“The only way you can get good, unless you’re a genius, is to copy. That’s the best thing. Just steal” – Ritchie Blackmore
Walter Schloss and to a much greater extent Warren Buffet are the most well known of stategy ‘thieves’ insofar as they used the principles of investing that Ben Graham taught them. They are not the only ones.
There’s no shame in standing on the shoulders of giants, especially one as tall as Ben Graham.
Today’s short post ‘steals’ an idea from Ben Graham that gets investors to begin the process of practising company analysis. Handy if you are new to investing and a nice refresher if you’re an old hand.
Graham used to take two companines, sometimes more, that were sitting next to each other alphabetically on the NYSE and compare them. Page 330 of The Intelligent Investor has more on this type of company analysis.
Company (Stock) Analysis: Solarwinds Inc and Solera Holdings Inc
Below you will find two companies sitting side by side on the NYSE that have the same (or as close to the same*) statistical and value metric information that Graham used in this process.
*These companies were not entirely chosen at random: I used the first two letters of my daughter’s first name as a reference.
All data is taken from ADVFN and the closing prices were for 3 August 2012.
|Solarwinds Inc (SWI)||Solera Holdings Inc (SLH)|
|2||No of shares of common||74,200,000||69,500,000|
|3||Market value of common||4,025,350,000||2,805,200,000|
|4||Total non current liabilities incl. preferred stock||89,000,000||1,180,000,000|
|7||EPS this year||0.84||2.23|
|8||EPS five years ago||0.24||-2.82|
|9||EPS ten years ago||0.00||0.00|
|10||EPS five year average||244%||0.00%|
|11||EPS ten year average||0.00%||0.00%|
|16||Tangible book value per share||1.79||-9.33|
|18||PE ratio 1 year ago*||30.60||23.60|
|20||Price/tangible book value||30.00||-4.33|
|22||Net profit margin||31.50%||23.00%|
*Note that due to the short operating histories for these companies, price to earnings are compared to one year ago as opposed to the 5 year average.
‘At a Glance’ Company Analysis
The first thing to note about these companies are that they are not typical ‘Graham type’ companies.
For example, they have short operational histories and one of them does not pay a dividend. Short operational histories make it difficult to judge how well a company has grown EPS in the past through catasprophies such as recessions or downturns within the company’s industry.
Also the PE ratios are very high – Graham advised newbie investors that companies should have a PE of no more than 15.
Furthermore Solarwinds is trading massively over tangible book value and Solera has a negative tangible book value – all its debts are more than the value of its tangible assets.
The financial condition of Solarwinds is much better than Solera as can be seen by the negative tangible book value (line 16). Also, if you look at the total non current liabilities (line 4), Solera has a huge debt burden as compared to its market value: $1.180 billion of debt compared to $2.805 billion of market value.
What if the value of Solera declined significantly due to a general slowdown or stock market crash? It could end up having more in debts than the company is worth.
In comparison, Solarwinds has little debt compared to its value: $89 million of debt compared to $4,025 billion of market value.
Things to note
- The ‘at a glance’ analysis above took me about five minutes.
- The majority of the time was spent searching for the information to populate the comparison table in the first instance.
- To attempt this exercise yourself and for a thorough analysis, the figures would need to be taken from the company financial statements which can be found online either from their corporate website or the SEC database for US companies.
- I would not invest in either of these companies for the reasons above: they are both overvalued and one of them (Solera) has too much indebetness to provide a margin of safety.
Thanks for reading today’s short post on The Shares and Stock Markets Blog and good luck with all of your investments.
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