I took a look at their annual reports and I see what you mean. I think the confusion is in the language. Many companies list “issued” and “outstanding” on the balance sheet. WMI only shows “issued” and you have a touch of math to do. As it stands, the company has:

• 1,500,000,000 shares authorized (if they need to sell more to the public);
• 630,282,461 issued (meaning someone owns them);
• 96,598,567 in treasury (meaning the company owns 96 million of the 630 million issued.

If the company reported the “outstanding” on the balance sheet, you would see 533.7 (~630.3-96.6) million in fiscal year 2006 and 552.3 (~630.3-78.0) million in fiscal year 2005.

In Item 5 of the company’s 10-k (annual report), they confirm that they repurchased ~31 million shares. Above, we show a reduction of 18.6 million shares. That means the company issued (via options or otherwise) another 12.4 million.

They will adjust the amount for every quarterly and annual report.

As to the second part of your question, a company is not supposed to be able to manipulate its stock price in the way you mentioned. If a company manipulates its news to inflate or depress the price, the SEC and attorney general will have a field day taking the executives to court. That said, I’m sure that the scenario plays out to a certain degree in reality. The old balance-between-what’s-legal-and-what’s-profitable tightrope act that a small number of companies will try.

Also is there any restrictions as to how they can buy back shares., after all whats to stop them from putting out bad news only to buy back at a lower price.

Your input would be great.

Jeff: A company has basically three values – the liquidation value, the ongoing “forever” value, and the “somewhere in-between” value. In general, when valuing a business, I don’t expect it to continue forever and I don’t expect it to break up tomorrow. As such, I try to value it as if I were going to hold it for twenty years, and then decide what to do with it.

You can value it for ten years, and then add a sales price in (a la Mohnish Pabrai) or value it forever and just put a dollar amount on cash flow and ignore the assets entirely. I have found that the 20-year valuation gives a very tight correlation between price and value over the long-term.

Hope that helps!

I didnt predict enough years of cash flow for TM. I think that I thought that I was closing in on a normalized rate or something. I should have used a multiplier like 20.7/23.5 to compare my approximation.

What is the significance of projecting for exactly 20 years ?

Do you know if when a company says it’s buying back shares and “canceling” them, this is the same thing as the buybacks going into the treasury? I’d assumed “canceling” meant taking them out of circulation for good.

sp

If I look at TM’s free cash flow from 2001 to 2007, I get

2001 $ 12,887

2002 $ 12,265

2003 $ 16,978

2004 $ 20,096

2005 $ 22,148

2006 $ 22,341

2007 $ 27,749

which calculates to a 13 % growth rate

Since times are tough on the auto makers, I will give them a break and lower this rate to 10% for the next 5 years

2007 $ 27,749

2008 $ 30,523

2009 $ 33,576

2010 $ 36,933

2011 $ 40,627

2012 $ 42,658

total = $ 212,069

I expect TM to generate $ 212,069 in future cash by 2012

Using M$ Excel and a discount rate of 15% ( =NPV(15%,2012-2007,212069-0) ), I know that I will need to invest $ 160,358 today to buy this future cash.

If I add in today’s total equity of $ 99,042 , I arrive at an intrinsic value of $ 259,400 Mil or $ 259.4 Bil

Since there are 1.8 Bil shares OS, I can see that (259.4 / 1.8) = $ 144 share price

Using a margin of safety of 25%, my target price would be $ 108

It looks like I may have overpaid at $118 unless my logic is flawed. Hmm…. should I hope so or not…

And, back to my original question, could this value be higher with the TM share buy back ?

Sorry for the lengthy post

Thanks,

Jeff

Thanks for the great information. I have just recently stumbled upon this site and have become fascinated with your teachings regarding company valuations.

I found today’s blog on stock buy backs very interesting. I already own some Toyota stock but wonder if it was a smart buy in the $118 range. What is your take on TM and their recent stock buy back plan ? Smart move as it may relate to an undervalued stock or are they also morons ?

Thanks in advance and please keep up the blogging. I’ve become addicted to your writings.

Jeff

Some of my random thoughts:

I know this is not as much a spreadsheet issue as one would like. Bottom line, are the other factors (ie: owner earnings growing) trending as one would like, then make an assesment as to the effect of the buyback.

Problem with just adding back buyback to equity is then where do we place that adjustment in our spreadsheet. The cash would be higher if not for the buyback, so CROIC would be lower. I guess the way the spreadsheet is set up that is taken care of.(?)

Do you even recommend as part of the “art of valuation” to perform an addback to equity for purposes in the spreadsheet? Similar to removing a down year in a company’s past due to some irregularity?

Guess it is an “educated gut feel kind a thing”.

Thanks for taking the time to put your original post up, it is much appreciated.