Comments on: Phil Fisher on Profit Margins, Part II http://www.fwallstreet.com/article/146-phil-fisher-on-profit-margins-part-ii/ Value Investing Blog Mon, 16 May 2011 10:55:06 +0000 hourly 1 http://wordpress.org/?v=3.3.2 By: Amit.D http://www.fwallstreet.com/article/146-phil-fisher-on-profit-margins-part-ii/#comment-1971 Amit.D Fri, 08 Aug 2008 07:57:50 +0000 http://www.fwallstreet.com/article/146-phil-fisher-on-profit-margins-part-ii#comment-1971 I have always wondered if IT was a viable option, in the works of Valuation. It makes sense to include dilution & Share Buybacks. I have always wondered if IT was a viable option, in the works of Valuation. It makes sense to include dilution & Share Buybacks.

]]> By: Jeremy http://www.fwallstreet.com/article/146-phil-fisher-on-profit-margins-part-ii/#comment-1965 Jeremy Sun, 27 Jul 2008 14:36:33 +0000 http://www.fwallstreet.com/article/146-phil-fisher-on-profit-margins-part-ii#comment-1965 Trader's post actually touched on an issue I have become increasingly aware of, and not for the better - stock buybacks. To me, while a company may spin this as a positive thing, I would view it as a way to keep the stock price inflated to make things not appear as gloomy as they are. What is your take? This topic might deserve a blog post in itself if you haven't spoken to it already. But my main question would be is do you have a preferred site to track the history of buybacks and common shares outstanding? Thanks for all the GREAT information, I am an avid reader of yours. Trader’s post actually touched on an issue I have become increasingly aware of, and not for the better – stock buybacks. To me, while a company may spin this as a positive thing, I would view it as a way to keep the stock price inflated to make things not appear as gloomy as they are. What is your take? This topic might deserve a blog post in itself if you haven’t spoken to it already. But my main question would be is do you have a preferred site to track the history of buybacks and common shares outstanding?

Thanks for all the GREAT information, I am an avid reader of yours.

]]> By: Joe Ponzio http://www.fwallstreet.com/article/146-phil-fisher-on-profit-margins-part-ii/#comment-1961 Joe Ponzio Wed, 23 Jul 2008 17:54:36 +0000 http://www.fwallstreet.com/article/146-phil-fisher-on-profit-margins-part-ii#comment-1961 <b>Pakorn:</b> You are absolutely right, and Fisher does not mention this. A company with a 4% or 5% profit margin with high inventory turnover can be just as good as a business with high profit margins. <b>Trader:</b> I see your point. What I am looking at is how much cash the business could generate, regardless of the number of shares outstanding. Once I have calculated a value for the entire business, I'll go back and look at the shares to see if the company has kept them the same, is diluting ownership, or is regularly repurchasing shares. If a company is greatly diluting ownership via stock options or stock sales, I will lower my estimation of present value based on my expectations of how much the company will be diluted in, say, ten years. In your acquisition scenario, I would value the entire business, and then divide by the number of shares outstanding. So, my intrinsic value per share would not change because intrinsic value per share would not change -- double the cash flow, double the shares. If the business was worth $10 million before the acquisition and $20 million afterwards, I still come up with a per share price which would not change. The share dilution or repurchase policies come into play after I have estimated the business' value, and then I adjust my valuation and expectations accordingly. Make sense? Pakorn: You are absolutely right, and Fisher does not mention this. A company with a 4% or 5% profit margin with high inventory turnover can be just as good as a business with high profit margins.

Trader: I see your point. What I am looking at is how much cash the business could generate, regardless of the number of shares outstanding. Once I have calculated a value for the entire business, I’ll go back and look at the shares to see if the company has kept them the same, is diluting ownership, or is regularly repurchasing shares. If a company is greatly diluting ownership via stock options or stock sales, I will lower my estimation of present value based on my expectations of how much the company will be diluted in, say, ten years.

In your acquisition scenario, I would value the entire business, and then divide by the number of shares outstanding. So, my intrinsic value per share would not change because intrinsic value per share would not change — double the cash flow, double the shares.

If the business was worth $10 million before the acquisition and $20 million afterwards, I still come up with a per share price which would not change.

The share dilution or repurchase policies come into play after I have estimated the business’ value, and then I adjust my valuation and expectations accordingly. Make sense?

]]> By: Trader http://www.fwallstreet.com/article/146-phil-fisher-on-profit-margins-part-ii/#comment-1954 Trader Wed, 23 Jul 2008 13:43:25 +0000 http://www.fwallstreet.com/article/146-phil-fisher-on-profit-margins-part-ii#comment-1954 Hi Joe, Sorry for posting the comment here, I was not sure if anyone checks the comments on older posts. First, great website, this is THE website that I have learned the most about investing. I have a question on your evaluation spreadsheet. I was looking at JNJ and you have estimated the FCF growth to be 16.1%. Wouldn't it be better to consider FCF/share to estimate growth ? If you take FCF/share, JNJ's growth rate will be 15.2% as its outstanding shares increased from 2691mm to 2891mm during the period. Taking to extreme, a no growth company could acquire another company of the same size issuing shares, its FCF will double, whereas FCF/share will remain the same, which is what we are interested in. Thank you. Hi Joe,

Sorry for posting the comment here, I was not sure if anyone checks the comments on older posts.

First, great website, this is THE website that I have learned the most about investing.

I have a question on your evaluation spreadsheet. I was looking at JNJ and you have estimated the FCF growth to be 16.1%. Wouldn’t it be better to consider FCF/share to estimate growth ? If you take FCF/share, JNJ’s growth rate will be 15.2% as its outstanding shares increased from 2691mm to 2891mm during the period.

Taking to extreme, a no growth company could acquire another company of the same size issuing shares, its FCF will double, whereas FCF/share will remain the same, which is what we are interested in.

Thank you.

]]> By: Pakorn Wong http://www.fwallstreet.com/article/146-phil-fisher-on-profit-margins-part-ii/#comment-1949 Pakorn Wong Tue, 22 Jul 2008 20:54:37 +0000 http://www.fwallstreet.com/article/146-phil-fisher-on-profit-margins-part-ii#comment-1949 Great Post as alway joe, one of the investment blog that I enjoy the most. Just want to share that, eventhough, profit margin is important to monitor, but do not decided on just PM alone. In some business like retail store, PM may be low like 2-6% but it could have very fast turnover. Very fast turnover, even low PM, still could mean good profitable business, just don't forget to observed that company have a good moat. If you just look at PM alone you could misss manny wonderful business. Cheer, Great Post as alway joe, one of the investment blog that I enjoy the most.

Just want to share that, eventhough, profit margin is important to monitor, but do not decided on just PM alone. In some business like retail store, PM may be low like 2-6% but it could have very fast turnover.

Very fast turnover, even low PM, still could mean good profitable business, just don’t forget to observed that company have a good moat.

If you just look at PM alone you could misss manny wonderful business.

Cheer,

]]> By: Eliot Murray http://www.fwallstreet.com/article/146-phil-fisher-on-profit-margins-part-ii/#comment-1944 Eliot Murray Mon, 21 Jul 2008 04:14:16 +0000 http://www.fwallstreet.com/article/146-phil-fisher-on-profit-margins-part-ii#comment-1944 Excellent post. We look at profit margins with our own wallets, why not with businesses you want to buy? I recently added profit margins as a vital part of my analysis. Excellent post. We look at profit margins with our own wallets, why not with businesses you want to buy? I recently added profit margins as a vital part of my analysis.

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