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Dec
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Valuing companies and looking for deep discounts is pretty boring. For the most part, companies are generally priced right around their intrinsic business value which makes finding steals a difficult and often disappointing venture. In fact, it would make for a fairly boring TV show—even if you had bells, whistles, and mooing toys.
Such is the case with Abbott Laboratories.
If you aren"t familiar with Abbott (ABT), it is a manufacturer of pharmaceuticals, medical devices, etc. It is in the game with Johnson & Johnson, Pfizer, Eli Lilly, and the other big, diversified players. It has been around so long that Ben Graham used it in his book The Intelligent Investor two generations ago.
Price follows value. For the most part, the markets are generally efficient—pricing companies right around their intrinsic business value. From time to time, however, the markets give us an opportunity to steal businesses for pennies on the dollar. Or, to put it the popular way—to buy $1 worth of a business for $0.50.
Consistency
Abbott Laboratories is one of those boring, conservative, consistent businesses that generally seems to grow at a boring, conservative, consistent rate. For every dollar of invested capital, it generates roughly $0.15 to $0.18 a year in excess cash. The cash tends to tick up consistently each year at a predictable rate.
Most people would consider Abbott Labs to be a blue chip, boring stock—a conservative investment for the long term. The few that might not? Those are the people that bought ABT without knowing (or estimating) its intrinsic value—ultimately overpaying for the stock when it was grossly overpriced over the past decade.
Growth Rates
Abbott Labs has been chugging along for more than a hundred years. It"s no surprise, then, that the past ten have seen just 9% (or so) growth. Regardless of what the stock price has done, the business has grown at a touch more than 9% a year.
It hasn"t really been a net buyer or seller of its stock, so we can"t expect to get much growth in our ownership from that. When valuing ABT, we have to make assumptions about the future. As such, I"ll assume that it will continue to grow at about 9% for the next three years, then slow to just over 8% for three years, and then slow to 7.5% for the next four. Beyond year 10, I"ll assume ABT will grow at just 5%.
Price and Value
Like most companies—especially most large ones—the price of the stock generally follows (and is often married to) the actual intrinsic value of the company. Such has been the case with Abbott:
Since 1997 (and long before that as well), the stock price has danced around the value of the company—a value I estimate today to be about $52 a share. At times, the price got out of control—sometimes coming in 30% or more higher than the actual value of the company.
Considering that prices are driven by supply and demand, that means that speculators, institutions, and non-business investors were paying 30% or more too much to own a piece of ABT.
The Problem With Giants—Good and Bad
Abbott is huge. Because of that, it would take a miracle to kick this company in the butt and get more than 9% or so growth going forward. That is a bad problem because you can"t expect too much from your company. It is a good problem because you need not expect too many surprises either.
Is There Growth Left In Abbott?
Sure! You can own Abbott when it is fairly priced to its value and reasonably expect your investment to grow at roughly the same rate as the company. You can choose to overpay and expect a lesser return. Or, you can wait for a deep discount and reasonably expect a much greater return.
If you look at the chart again, you"ll see that Abbott never really gave us a chance to buy it at a deep discount. Will it ever? I don"t know. And you know what that means: Keep an eye out for a 50% drop on noise (not news) but move on in the interim.
There"s a whole world of investment opportunities out there just waiting for you to analyze.
Side Note: Spam
I have been working with my web designer to figure out how to curb some of the spam comments that I have been getting—specifically, the 30 or so a day that I have been blocking. I know I am behind on comments and e-mails, but I am swimming in a sea of garbage and trying to sift through it all. If you need cheap airline tickets or viagra, let me know and I'll start letting those comments through. Otherwise, as always, I appreciate your patience and promise to respond to everyone!
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Like you said in one of your comments, it's about turning over as many stones as possible to find that hidden gem.
Oh... and I wouldn't mind getting a dose of Viagra on a cheap Southwest flight. =)
by J on December 3, 2007 at 11:37 AM