they are plugged in. And so when I did all the calculations for everything, I came up with the intrinsic value of $12 and 16 cents. And comparing that to a May 8th of 2019, which is when I worked the post, uh, the value of the company was trading at $39 and 6 cents. So quite a bit lower than what it’s what it’s trading at right now. Um, so mark, you know, yeah. Do margin of safety. So, um, you know, based on that, your just initial response would be, you know, is Hormel or valued.

Dave:                                    32:41                     I, you know, that’s, that’s always the question in the answer. That’s, that’s much harder to come by. Uh, and this is kind of where the art of value investing comes into play. And this is why estimates are just estimates. And this is why when you’re looking at, you know, calculating and intrinsic value, you have to also use a lot more brain power to determine whether you’ve done all these calculations, whether this is the right number or not. And just to kind of reference, you know, if you look at a discount of cashflow based on just free cash flow, the price per share comes up at two $27 and 75 cents. And if you use the earning is based calculation, which is what most people use, it comes up with $31 and 19 cents. So still under the value of what it’s trading at right now. And you know, if you look at the PE of, of Hormel right now is 22.2 which is not horrible.

Dave:                                    33:35                     It’s not high, but it’s not low. So you know, you look some other numbers, the uh, price to sales is 2.22 and the price to book is 3.66. So those might be a little bit on the high side. You know, the thing that I, I would ask myself when I look at Hormel is it’s an un, it’s unquestionable that the company is doing well. There’s no, there was no issue about that. When you look at the owner earnings, you look at their debt to equity ratio, you look at their, their growth of their dividend over the last 50 years. They obviously are hitting, hitting it on all strides in that respect. But is the company worth $39 it’s worth. And I guess one of the things that I would ask myself based on the calculations that I looked at and just knowing what’s going on in the stock market is it’s a dividend aristocrat.

Dave:                                    34:26                     Everybody wants to own it because it pays a great dividend and it’s a great investment. It’s a stable company, but everything in the market has been bid up because people want to own things and they keep buying stuff. And when they, when they keep buying something in a Hormel, it keeps making it more popular, which raises the price. And so is it really worth that? I don’t know. And that’s, that’s, you know, that’s the hard question about doing all of these things. And I guess the reason why I wanted to go through this exercise was because I like doing this kind of cash flows and I think they’re interesting but they’re a little more laborious and I felt like that the owner earnings take on it and using some of the things that Warren Buffet has talked about time and time and time again even talked about it.

Dave:                                    35:10                     And you know, the, all these things that I’m talking about right now are the exact same things that he talked about in the last, um, you know, annual meeting that he had. I listened to a couple of hours of it on Yahoo and he talked about some of these things during that meeting. So it’s just kind of verify to me that this is the way that he looks at it and who am I to say that he’s not the right person to emulate when I’m thinking about trying to calculate intrinsic value. And I just felt like that this was a far more conservative way of looking at it, which appeals to me and my conservative nature. And I feel like that some of the ways that he does this help build in a better margin of safety without just doing a regular calculation and going, okay, now I’ve got to find something 50% off of that.

Dave:                                    35:53                     It just feels like this automatically drives it down, um, which appeals to my conservative nature. So they got those. And I thought if I can add my thoughts on Hormel a disclaimer, I am long Hormel, they are one of the dividend fortresses in the Eli there. But with you and your conclusion that you believe it’s probably overvalued, um, when I ran the Vti on it with the same price you were looking at, it also said it is not a strong buy. So it would not be a evaluations I would buy at at the moment. Uh, I did buy it back in 2015 so it’s been a nice gainer for the portfolio. But yeah, I would agree with it being generally overvalued. Yeah. And that’s, and that’s kind of what I thought too. I mean, I ran it through there as well and it came up the same way.

Dave:                                    36:45                     So but I wanted to let you throw that in there. Um, but, uh, you know, that was, that was something that I, that I thought was inappropriate way to do it. And so, um, I’d be real curious to hear what people think about this and, and uh, get their thoughts on this. And, um, yeah, I guess that’s all I got.

Andrew:                              37:05                     Did you happen to find a stock using the same formula where there was a margin of safety?

Dave:                                    37:13                     I did another, I needed, did another example, um, for giggles, just to, don’t give them the answer, make force them to go on the blog post. Yeah, you’re gonna, you’re gonna have to go into it. So I did two examples that did Hormel and I did another company and the other company did come up with a margin of safety. Um, I did not run it through the, the VTI but I have looked at the company off and on over the last six months or so. And it is something that I’m contemplating investing in, but uh, it, uh, it did come up with a favorable number. So, um, that would be something that you might want to look at as well, but you’ll have to read the blog posts to find out what the company is and what my thoughts were on it.

Andrew:                              37:54                     Final thing. So what I liked about that have, including that example in the blog post is you got an intrinsic value of a one oh five 46 compared to 78 oh three. So if you combine those two numbers, you basically have a 35% margin of safety. So I wanted to ask you, do you have a general idea of how much margin of safety would be enough for you to pull the trigger? Obviously it’s again, an art, not a science. It depends on how confident you are in the estimates you made. But would you have some sort of guidance on how you would maybe make that decision?

New Speaker:                   38:29                     Uh, for me it would be 25%. That’s really kind of what I would really want to go with. I mean obviously the bigger the better would be great, but, um, I think 25% would be, would be really good.

Dave:                                    38:41                     I mean 35% for this company is, you know, is great. Uh, I guess, uh, there wasn’t any real reason why haven’t invested in the company yet. Um, I just haven’t done enough other research on the company to find out what I think about, you know, the volatility of the company. And I mean it’s, it’s a pretty simple company. What they do is pretty straight, straight forward and straight ahead. Uh, I just haven’t done enough, you know, research on it yet to determine whether this is something that, you know, I would want to invest in. I think it is, but am I’m not done yet.

Dave:                                    39:18                     All right folks, we’ll, that is going to wrap up our discussion for tonight. I hope you enjoyed my thoughts on that discounted owner earnings and how Warren Buffet looks at intrinsic value. I think you’ll find a lot of value in this and hopefully this can help you get a better idea of how to do discounted cash flows. And if you have any questions on this at all, please wet Andrew and I know and we’ll be happy to reach out to you and help you in any way that we can. So without any further ado, go out there and invest in a margin of safety, emphasis on the safety and have a great week.

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