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Berkshire Hathaway Inc. Message Board

  • AynRand23 AynRand23 Aug 14, 1998 9:41 AM Flag

    The intrinsic value of Pepsi

    Here's my rationale for saying Pepsi is the
    cheapest stock on the S&P500 right now.

    Pepsi's
    owner earnings (net income + deprec. & amort.-cap.
    exp.)
    for the coming 4 quarters is expected to be about
    $1.15. If you use a growth rate of 8%, a discount rate
    of 7%, and growth after year 10 of 5%, the value
    works out to $72.56. However, stocks always sell below
    their full value (except in buyouts), frequently at
    65-70% of intrinsic value. Buffett has stated he looks
    to purchase stocks selling at less than 50% of their
    intrinsic value. Well, that would be $36.28 for Pepsi, 6%
    above today's price of $34.25.

    I used a 7%
    discount rate because there is very little chance of Pepsi
    growing at less than an 8% rate in the next 10 years. The
    industry is excellent, they have been and will continue to
    buy back shares, and they are currently in the
    process of spinning off their bottlers just like Coke did
    in the 80's. Therefore, I think a 1.3% premium over
    the 30-year bond is the amount of risk incurred in
    making the assumption that Pepsi will increase earnings
    8% per year. Going back to the discussion of the
    value of a brand name, only with a very strong brand
    name company in a stable industry can you justify
    using a discount rate this low.

    If you use a 15%
    growth rate for 10 years and 5% after that, and use an
    8% discount rate (higher growth rate, so more risk
    of being wrong, so higher rate), you get an
    intrinsic value of $79.94, 50% of which would be $39.97.


    The bottome line is: if Pepsi can grow at anything
    more than 8% over the next 10 years and 5% thereafter,
    they are undervalued currently. It's highly unlikely
    they won't be able to do this. Recent, short-term
    problems have beaten the stock down. Don't make the
    mistake of losing out on this opportunity because you
    believe Mr. Market.

    SortNewest  |  Oldest  |  Most Replied Expand all replies
    • what is your definition of evil? isn't that a religious term?

      Greg

    • Mr. Flemin:

      <<<
      whether
      pricing pressure hits gold, real estate, stocks, fine art
      or some other area(s) is only a matter of who
      controls purchasing, and their collective
      taste.
      >>>

      "Pricing", i.e. how many dollars it takes to purchase things
      is a direct consequence of the amount of dollars in
      existence, and a market full of men determining which things
      they want to buy.

      At different times, some
      things become "in favor" or "out of favor". In times of
      extreme inflation (i.e. when suthinah's from left-liberal
      academia smile their way into office) people think about
      how to put their wealth into things that are not
      effected by inflation, e.g. land and gold. If such men
      pull their money out of stocks and other securities,
      then the price of said securities will
      drop.

      <<<
      that's my analysis attributing the run-up in average p/e
      to the inflation over the last decade+, rather than
      more general price level
      increases.
      >>>

      Yes, but unless men have "enough" of cars, tv's,
      vacations, computers, and other luxuries, etc. (I assume
      almost all men in the US have more than enough food)
      then when they get more money they spend more on the
      things they want.

      There isn't any reason to say:
      "yes, men have more paper money now than in years past,
      but they haven't used it to bid up the prices of
      goods and services, they've merely used it to bid up
      the prices of stocks"

      <<<
      if
      history is a good indicator, governments will attempt to
      control money movement (they try their best now) thru new
      legislated curbs on trading as an "emergency measure in this
      economic crisis to combat greedy speculators,
      etc...."
      >>>

      History is rife with examples of this. But the cause is
      bad ideas. Keynes has long since been proven to be
      evil, and yet his ideas still predominate because they
      allow power-lusters such as Clinton and Greenspan to
      "get away with it". If everyone had the understanding
      of Mises (let alone Rand), we'd not have keynes
      being touted as the reason why power-lusters like
      Clinton are doing us all good.

      Finally you
      say:

      <<<
      the only comfort in holding unpopular views today
      seems to be Slick Willie STILL @ 60%+ approval rating
      while lying like a pooch.
      >>>

      I
      dunno about you, but no dog I've ever seen has lied. :)

    • Mr. Flemin:

      <<<
      "Lenin was
      certainly right, there is no subtler , no surer means of
      overturning the basis of existing society than to debauch the
      currency. This process engages all the hidden forces of
      economic law on the side of destruction, and does it in a
      manner not one man in a million can diagnose." but maybe
      he exaggerated a little on the
      ratio.
      >>>

      Wow, then Keynes was even more evil than I thought.
      :-/

      <<<
      the definition you use of inflation requires
      maipulation of the money supply to match supply of goods, or
      some similar mechanism, and requires that some one be
      in charge of price
      level.
      >>>

      Inflation is a product of government fiat-money. In a
      laissez-faire economy, there is no central control over the
      money supply as such, and no inflation. I.e. if we all
      traded in 24K gold as measured by mass, there would be
      no inflation.

      So if my definition of
      inflation presumes the control over the money supply by a
      central bank, well, that's the system we have now, and
      that's the reason for inflation as
      such.

      <<<
      you said that an increase in the money supply affects
      everything purchased with money, but i can't buy that. in
      1979/80 housing and gold went stratospheric while other
      price levels merely increased
      quickly.
      >>>

      Right. As the money becomes more plentiful, it takes
      more "new dollars" to buy what fewer "old dollars"
      did. Enduring values such as real assets--and
      objective money such as gold--are effected differently than
      consumables because people think of them both as investments,
      and as havens safe from the government's
      printing-press money.

      <<<
      Carter could remove
      home ownership from the cpi and politically rearrange
      perceptions of inflation.
      >>>

      Yes, the CPI
      is a politically-controlled statistic which bears
      only a superficial correlation to actual inflation.

    • thanks for your analysis. you are certainly
      correct that "my theories" on inflation are not widely
      accepted (your term was "radical") especially in public
      sector circles. except that I must give credit to the
      Austrian hard money theorist, Ludwig von Mises for my
      viewpoint. another of my less-than-popular views is that
      Keynes was an ass 95% of the time, but was struck by
      uncharacteristic lucidity when he said:

      "Lenin was
      certainly right, there is no subtler , no surer means of
      overturning the basis of existing society than to debauch the
      currency. This process engages all the hidden forces of
      economic law on the side of destruction, and does it in a
      manner not one man in a million can diagnose." but maybe
      he exaggerated a little on the ratio.

      the
      definition you use of inflation requires maipulation of the
      money supply to match supply of goods, or some similar
      mechanism, and requires that some one be in charge of price
      level. my definition accepts a gradually diminishing
      price level, proportioned among available goods and
      services by the free market, as the natural order of
      things. again, my view is unpopular, and untried (at
      least since government usurpation of money supplies),
      and yours prevails.

      you said that an increase
      in the money supply affects everything purchased
      with money, but i can't buy that. in 1979/80 housing
      and gold went stratospheric while other price levels
      merely increased quickly. that is why Smiley Carter
      could remove home ownership from the cpi and
      politically rearrange perceptions of inflation. history is
      rife with illustrations of sector vs sector pricing
      distortions . this is a market mechanism that isn't
      controllable by currency czars except thru orwellian measures.
      whether pricing pressure hits gold, real estate, stocks,
      fine art or some other area(s) is only a matter of who
      controls purchasing, and their collective taste. people on
      subsistence wages don't much enter into this mechanism, since
      they don't control enough of the money supply. but the
      disproportionate effect in some sector(s) is usual in an
      inflation, not unusual. that's my analysis attributing the
      run-up in average p/e to the inflation over the last
      decade+, rather than more general price level increases. i
      think people who control much of the money supply have
      turned to the stock market in this cycle instead of
      other goods/services.

      program trading is a
      structural shift, as you state. but i fear the outcome of
      high money supply increases may act differently than
      you suggest. if history is a good indicator,
      governments will attempt to control money movement (they try
      their best now) thru new legislated curbs on trading as
      an "emergency measure in this economic crisis to
      combat greedy speculators, etc...." and this will
      exacerbate money movement internationally (look at what
      happened to the Mexican peso, Indonesian rupia, Italian
      lire). governments bent on inflation have never cared
      much what the domestic consequences were till the
      elections or excecutions came home to roost. and then the
      inflation is already done. obviously my ideas are way out
      of sync with these inflationary regimes as well;
      they "win," I lose.

      the only comfort in holding
      unpopular views today seems to be Slick Willie STILL @ 60%+
      approval rating while lying like a pooch.

    • For those having doubts over the title of this
      mail, please buy a copy of Paul Zane Pilzer's God Wants
      You To Be Rich and
      enjoy reading!!

      For the
      past few centuries, prices have actually
      been
      falling. What we see as price increases are
      actually
      new prices on newly improved products. For eg, we

      have better quality electrical appliances, we have
      better cars,
      etc.

      The median house in America
      fourty years ago is perhaps the size of a 20th
      percentile house of today. Get the picture?

    • Mr. flemin:

      <<<
      2) CPI is not
      inflation. it is a statistic compiled by an agency subject
      to political manipulation.
      >>>

      I
      totally agree.

      <<<
      inflation is
      defined as an increase in the money
      supply.
      >>>

      Well, more specifically the difference between the
      increase in the money supply and the increase in the
      available goods and services.

      <<<
      the
      effect of that increase may land in the cpi or outside
      of it. guess what doesn't fall under the cpi?
      Stocks.
      >>>

      This is dubious...

      <<<
      most of the
      effect of the money supply increase, ie:inflation, of
      the last decade has landed in the financial
      investment arena,
      >>>

      An increase in the
      money supply effects everything that's purchase with
      more money. The economy doesn't fit itself into
      whatever neat compartments the economist wants to jam it
      into...

      <<<
      steadily advancing valuations above historical levels and
      outpacing even the excuses given for an infinitely
      increasing market level (like better
      productivity).
      >>>

      This is because investors think that the companies in
      which they're putting their money will increase in
      value. If it was just inflation, then every good/service
      which competed for money would increase in cost. And
      then, there'd be that anomalous period of inflation
      during the 1970's when stocks *didn't* increase, but
      cars, gasoline, food, etc.
      did.

      <<<
      I don't belive inflation is
      dead.
      >>>

      You oughtta look at the fact of the matter of how
      much money the fed has created out of thin air, and
      the increase in goods/services. We don't have much
      (if any inflation) right now. This doesn't itself
      mean that our central bankers won't concoct more in
      the future (though I suspect their ability to get
      away with it, i.e. profit from the "float" has been
      reduced by computer currency
      arbitragers).

      <<<
      it has simply affected a price category that isn't
      counted in the cpi. so real interest rates are not
      actual-cpi, but actual-inflation. I think the real question
      for investors is when (or whether?) the tide of
      inflation will recede from financial markets and rise
      elsewhere.
      >>>

      I am not sure you realize just how radical your
      theory is, or how utterly unsupported by the evidence it
      is.

      <<<
      maybe the world has changed and a structural shift has
      occurred in the USA
      >>>

      Program trading
      has made capital more liquid and has decreased the
      amount of time between when the central bank creates the
      new money and when the markets react by devaluing
      it--from years to hours or days.

      Put simply, you
      dont have to keep your wealth in dollars; with the
      click of a computer key you can be in marks or yen or
      pounds sterling--or gold.

      <<<
      people
      with money in the market will accept continuingly
      lower yields as measured by
      p/e.
      >>>

      Nope, take a look at those companies which miss
      earnings projections. And even some that make them (e.g.
      VLSI). Investors ruthlessly dump them in search of the
      next Microsoft or Yahoo or Amazon.

    • Mr. banker:

      <<<
      I agree with
      you 100% on the inflation rate. It will not be 7%
      from here to eternity; I believe it will turn out to
      be 14.5.
      >>>

      What evidence do you
      have to say this?

    • Mr.
      bobo:

      <<<
      ..........attorneys at Justice say they "will cut off Microsoft's air
      supply".
      >>>

      So much for the various media and govt blowhards
      that the DoJ is seeking "justice". They are, in fact,
      seeking to choke the life out of the best company in the
      past 30 years.

      <<<
      So much for that
      blowhard Ballmer's posturing about Janet Reno. He should
      of took her by the hand before she takes him by the
      throat.
      >>>

      Appeasement doesn't work.

    • If I were Buffet and I had secrets to keep, I
      wouldn't use actual numbers in any of my public
      calculations... would you?

      Besides, my gut feeling is that
      Buffet publicly endorses intrinsic value because it is
      so elusive, which makes it easier for him to 'share'
      his knowledge with us wanna-be's. I think it is
      useless as a measure for picking stocks, but rather a
      guage to access risk.

      You should pick stocks
      based on the business, which means you have to
      understand the business. ie. Is the case of cereal at
      Safeways considered asset or a debt? How does GAAP require
      the business to record inventory? How should you
      modify the GAAP numbers to more closely reflect business
      fundamentals? If you understand the business, then you'll
      understand the numbers better.... and then ROE, ROA, PEG and
      the rest of those officially published figures is
      often useless in figuring intrinsic value. What then is
      the real IV ??

      Just a thought....

    • there are two elements that I haven't seen come
      up in the discussion on choosing a discount rate,
      so:

      1) "IV is importantly influenced by what you do with
      capital over time." (web @ '95 ann.mtg. per janet lowe.)
      each of us has a time frame (even if we claim it is
      forever implying a disrtibution @ our death). that time
      frame has discount rate implications vs our capital
      deployment intentions. if you MUST earn exceptionally high
      returns to meet future needs/desires, you can use a
      higher discount rate to flush out marginal (for you)
      opportunities and wait for better returns.

      2) CPI is
      not inflation. it is a statistic compiled by an
      agency subject to political manipulation. eg:J.Carter
      had the cost of home ownership removed from the cpi
      when interest rates were sky high, under the
      justification that not all consumers were home owners. in
      reality, the sky high cpi was causung him political gas.
      inflation is defined as an increase in the money supply.
      the effect of that increase may land in the cpi or
      outside of it. guess what doesn't fall under the cpi?
      Stocks. most of the effect of the money supply increase,
      ie:inflation, of the last decade has landed in the financial
      investment arena, steadily advancing valuations above
      historical levels and outpacing even the excuses given for
      an infinitely increasing market level (like better
      productivity). I don't belive inflation is dead. it has simply
      affected a price category that isn't counted in the cpi.
      so real interest rates are not actual-cpi, but
      actual-inflation. I think the real question for investors is when
      (or whether?) the tide of inflation will recede from
      financial markets and rise elsewhere. that could have some
      very real interest rate ramifications, and some
      serious effect on my choice of discount rate. maybe the
      world has changed and a structural shift has occurred
      in the USA toward japanese levels of stock
      valuation, and people with money in the market will accept
      continuingly lower yields as measured by p/e. if so, cpi may
      remain dormant even while the money supply continues to
      escalate. I'm sceptical, though, of theories that rely on
      the world changing. whew! sorry for length.

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