Buying a piece of business.
What is a business worth?
Mario Gabelli’s approach (GAPIC approach)
- Gather the data and look at all the public information.
- Put the data by rearranging it.
- Interprete and
Graham-Dodd Net-Net Approach
- 1 million shares outstanding
- Price per share $10
- Cash and Receivables $12 per share
- Thus, you will be buying below net current asset value in the public market.
2. Cumulative knowledge of industry over extended period of time.
For example, by following the auto industry, farm equipment business and entertainment business for 40 years, you can adopt to changes quicker. If the stock market (Mr. Market) comes down because of Brexit, you can see which company makes an interesting opportunity. Are they weakened up and how much time you have to hold it?
Private Market Value with a Catalyst versus Market Price
In value investing, how do you close the gap between the market price and the book value, assuming you bought with a gap of 20% below the book value?
We aim to narrow the spread between the Private Market Value with a catalyst and the Public Price of the security.
- What element is visible to a strategic buyer or an interested corporate buyer?
- We do not necessarily look at book value.
- What multiple of cash flow minus capital expenditure (EBITDA) would you pay to own the business?
- How quickly EBITDA grows? Will it be affected by inflation or deflation?
- Are the cash flows, subscription revenues (cable TV cash flows) or transaction revenues (price of sugar spikes up giving lots of gains)? How much or what multiples would you pay?
- We look at book value versus value of business and that value can change over time.
In leveraged buy-out or private equity transactions:
- What multiple will you sell the business 5 years from now?
- What kind of return on your equity investment are you looking at?
- How much debt can you raise to finance the purchase today?
- Also, how much debt can another raise 5 years from now who wish to the same thing?
Turnover 10% per year.
Holding period for stocks about 10 years.
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