Going back to Wal-Mart: I expect the company to keep opening new stores. When it does, I have a reasonable basis for knowing what to expect from each store. Still, the CapEx associated with opening stores generally goes to the balance sheet (in the form of shelves, buildings, etc) and I become part owner in the new store. In that case, the future CapEx for growth is not a charge to or reduction of owner earnings, it is a reinvestment of owner earnings.
I agree that the future cap ex for growth is not a charge to owner earnings. However, the 6,522 of owner earnings in 2007 should not count as an interim cash flow in deriving the present value of the business. Cash after maintenance cap ex cannot be used in a DCF model to derive intrinsic value if the business is using the cash to grow, otherwise that would be double counting

I have a simple question about your spreadsheet. What methodology do you follow for populating you spreadsheet with the basic data (current liabilities, total liabilities, shareholders’ equity, etc.).

Do you start with the most recent 10-K and work backwards? Do you use the 3-year comparisons in the most recent 10-K or go year-by-year?

The quirkiness of GAAP accounting often results in restatements for comparability purposes and I struggle with the decision of what numbers to include prior to performing my analysis.

Thanks in advance,

RD

May I ask what excel spreadsheet you used to come up with the JNJ calculations?

I read your comment above about how Charlie Munger laughed at WACC calculations. When I was trying to get a real handle on DCF valuations I reviewed a series of different techniques to arrive at a DCF valuation and actually the quality of the business and the assets can have a huge bearing on margins of error making the whole WACC calculation seem very tortuous for the value it gives.

For WACC, I found the calculations all a bit convoluted, and having gone through the exercise of working it all out I came to the conclusion that actually the error margin in choosing the appropriate profit margin, cost of capital or revenue growth made the whole WACC question totally meaningless, in fact doing as you recommend and picking a rate of 9 or a ten year bond rate if above 9 gives results that are well within any possible errors we might introduce in estimating one of our other parameters.

I don’t know, perhaps the fact that the maths geniuses on Wall Street can hack together immensely complicated computer models to give them three decimal places in precision gives them some comfort.

Here is a very interesting point, and it’s meaningless to pure mathematicians as their training is the stuff of ideal models and not of measurement. Precision and accuracy are completely different things. The best example I have is throwing three darts at a dartboard and aiming to hit the bull’s-eye. If all three darts arrive at the edge of the board within millimetres each other, our throwing is very “precise”, but totally inaccurate. At his point, Buffett’s quote, “I’d prefer to be approximately right than precisely wrong” really hits home.

For me working out the WACC, is a way of being precise but it’s a meaningless exercise if we are looking for businesses that A) demonstrates a strong return on capital and B) The management of those businesses are vocally committed to strong returns on capital in all capital allocation activities. In these cases the WACC looks after itself as management have already done the work on a project by project basis.

If I don’t get the impression that the business is orientated that way I simply won’t buy it, unless it’s a net net assets value play, and then I’m buying dollars for cents anyway.

Approximately right on a 50% margin of error is where I’d rather be than precisely wrong with none at all.

Welcome! The true value of F Wall Street is the amazing community and discussions in the comments. We all encourage you to jump in!

I have been reading some posts and it is amazing the amount of useful information available in this website. I just want to thank Joe for creating this site, it is impressive.

I also want to thank the rest of the people that are making comments because they provide very interesting points of view too.

I am graduating in Dec2010 and i want to do my final project on value investing.

Hopefully I can ask you guys for recommendatios when it is time.

Thanks

I guess I would add one more thing to this. By using Joe’s method, you are implicitly assuming that net assets will grow at whatever rate you choose for your discount rate. Perhaps this would make some of you more comfortable using Joe’s method?