Western Union fell 5% yesterday on News that Verizon was letting customers transfer money with their phones. Western Union said they thought the technology was interesting and will be exploring the possibility of using it. I doubt this will have any lasting effect and it won't be long before Western Union partners with a cell phone company to do this. Even if they don't I doubt the majority of their current customers have phones or can afford them.
To see if this drop will finally allow me to average down I updated my valuation, using the intrinsic value model Pabrai writes about in Mosiac.
Current Excess Capital On Hand $1,749.0
Starting FCF $1,094.50
Next Year Growth 12%
Year 2 - 4 10%
Year 5 - 7 10%
Year 8 - 10 8%
Discount Rate 9%
Shares Outstanding in Year 1 768.00
Shares Outstanding Compound Rate (Optional) -0.50%
PV 10 Year Sale, Years 1-10 FCF, and Excess Capital 24,895.99
Year 10 Shares Outstanding 730.45
Price/Share $34.08
Price/Share w/50% margin of safety $17.04
Year FCF PV of FCF
Start $1,094.50 $1,094.50
1 1,225.84 1,124.62
2 1,348.42 1,134.94
3 1,483.27 1,145.35
4 1,631.59 1,155.86
5 1,794.75 1,166.47
6 1,974.23 1,177.17
7 2,171.65 1,187.97
8 2,345.38 1,177.07
9 2,533.01 1,166.27
10 2,735.65 1,155.57
sale 27,356.54 11,555.70
fcf 19,243.80 11,591.29
Total 46,600.34 23,146.99
In this DCF I use assumptions of 12% growth next year,
then 10% every year before years 8-10 when I predict 8% growth.
I also assume Western Union will buy back .5% of its shares every year.
This puts the value at 34.08, not the 50% discount that Pabrai looks for but 40% discounted which is enough for me in a business I like and I've bought more today.
Netflix
Munger said checklists should be used in investing which is why once again I'm using Buffett's checklist according to Hagstrom to look at Netflix.
Business
Simple, Understandable
Yup. They are an online movie rental business. They have over 75,000 titles available to rent online and multiple different paying options depending on how many movies one would like to rent at once. They also have started with digital downloads of movies that customers can watch in their web browser.
Consistent History
Um, younger than me so not really long. But it is consistent.
Favorable Long-Term Prospects
Excuse my French, but Hell Yes! Uncertainty on this is what is depressing the price, but they did so well fending off Wal-Mart that Amazon.com decided to can its business renting DVDs. People also think Blockbuster will kill Netflix but so far its spent hundreds of millions of dollars on its Online Rental business only to get it not as good as Netflix and to have less then a third of the share of Netflix, still. Right now it is basically giving away movies Blockbuster will probably have to choose online or stores pretty soon, if not it will have to raise its price on Total Access which will allow Netflix to gain a lot of Blockbuster's subscribers.
Management
Rational
Yes. Netflix knows exactly what it's doing and what will happen to its business in the future.
Candid
They have the best IR Site I've seen. Even including Videos with the executives discussing the business.
Resist Institutional Imperative
Management appears to be more focused on finding shareholders for the long haul and not on short term results.
Financial
Return on Equity
Currently Netflix has an OK ROE of 16%, I believe in the future as its marketing expenses dip relative to revenue ROE will rise to a very god number reflecting its dominance in the industry.
Owner's Earnings
Income 49,082
+ D&A 88,204
- CapEx 15,720
=Owner's Earnings - $121,566
Profit Margins
Currently Owner's Earnings Margins are at 24%, very high and it will only rise in the future as marketing and technology expenses fall.
Value
Using the same method I used for WU with growth next year of 20%, and then growth of 18% until year 8 when it reduces to 10% and a discount rate of 12% I get a value of $48 per share, which is way above the current price, but also just a starting point.
Conclusion
The valuation model I used was set-up to be aggressive, because Mohnish was using it to show how overvalued some tech stocks were, which is why I used such conservative inputs with WU, but I also believe my Owner's Earnings estimates for Netflix may be high, I will continue looking at it, I definitely believe it is a value stock flying under the radar.
To see if this drop will finally allow me to average down I updated my valuation, using the intrinsic value model Pabrai writes about in Mosiac.
Current Excess Capital On Hand $1,749.0
Starting FCF $1,094.50
Next Year Growth 12%
Year 2 - 4 10%
Year 5 - 7 10%
Year 8 - 10 8%
Discount Rate 9%
Shares Outstanding in Year 1 768.00
Shares Outstanding Compound Rate (Optional) -0.50%
PV 10 Year Sale, Years 1-10 FCF, and Excess Capital 24,895.99
Year 10 Shares Outstanding 730.45
Price/Share $34.08
Price/Share w/50% margin of safety $17.04
Year FCF PV of FCF
Start $1,094.50 $1,094.50
1 1,225.84 1,124.62
2 1,348.42 1,134.94
3 1,483.27 1,145.35
4 1,631.59 1,155.86
5 1,794.75 1,166.47
6 1,974.23 1,177.17
7 2,171.65 1,187.97
8 2,345.38 1,177.07
9 2,533.01 1,166.27
10 2,735.65 1,155.57
sale 27,356.54 11,555.70
fcf 19,243.80 11,591.29
Total 46,600.34 23,146.99
In this DCF I use assumptions of 12% growth next year,
then 10% every year before years 8-10 when I predict 8% growth.
I also assume Western Union will buy back .5% of its shares every year.
This puts the value at 34.08, not the 50% discount that Pabrai looks for but 40% discounted which is enough for me in a business I like and I've bought more today.
Netflix
Munger said checklists should be used in investing which is why once again I'm using Buffett's checklist according to Hagstrom to look at Netflix.
Business
Simple, Understandable
Yup. They are an online movie rental business. They have over 75,000 titles available to rent online and multiple different paying options depending on how many movies one would like to rent at once. They also have started with digital downloads of movies that customers can watch in their web browser.
Consistent History
Um, younger than me so not really long. But it is consistent.
Favorable Long-Term Prospects
Excuse my French, but Hell Yes! Uncertainty on this is what is depressing the price, but they did so well fending off Wal-Mart that Amazon.com decided to can its business renting DVDs. People also think Blockbuster will kill Netflix but so far its spent hundreds of millions of dollars on its Online Rental business only to get it not as good as Netflix and to have less then a third of the share of Netflix, still. Right now it is basically giving away movies Blockbuster will probably have to choose online or stores pretty soon, if not it will have to raise its price on Total Access which will allow Netflix to gain a lot of Blockbuster's subscribers.
Management
Rational
Yes. Netflix knows exactly what it's doing and what will happen to its business in the future.
Candid
They have the best IR Site I've seen. Even including Videos with the executives discussing the business.
Resist Institutional Imperative
Management appears to be more focused on finding shareholders for the long haul and not on short term results.
Financial
Return on Equity
Currently Netflix has an OK ROE of 16%, I believe in the future as its marketing expenses dip relative to revenue ROE will rise to a very god number reflecting its dominance in the industry.
Owner's Earnings
Income 49,082
+ D&A 88,204
- CapEx 15,720
=Owner's Earnings - $121,566
Profit Margins
Currently Owner's Earnings Margins are at 24%, very high and it will only rise in the future as marketing and technology expenses fall.
Value
Using the same method I used for WU with growth next year of 20%, and then growth of 18% until year 8 when it reduces to 10% and a discount rate of 12% I get a value of $48 per share, which is way above the current price, but also just a starting point.
Conclusion
The valuation model I used was set-up to be aggressive, because Mohnish was using it to show how overvalued some tech stocks were, which is why I used such conservative inputs with WU, but I also believe my Owner's Earnings estimates for Netflix may be high, I will continue looking at it, I definitely believe it is a value stock flying under the radar.
