Business trip with SM (trip report)

[krishan]

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Why is EBITDA revelant to the value of a stock?

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EBITDA doesn't tell you anything about a stock's value. It basically means this is what I would've earned if I didn't have any expenses; similarly, I would be a richer poker player if I didn't have to pay rake nor taxes.

What you want to look for is return of capital/equity, net income, operating margins, PE vs its competitors.

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The problem with raw PE ratios is that they doesn't account for capitalization structure, i.e. how much debt the company has. If two companies have the same net income, same PE ratio (hence same market cap), same net profit margins, but company A has a ton of expensive debt, and company B has no net debt (cash = debt), which has the stronger underlying business?

Clearly A since it's producing similar earnings while paying substantial amounts of interest on it's debt. Which is the more expensive business to purchase? Clearly A again, even though the market caps are identical in A's case you also have to assume a bunch of debt. If you can buy a house for $100k plus assumption of a $100k mortgage, you actually are paying $200k for the house.

EV/EBITDA is often a better tool than PE ratios because of this. EV is enterprise value, or the market cap + net debt, which gives you the company's real market value. EBITDA gives you the cash flow supporting that value.

Maybe EV/EBIT is better because it ignores the depreciation vs. capex issue, which you have to analyze separately anyways. EBITDA can be a very useful metric, but it's a very misleading metric if you take it as gospel. Sometimes depreciation is overstated and sometimes it's understated. It can't ever be ignored as it's an important part of long term value, i.e. what reinvestment is required to keep the business going successfully.

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very nice DC.

Krishan

[El Diablo]

SM, krishan:

Approximately what percentage of all companies that you take positions in have you met with management in person? What percentage of your major plays?

[Scorpion Man]

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SM, krishan:

Approximately what percentage of all companies that you take positions in have you met with management in person? What percentage of your major plays?

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In terms of companies we have worked on together, we have spoken to top mgmt at all of the stocks we are in. I own 3 of the companies we met on the trip now...they are maybe 20% of my actively managed portfolio. I have visited with 35% overall I would say. The main reason for this is laziness.

I have met with one of my 2 biggest positions. Third biggest is Comcast...met with them in a previous life but not since i retired. If you include past meetings I have met with my second biggest position (CHTR) as well..

I edited this because as I look through the list and realize I have met with more than I thought...its actually more like 40% if you exclude biotech which I do totally on tips from a friend.

[krishan]

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SM, krishan:

Approximately what percentage of all companies that you take positions in have you met with management in person? What percentage of your major plays?

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We have talked with management on everything we have worked on together. This is our first trip and was built around our best idea (17% position for me). My only other large position is chtr at 20% which I have done no work on. As it was SM's largest position I felt pretty comfy with it.

Krishan

[krishan]

SM,

Man up and relate some more details of the trip. I'm sure I left stuff out.

Krishan

[DavidC]

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Why is EBITDA revelant to the value of a stock?

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It allows you to compare similar companies with different capital structures/levels of debt.

Krishan

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Interesting.

How does EBITDA differ from Revenue?

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earnings before interest taxes depreciation & ammortization.

but after operating expenses & what it took to GET the revenue (in theory).

so ebitda tells you how a firm operates minus its debt levels. the ebitda margin (ebitda/net revenues) is a good indicator of the expense ratio (again, what it takes to make those monies)

Barron

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Sorry, I should have been able to figure that out myself. Thanks dude.

[Scorpion Man]

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SM,

Man up and relate some more details of the trip. I'm sure I left stuff out.

Krishan

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It's always inspiring to be told to "man up" by a cranberry juice drinking, Magic playing, Salvation army dressing, directionally impaired newbie stock analyst who is unable to run (actually, jog slowly) 2 miles without collapsing.

I thought Krishan did an excellent job on this trip, if you don't count the purple shirt on Day 2 and the pair of shoes that looked like FIDO had had his way with them daily since 1999, when they were originally purchased.

It is true that I was prepping while pissing. The question here is: Why wasn't he?

One of the things that came out of this trip is how big a deal pension expense is for industrial companies in the heartland. Two of our companies, SR and MZ would be very interesting without pension but are marginal with them because of huge cash needs in the next five years.

The other thing that came out of the trip is the tsunami that ethanol is creating...I am beginning to wonder if the real trade is to just buy everthing associated with farm income -- Deere and Monsanto come to mind.

I promised Krishan before this trip that he would screw up the logistics -- get lost, not know which buildings we needed to go to, and get a time wrong. He assured me this was not the case. He was 3 for 3, and this despite the fact that I brought a portable GPS that was spot on. The problem, Krishan informed me, was that he was unable to talk to me in the car and follow the directions at the same time. I had to choose.

Lastly, the most impressive thing about Krishan on the trip was that he was (seriously) able to contribute to the meetings in a way that was very additive. His comments were relatively infrequent...but they succeeded in pulling us back to important issues that had been glossed over or noting that my line of questioning had a fundamental misconception behind it, for example. This is an important and difficult aspect of participating in meetings, particularly for less experienced folks. They tend to put together a list of questions and just ask them regardless of how the meeting is going, often just talking so that they could feel good about having participated despite no value add.

I will tell you this..it is much more fun and relaxing and to do 3 companies a day with another person than to do 6 by yourself. It's like a different business.

Oh, and Ohio is [censored] nasty in the summertime.

[Statutory]

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SM,

Man up and relate some more details of the trip. I'm sure I left stuff out.

Krishan

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It's always inspiring to be told to "man up" by a cranberry juice drinking, Magic playing, Salvation army dressing, directionally impaired newbie stock analyst who is unable to run (actually, jog slowly) 2 miles without collapsing.


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A little about me. I don't drink. I played competitive Magic for 4 years. I dress worse than SM. I almost died trying to jog with my roommate last night.

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[turnipmonster]

this is an interesting trip report. if you or krishan have the time, I would be really interested in the process of talking to a company on the phone as an investor, from start to finish. in other words, do you just call them up and tell them you're an investor and would like to talk to investor relations or whatever? how do things usually proceed from there? is your initial line of questioning relatively company specific or more general or both?

[El Diablo]

SM, Krishan:

This is very interesting and informational stuff. Great posts.