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Natuzzi SpA Message Board

  • the_fat_baboon the_fat_baboon Dec 11, 2003 11:08 AM Flag

    Preliminary Valuation 3


    9.) This valuation assumes two very questionable events. The projected cost saving of E35m in 2004 has not happened and we won't know whether the project is succesful until next year. This projected saving increased 2004 net income projections by E22m, for all exchange rate assumptions.
    Also we assumed growth of underlying operating income in 2003 and 2004 which has definitely not happened in 2003 (exchange rate issues aside) and doesn't look to happen in 2004. Nonetheless I don't think it is outlandish to posit a 5% growth rate long term but perhaps our 2003 operating base should the same as in 2002, i.e. we see no growth in 2003 but 5% growth thereafter.

    Let's give management the benefit of the doubt, they are going to meet their cost saving objectives in 2004. We have seen enough evidence this year that growth is not happening, however, so let's make a more conservative valuation using the 2002 base operating earnings as the platform for 5% growth commencing in 2004.

    2002 OI = 2003 OI
    1.10: E76m
    1.15: E69m
    1.20: E62m

    2004 OI (2003*1.05)
    1.10: E80m
    1.15: E72m
    1.20: E65m

    ...& the E18m increase...
    1.10: E98m
    1.15: E90m
    1.20: E83m

    ...& the 38% tax rate...
    1.10: E61m
    1.15: E56m
    1.20: E51m

    ...& capitalized...
    1.10: E610m
    1.15: E560m
    1.20: E510m

    ...& adjusted for non op cash asset...
    1.10: E680m
    1.15: E630m
    1.20: E580m

    ...& in dollars...
    1.10: $816m
    1.15: $756m
    1.20: $696m

    ...& VPS...
    1.10: $14.92
    1.15: $13.83
    1.20: $12.73

    10.) I think this valuation makes clear the impact on value of the future average USD/EURO exchange rate. More than $100m of value evaporates when the rate moves from 1.10 to 1.20. More value will be lost if the dolar continues to weaken against the euro. Projecting and having an understanding of this exchange rate will be crucial in determining an accurate value today. I can't say I have much of an idea about the average rate for the next 3, 5 or 10 years; but for what it's worth (not very much) I see current rates i.e. 1.20 as a better guide than the prevailing rate three or four years ago. Also, where I can't predict something confidently I prefer to be conservative.

    Also, I am not completely comfortable with adding the full E70m of cash to capitalized earnings. Like I said some of this is part of working capital and some is committed to the completion of projects in China, Brazil (see the 3Q release where they talk of expanding operations in these factories). E70m is $1.54 per share.
    So, my idea of NTZ's intrinsic value per share is between, $11.19 and $12.73.

    This topic is deleted.
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    • Just want to say the Message Board of NTZ is truly amazing. Everything that is said here is backed with credible financial analysis.

      On another note NTZ has a great business. However, the growing pains is the change from Munfacturing to Retailing, which is the companies aim for the future. The economics of the business is great because whenever you have people who just refinanced their homes at lower rates will end up using the extra money to improve their homes and their style of living. Furniture purchased, which is predominately made by women, will grow with a lag after the finance boom in mortgages has gone down. The furniture business can be considered a lagging indicator but is a very strong and consistent business.

      To the fat baboon. I feel your pain of boredom. There is really nothing out there that is worth looking at. However, there are these two companies I have looked at that might be quite interesting to look at. The companies are OCA or Orthodontic Centers of America and PSTA Monterey Pasta Company.

      The first company provides business services to orthodontists, they believe that doctors don't know how to run businesses so they run it for them at a price. Why its down? Well the company bought out another similar company about a year ago that brough in 50 docotrs who are litigating. Whenever the lawyer is involved things get weird. Their cash flow is still strong and their debt level has been decreasing and can be paid off in 2 years. They are selling below "book Value" (with goodwill). I like the economics more than the current short term problems. Everybody needs to get their teeth fixed and these are the only guys who can do that.

      In reference to the other company PSTA, or Moneterey Pasta. We have a company that relied totally on Costco for the selling of high end pasta. Well the comapany changed CEO's last year and have changed their strategy bringing out new products like the LOW CARBOHYDRATE PASTA. The company has no debt and 6 million in cash. They have increased their retail side of the business which is what is going to cause them to detach themselves from Costco.

      Allrighty I hope this helps. If not then I guess you will be bored, sorry I couldn't help.

    • sameplotdifferentcharacters sameplotdifferentcharacters Dec 17, 2003 12:38 AM Flag

      Agree that it is hard to find 50% margin of safety on high quality companies so today's market requires accepting a little (hopefully temporary) hair.

      In the spirit of the holidays, I offer an idea for your consideration...I hope you enjoy it as much as I enjoyed your banter...

      Check out MDS...Turnaround is "in the bag." Results should be pretty clean in 2004 and sparkling in 2005. Underlying business after turnaround will be almost pure franchise fees, royalty fees, and real estate rental fees (see PEP Boys turnaround for comparable trajectory).

      There's a free cash flow pony in all that poop! $25/share just for the clean numbers in 2004. $35/share by late 2005 if the management team is as good as they appear to be.

      If you want to discuss, happy to do so...

    • "That said, I don't think I will be projecting the historical ROC into the future. I don't want to make bullish dollar assumptions for the future and I don't think that management will be able to fully overcome the changed exchange rate's impact on margins (and, consequently ROC). With a $1.20:E1.00 rate projected into the future ROC could be 40% lower than the 20% historical rate, or 12%."

      I agree that it might be too aggressive to project historical ROIC into the future, especially now, that margins are under pressure, so 12% might be a good guess. But OTOH, I wonder if it is not too conservative to

      * project depressed earnings into the future,
      * discount them with a steep 15%
      * and in addition, demand a large (50%) margin of safety.

      I don't think there were too many businesses (if any at all) available, even 8 months ago, that would have been even mildly interesting under such rigid requirements. Sure, it is necessary to purchase cheaply, but the set of requirements should still be realistic enough to find an investment at least once a year, on average.

      Suppose, you have a business that earns a 15% ROIC, and you discount dividends (or FCFs) with 15%. Then intrinsic value would coincide with book value, which would represent a p/e of 6.66. For a margin of safety of 50% you would need to purchase at a p/e of 3.33. I guess it is very rare to find a company trading at 3.33 times depressed earnings, and still having good management and a decent strategic position (which I think is the case with NTZ). And that still does not take into account any taxes one would have to pay on dividends.

      "Of course, as you say, NTZ should be able to manage the new environment to improve on this,
      and I guess the question is by how much."

      I have no insight into this, but NTZ's management leaves a good impression on me. Their past initiatives were very successful and well planned. From what they write in their AR, I think they understand their strategic position.

      I wish I had never written this last paragraph!


    • You may look at BOSN.AS and CNQ

    • shorted 500 XMSR @24.59
      and 1000 SSFT @5.41

    • Ahh...!!!

      Your doing just fine in your search for investments.

      Just stay board (sit on your hands or take up a hobby) but don't stress... their is not much around.

      Cheers WBplc

    • I don't want to get into a thread about what discount rate to use but here are some facts to research...

      1. Long term (50-100 yrs) average aggregate corporate ROE @ 12-13%

      2. Long term (60 yrs) aggregate S&P 500 returns (nominal) 11.5% (including dividends which incidently average @ 4.4% during the past 100 years)

      3. Medium term (30 yrs) the stock markets implied 'equity risk premium' has occilated in the range 2.5 - 10% more than AAA bonds (i.e. an implied discount rate of AAA bond + ERP of 2.5 - 10%) with an average ERP in the range of 3.5 - 4.5%

      You can choose your own poison with the discount rate but I still believe that at <$10 NTZ has some margin of safety.

      Cheers WBplc

    • thanks for the detailed analysis...but I think you are too conservative (and I am pretty damn conservative).


2.40+0.03(+1.27%)Aug 19 4:00 PMEDT

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