Monthly Archives: November 2013

Editorial stuff: New “Investment Fundamentals” page

In order to organise the content a little bit better, I have created a new page called “Investment Fundamentals” within the blog which collects all the more general posts I have written over the last 3 years.

It makes it easier for me to find the stuff and maybe it helps some of my readers as well. In order not to overload the blog, I deleted the German “Anlagephilosophie” and the “Boss Score” page.

For the moment the new page looks like this:

General valuation / accounting know how

Risk free rates and discount rates for DCF

How to calculate Enterprise value

Operating Cashflow and interest expenses

Operating Leases and IFRS (German)


Special situations

Underrated Special situation: Deeply discounted rights issues

Some thoughts on holding companies

3 part series on European spin offs: part 1, part 2 and part 3

Preference shares (German) part 1 and part 2

Portfolio construction / management

Momentum and Value Investing

Position sizing and cash quota

Leveraging Investment returns if you are not Warren Buffet

Behavioural Investing: Averaging Up vs.Averaging down

General thoughts

Competitve advantages of individual investors

The value of paying divdends

Short interest and stock performance

Transformational acquisitions

Special situation: MAN AG (ISIN DE0005937007 / DE0005937031)

Short Background:

Volkswagen, the Geman car giant bought the majority of MAN AG, the German truck maker back in 2011. Over the next year, they increased their shareholding to 75%.

Under German law, once the 75% threshold is reached, a majority owner can implement a contract which cedes the full control to the majority shareholder. However, a compensation amount plus a guaranteed dividend has to be offered to minority shareholders. (for a true squeeze out, at least 90% ownership is required). The main benefit of those kind of contracts is not only control but also a big advantage from a tax perspective.

In the 2013 shareholder meeting of MAN, a “Beherrschungs und Gewinnabführungsvertrag” (BGAV) was decided with the following amounts:

– shareholders will receive a compensation of 80,89 EUR directly if they hand in the shares
– OR a guaranteed dividend of 3,07 EUR per share if the compensation offer is not accepted

Normally, investors have 2 months time after the BGAV has been registered in the commercial register (Handelsregister) in order to tender the shares. Minority holders however have the right to challenge the terms if they think that the offer is too low.

And here it gets interesting

As part of the process, MAN had to present the underlying assumptions and the valuation details to the shareholders. The document can be downloaded here (German).

And there the fun starts.

For instance on page 114, they describe the inputs for the calculation of the terminal value starting 2018. For some unexplained reason, the starting EBIT is some 24% lower than the official company plan on page 91.

As a risk free rate they use 2.5%, which for a German company should be a lot lower. Also the assumptions for Beta and Growth (-1%) as well for the equity premium are not in line with “standard” assumptions.

If any of those assumptions gets successfully challenged, Volkswagen has to pay more. One can easily calculate this in a spreadsheet.

All in all, a final price of 105-110 EUR might not be unrealistic. The downside is limited. If the court approves the original price, shareholders can still “put” the shares to Volkswagen at 80,89 EUR plus a 5% interest since the BGAV has been implemented.

The “Spruchstellenverfahren” is held in Munich which is known to be rather minority friendly.

One remark: 3. quarter results of MAN on a net income basis were quite weak, but this will not be taken into account for the current trial. Only the assumptions of the submitted document are relevant, not the “real world developement”.


So we have a quite interesting situation here:

The downside is ~82 EUR, I.e. a loss of 7 EUR for the common shares vs a potential gain of 15-20 EUR. If we assume a 50/50 chance, we already have a positive “expected” value of 11-13 EUR per share.

The stock price itself is slowly trading up since July:

Although this does not sound like a huge deal, I think it is a nice, uncorrelated “bet” with a rather short time horizon and a clearly limited downside. Therefore, I have opened a 2.5% position in the common shares at 89 EUR and hope for a minority friendly outcome….

Edit: There are by the way a couple of erman stocks which have this guaranteed dividend. Some of them might be an interesting alternative to bonds. More in a later post.

Some links

Great analysis of Nicholas Financial by the excelent Punchcard blog

Eddy Elfenbein with a great look back into history into the Great Salad Oil Swindle. Good for Warren Buffet who bought into Amex because of this.

Damodaran still thinks that Twitter is worth only 18 USD per share

Sear has been an actually good investment over the last 20 Year, if you include all spin-offs.

Will the machines take over investing ? They seem to be even better at brewing coffee now.

P/E, EV/EBITDA, EV/EBIT, P/FCF – When to use what ?

This post was prompted by a minor change in the standard Bloomberg company description which I noticed over the last view months. If one uses the function “DES” Bloomberg provides on page 3 some standard ratios which are quite helpful in order to get a first view on a company. Within the screen there are 6 boxes, the upper left box showing currently the following ratios (example: National Oilwell Varco, NOV US):

Issue Data
~ Last Px USD/80.91
~ P/E 14.4
~ Dvd Ind Yld 1.3%
* P/B 1.60
~ P/S 1.5
~ Curr EV/T12M EBIT 8.6
~ Mkt Cap 34,637.6M
~ Curr EV 35,743.6M

Interestingly, a few weeks ago (??), one would get EV/EBITDA instead of EV/EBIT. I am not sure why they changed it, but it is a good starter in order to think about the differences between P/E, EV/EBITDA and EV/EBIT

The P/E ratio

The P/E ratio is clearly the most famous valuation ratio. A low P/E strategy still seems to work. In my opinion, the P/E ratio clearly has two major fundamental drawbacks as a “strong” criteria for me as a stock picker:

– it does not reflect net debt or net cash
– under IFRS, many items (Pensions, currency changes) are booked directly into equity. This is the reason why I prefer P/Comprehensive income


The “classic” EV/EBITDA ratio is much better in capturing debt and net cash than the P/E. As I have explained in an earlier post, one should be careful with EV in certain cases (leases, pensions), but overall, EV is much better to compare highly leveraged companies with “conservative” companies

EBITDA, as the name says, is “Earnings before Interest, Taxes, Depriciation and Amortization”. Some people have called it “Earnings before everything else” but in theory, EBITDA should be a proxy for operating cashflow.

As I have written before, this metric has been used a lot by Private equity buyers in order to assess, how much debt could be pushed into a company unitl it chokes.

In the latest edition of O’Shaugnessey’s “What works on Wall Street”, EV/EBITDA is also one of the strongest single factors, much better than P/B and P/E.

The problem with EBITDA is that although it might approximate Operating Cashflow, it does not equal “free cashflow”. The “D” in EBITDA means depreciation. If you leave out depreciation, the effect will be that capital-intensive businesses which need a lot of capex (and depreciation) look suddenly quite good, although this cashflow never reaches the equity holder, because it is necessary to maintain the productive capital.

We can see this easily if we look at the DAX companies, sorted by EV/EBITDA:

Deutsche Lufthansa AG 3.26
RWE AG 3.51
K+S AG 4.33
Continental AG 4.78
E.ON SE 4.80
Deutsche Telekom AG 5.85
ThyssenKrupp AG 6.27
HeidelbergCement AG 6.82
Volkswagen AG 6.93
Bayerische Motoren Werke AG 7.26
Deutsche Post AG 8.19
Infineon Technologies AG 8.19
Fresenius SE & Co KGaA 8.74
BASF SE 8.82
Bayer AG 8.97
Linde AG 9.10
Merck KGaA 9.12
Fresenius Medical Care AG & Co KGaA 10.33
Siemens AG 11.05
Henkel AG & Co KGaA 11.46
Adidas AG 11.85
Daimler AG 11.86
Deutsche Boerse AG 13.64
SAP AG 13.93
Beiersdorf AG 15.59

The cheap stocks are those companies, which are REALLY capital-intensive. Clearly, RWE and EON need to continuously reinvest into their huge power stations or they will not be able to produce any electricity soon. On the other hand, Deutsch Börse is basically a market making software with some computers and a government license. Very few assets, small depreciation.

So the “difference” between low EV/EBITDA and HIGH EV/EBITDA is not necessarily “cheapness” but different levels of capital intensity


This is why many “professionals” prefer EV/EBIT to EV/EBITDA. EBIT already deduces depreciation and should therefore be a better proxy for Free cashflow than EBITDA.

Let’s look at the Dax companies sorted by EV/EBIT:

SDF GY Equity 5.7 4.3 7.7
CON GY Equity 7.5 4.8 13.4
EOAN GY Equity 7.5 4.8 11.0
RWE GY Equity 7.9 3.5 22.4
FRE GY Equity 11.2 8.7 17.9
HEI GY Equity 11.2 6.8 34.2
TKA GY Equity 11.3 6.3 N.A.
DPW GY Equity 12.3 8.2 16.3
BAYN GY Equity 12.7 9.0 24.7
BAS GY Equity 13.0 8.8 14.9
FME GY Equity 13.4 10.3 19.8
HEN3 GY Equity 13.6 11.5 22.7
LXS GY Equity 13.6 7.3 24.5
BMW GY Equity 13.9 7.3 10.2
DTE GY Equity 14.3 5.8 N.A.
DB1 GY Equity 15.8 13.6 19.8
VOW3 GY Equity 16.0 6.9 10.4
SIE GY Equity 16.2 11.0 17.0
LHA GY Equity 16.2 3.3 8.7
MRK GY Equity 16.6 9.1 25.6
LIN GY Equity 16.7 9.1 19.4
SAP GY Equity 17.0 13.9 22.1
BEI GY Equity 18.3 15.6 32.2
ADS GY Equity 18.6 11.9 31.8
DAI GY Equity 19.2 11.9 8.5
IFX GY Equity 22.5 8.2 28.6
avg 13.9 8.5 19.3

I have added also EV/EBITDA and P/E in this table. It is interesting that P/Es look rather random when we sort by EV/EBIT. Especially Lufthansa looks now really expensive as well as Daimler and Infineon. On the other hand, a relatively expensive looking stock like Fresenius now looks rather cheap. A company like Beiersdorf looks expensive in any metric and th utilities look still cheap but not Deutsch TeleKom.

For the utility stocks for instance I think EV is too low, because one needs to add the liabilities for decommissioning the Nuclear plants to EV.

A quick word on Free Cash flow and P/Free cashflow ratio

As I have written earlier, one really has to be carefull with reported free cash flows. Cashflow statement are not really audited and it is quite easy to “massage” the categories. Free cash flow is clearly an important number to look at in a second step, but as a standard indicator it has very limited use in my opinion.

Some additional pitfalls

Using EV/EBITDA and EV/EBIT smoetimes can also be tricky. Among others are operating leases, pensions, certain prepayments etc. which can change EV dramatically. But there can also be issues on the EBIT/EBITDA side:

For instance, those are the stats for Statoil ASA, the Norwegian Oil company:

P/E 11.8

From an EVEBit perspective, this clearly looks like a no brainer: we only pay 3 times EBIT for a rock solid oil and gas company. Well, but we might have forgotten one important thing: Between EBIT and Free cash flow we have still two other items: Interest and Taxes.

As Statoil doesn’t pay much interest (only 2% of EBIT) the issues is clearly taxes. Statoil is subject to special taxes, which on average amount to 75% of EBIT. There might be some leeway to shelter certain tax payments, but in a country like Norway the companies will have to pay most of those taxes in cash.

Interest and Taxes are especially important if one compares companies across different countries. All other things equal, companies in high tax rate countries with high taxes will trade at lower EV/EBIT and EV/EBITDA multiples than in low tax low-interest rate countries. So fo instacne the Swiss MArket Index trades at 16.7 x EBIT and 12.2 EBITDA significantly higher than the German index. At least part of that is due to the much lower tax rate in Switzerland and even lower interest rates.

So a comparison of peer companies across countries with very different tax rates ind interest rates should not solely be based on EV/EBIT or EV/EBITDA.

Other issues with EV/EBIT and EV/EBITDA – financial companies and financing business

EV measures usually don’t work well with financial companies and also companies which have a lot of financing business on their books. Originally, EV is meant to capture “real” leverage, i.e. debt issued to pay for machinery, inventory etc. Debt issued to fund for instance client purchases is referred to as “operating” leverage. It is a little bit a grey area. Clearly, one should prefer a company which sells only stuff against cash than financing it for several years. The financial crisis in 2008 has shown that such “operating” leverage quickly became “strategic” if the roll over doesn’t work. On the other hand, in normal times operating leverage could be potentially adjusted against EV as you have “extra assets”.

If one tries to compare financial companies vs. industrial companies though, P/E is clearly more useful, as financial companies per definition have much higher EVs than non-financial companies.

Price /Comprehensive income

This is a ratio which I use especially for financial companies. Comprehensive income inlcudes all kind of “value changes” which are booked directly against equity, such as changes in the value of pension libailities, value changes of financial assets including hedges, currency translations etc. Especially for financial companies, comprehensive income is a pretty good leading indicator although it is rarely used in my experience.


In general, I would recommend to look at all “Popular” ratios in parallel, because it gives a better “multi dimensional” view on a company. For “Normal” company, in my opinion, EV/EBIT is the most significant ratio, followed by P/Comprehensive Income.

P/Es and Ev/EBITDA are clearly also helpful. The most interesting cases are those, where the different ratios are completely different. This is often an indicator for somthing “special” going on and potentially a stock to investigate further.

In any case, although I like EV/EBIT, one should always “look down” in the P/L to the real bottom line (comprehenive income) as good CFOs are quite creative in moving expenses “down” the chain where many people don’t bother to look any more.

Finally as a special service, an overview over the different ratios and when to use them:

Performance review October 2013

Performance October 2013

October 2013 was the best month for the Benchmark (50% Eurostoxx, 30% Dax, 20% MDAX) since January 2012 with a gain of 5.9%. The portfolio increased only by 3.1% resulting in an underperformance of -2.8%. YTD 2013, the portfolio is up 30.5% against 24.4% for the benchmark.

Clearly the ~20% cash position explains almost half of the underperformance. Other underperfomers were Sol Spa (-9.4%), Cranswick (-8.6%). On the plus side was EMAK (+27%), Installux (+11.8%), Tonnelerie (7.6%).
Read more

Some links

Why Eike Batista’s downfall was not such a big surprise

Katsenelson likes Tesco. Just a few days before, Buffet sold part of his stake.

AlphaVulture on FFP, the French HoldCo of the Peugeot family

Jason Zweig on bad market timing by investors (hint: google the headline in order to read it)

Google, currently at the peak of investors attention, seems to loose it in some areas. I still don’t understand why the killed the Reader.

Finally, I discovered this new and very promising blog: Wertart Capital. Includes some well known ideas as well as some uncommon and interesting ideas. HIGHLY RECOMMENDED !!!

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