numberbiter
06 Mar 2018
Re: charlatan on trading update So, Jona, "A little bit of knowledge is a dangerous thing."Well I suggest you go to the 'Luceco' board. I advised this was a 'strong sell' in January when the price was 128p. Today it trades at 55p.As I have said a number of times, it is easy to predict that a share price will collapse, it is just impossible to know when. AA's price will collapse when you least expect it.
numberbiter
05 Mar 2018
Re: charlatan on trading update Bill, i am not selling anything at the moment, but nor am I buying anything because the prospect of Brexit concerns me a great deal. We know that retail and restaurants are suffering big time and I believe the market as a whole could go belly-up at any time. For that reason I am holding (in percentage terms) more cash than normal.I did recently take a punt (half my usual stake) on Moss Brothers. The reason for the punt is that the company has a great deal of cash and I concluded that even in this hostile environment they would survive. Since investing (after the big fall) I have become concerned that every time I have gone past one of their shops they appear to lack customers and the market has not encouraged me as the price keeps falling. As a matter of principle I never average down, but I do believe that the current 63p is ridiculously low.Prior to this investment I bought Easyjet on the grounds that Monarch went bust and Ryanair was experiencing problems. I am showing a good gain on this one, but I believe there is still some way to go.A significant proportion of my portfolio is in shares where the local currency is the Euro as I believe that after Brexit Europe will recover quicker than the UK.I appreciate this is not very helpful, but you asked for my view.
Bill1703
05 Mar 2018
Re: charlatan on trading update "My rerurn in 2017 was 18.3% and in 2016 was 14.4%, so my posts are based on practical experience and not just financial knowledge..."And thanks for your post NB... some good return figures there, which I have no cause to doubt. But it is even more puzzling, given the alacrity with which you post your almost-exclusively "Strong Sell" views across a wide group of stocks in which you (by your own admission) have no economic interest, why you do not also share your insights on those where you are making these returns. I think many on here would be interested, and as I say, it'd lend authority to your existing, more negative views."... cash EPS (cash generated from operating activities before movement in working capital, divided by the number of shares) apply minimal growth and then apply the appropriate discount factor, the 'discounted present value' is not very appealing."Yep, that's one way to look at it. I prefer to focus on Free Cash flow, after core investment requirements, as a better guide to prospective net cash returns, as per Buffett... but all valuation tools are mere proxies toward the same end, there is more than one way to skin that cat. I don't disagree with a "minimal growth" assumption (though it depends on your starting base?) - but as for an "appropriate" discount rate... that IS the question. As you know, even small variations there will produce wildly different results, and startlingly so for AA with its highly-geared structure."I agree that I am assuming that the banks will not lend AA anymore money, but the clue is that the dividend has been slashed... Besides dividend yield is not that important; some of my best investments never paid a dividend."The dividend cut is mostly to do with the covenant "gating" restrictions, which are relatively peculiar to AA and a reminder that the debt holders do indeed call the shots here (as if we didn't know!) - but no indication that they won't lend more money... the maintained investment-grade credit ratings suggest otherwise. I have always thought the dividend yield a "red herring" here - arguably the peculiar IPO structure should never have required it. I am not particularly sorry to see it cut - and actually somewhat puzzled why it wasn't passed entirely... possibly some behind-scenes deal to keep the big income funds (eg. Woodford) on board, I wouldn't be surprised? I don't think it actually helps the equity investment story, and possibly never did... and every chance it will still go, sooner rather than later."You will have noticed that the 'market' agrees with me; sensible investors are slowly getting out which is why the share price is constantly falling."Sure, we can see which way its going - for now (though neither you nor I have any real idea as how "sensible" any exiting investors may be!) So your view is correct today - as a trading call. But as an investment recommendation? Time will tell.Ultimately, we can agree to differ on this one - you are not going to buy in to AA here, and I am not going to sell my small (and consciously "special situation" speculative) holding - not am I ever going to change my view based merely on short-term market sentiment. But I am interested as to what you WOULD buy now, and why - as many of us on here share (for better or worse!) on a regular basis.
numberbiter
05 Mar 2018
Re: charlatan on trading update Bill, thank you for your massive post. For the record, I have been investing for over 20 years. My rerurn in 2017 was 18.3% and in 2016 was 14.4%, so my posts are based on practical experience and not just financial knowledge. I found out a long time ago that the best way to make money on stocks and shares was to take advice from people who are proven experts. So I started reading the annual Berkshire Hathaway Newsletter twenty years ago. My investment strategy is therefore based on the advice coming from Warren Buffet.You quoted him as saying, "Companies are valued at the 'discounted present value of future realistic cash returns' and that intrinsic value is often way above book value". Now this is EXACTLY how I value companies. The key word in this sentence is 'cash'; profitable companies should be generating a high level of cash.In AA's case, i cannot see much potential for growth (generating cash to reduce debt) as the company is in a very competitive market and pays out a high percentage of cash generated in interest payments. So if your calculate cash EPS (cash generated from operating activities before movement in working capital, divided by the number of shares) apply minimal growth and then apply the appropriate discount factor, the 'discounted present value' is not very appealing.I agree that I am assuming that the banks will not lend AA anymore money, but the clue is that the dividend has been slashed. Cutting dividends is the last thing company directors want to do as they know when they do the share price will come tumbling down. They take the view that if dividends are constantly being increased, then shareholders will not worry about their salaries being increased.I agree that there are many companies currently offering a low yield, but they don't carry the same risk. Besides dividend yield is not that important; some of my best investments never paid a dividend.You will have noticed that the 'market' agrees with me; sensible investors are slowly getting out which is why the share price is constantly falling.So, you have chosen the best advisor (WB); the secret is to apply his advice.
Bill1703
04 Mar 2018
Re: charlatan on trading update "Many businesses are valued on the basis of future earnings, taking into account potential growth and this is why there is no apparent relationship with assets values. But when valued on this basis the share price has to be discounted for risk and the highest risk a business can have is a very high level of debt."There's a fair bit I agree with you here, NB - but then, you are still not telling us anything we don't already all know. Reading a few headline figures from a reported balance sheet. Telling us debt levels are very high.Yours is an accountant's perspective (and a fairly simplistic one), but you are not an investor. And accountants often make pretty poor investors and analysts (I know, I've managed or overseen a few in my time), unless and until they learn the distinctions.On that - I'd amend your statement to ALL companies are valued on future earnings, or more to the point, free cash flows - not the backward-looking value of their net assets. The exceptions are investment companies and many financials, whose assets and liabilities are necessarily constantly "marked to market" and revalued, and therefore there's a much more reliable relationship between current-cost balance sheets and market value... as I've explained before, this is not the case with the vast majority of industrial stocks (defined broadly to include most everything else). Again, I've just been reading Warren Buffett's new annual "letter" (required reading for all investors IMO... less so accountants). He puts a lot of store in "intrinsic value", for his own business as well as any investment, which he defines as the discounted present value of future realisable cash returns. He also makes the point that Berkshire Hathaway's "intrinsic value" is way above the stated book value of assets, and has been for years - acknowledging that "intrinsic value" is always only an estimate, which will change regularly and be subject to disagreement between two different people, even very closely aligned (such as Buffett and his long-time partner Charlie Munger). "For AA's assets to exceed its liabilities then its intangible assets would have to be worth roughly double of the amount stated. I cannot see the logic for imagining this."Why not? As I think you'd agree, intangible assets are notoriously difficult to pin a value on... sometimes they prove to be overstated, but sometimes it becomes clear they are worth much more, often a multiple. Only time will tell which for the AA - but nothing illogical in the market's view that they are indeed worth more (though by less so than was recently the case)."It should be obvious that the banks will not lend AA any more money, which is why the dividend has had to be slashed to pay for the new strategy plan."Again, you have NO evidence for your assertion, whereas there is plenty for the reverse, as I've shown - in recent times, if not today. I guess we will find out - but maybe not until 2020, with no material debt maturities between now and then. "... assuming the share price doesn't fall further the current return is around 2.5%, which is very close to the risk free rate. Given the high level of risk here ... the current share price cannot be justified." There's a massive conceit here (some might say, deceit) - your assertion could be applied to any stock currently yielding 2.5% or less, of which there are hundreds in the main UK indices alone. And some, I have no doubt, will provide very good total returns into the future, via capital growth and often strong dividend growth too. Not saying the AA will necessarily be one of these, of course - again, only time will tell!An important question for you, NB... are you learning anything from this debate?? I am genuinely interested to know the answer.
numberbiter
04 Mar 2018
Re: charlatan on trading update Bill, the total non-current assets in AA's Balance Sheet is £1,486 million, of which £1,283 million is intangible assets. So, tangible assets amount to a mere £203 million.I agree that 'goodwill' is an historic cost, being the difference between what AA paid for the business and its asset value at date of aqusition, but it is not something that can be sold unless the business is taken over. For AA's assets to exceed its liabilities then its intangible assets would have to be worth roughly double of the amount stated. I cannot see the logic for imagining this.Many businesses are valued on the basis of future earnings, taking into account potential growth and this is why there is no apparent relationship with assets values. But when valued on this basis the share price has to be discounted for risk and the highest risk a business can have is a very high level of debt.It might be OK in this case if profits were being used to reduce debts, but with interest nearly 50% of profit before interest this is not happening in any significant way. In the previous few years net profit has barely been above the cost of dividends, so there is no money left for developing a new strategy. It should be obvious that the banks will not lend AA any more money, which is why the dividend has had to be slashed to pay for the new strategy plan.So, assuming the share price doesn't fall further the current return is around 2.5%, which is very close to the risk free rate. Given the high level of risk here (high debt, no guarantee that the new strategy will work) the current share price cannot be justified.
Bill1703
02 Mar 2018
Re: charlatan on trading update "UKGAAP (generally accepted accounting practice) which was based on historical accounting was abandoned in the UK in 2005. It was replaced by IFRS accounting, whereby assets and liabilities are shown in the Balance Sheet at market value. "Perhaps, NB, we are now getting to the nub of the matter? And our differences in "understanding". What you say is simply untrue - in practice. Which is what matters.It is true, that was one general intention of IFRS - at least in a directional sense. But in practice what happens is that some assets are more often written down, as and when it becomes clear they are overstated - but very rarely are they "written up", even where the opposite is pretty much arguable. And whereas 'Goodwill' and (some) other intangibles are most likely to be written down, with tangible assets it is much less common. The result, of course, is a fairly uneven experience across the board.A number of authoritative commentators have written about this, including Warren Buffett in one of his recent annual shareholder "letters" - worth looking up, I'd say.And as I say, it goes a long way to explain why for most industrial (ex-financial) stocks, the relationship between reported NAV and market cap is still so tenuous, with the UK market trading between 3x and 4x NAV. I could give you an immediate list of a dozen or so stocks trading at over 10x NAV, most of them familiar, respected names... and sure, some of these may indeed be 'overvalued', but not to that extent! "So if you believe that AA's assets exceeds its liabilities you really are in a dream world."Of course I do, in current market value terms ... otherwise, self-evidently, the market value and hence SP would be zero. And it's not! QED... Or at least, not yet! Of course, it can change in the future - as ever, only time will tell.Equally, I do not dispute that the reported (balance sheet) value of AA's assets do NOT exceed its liabilities - as you yourself have pointed out (as anyone who can read might do). Point is, these are two different things... it is the disconnect we are talking about. The accounting changes under IFRS may have moved the relationship a bit closer between reported balance sheet values and market values... but only a bit, and unevenly across different companies in practice. It is obvious you put a lot of trust in accounting values, and I respect that... it is simply that I have learned, over time, that market values are more likely to be a better reflection. Though of course, both are most likely to be "wrong", at any one time - and if that is where investment risk resides, it is also where investment opportunity lurks!
numberbiter
02 Mar 2018
Re: charlatan on trading update Bill, you must be living in a different world! UKGAAP (generally accepted accounting practice) which was based on historical accounting was abandoned in the UK in 2005. It was replaced by IFRS accounting, whereby assets and liabilities are shown in the Balance Sheet at market value. So if you believe that AA's assets exceeds its liabilities you really are in a dream world.
Bill1703
02 Mar 2018
"All change for AA... "... as dividends are cut and new strategic plan announced."Article in yesterday's edition of Shares mag - nothing really new, but perhaps of some interest to the group. Full text below:"Roadside assistance specialist AA (AA.) has decided to enter into a brave new world, led by an energetic new CEO Simon Breakwell. Rather than just providing roadside recovery once a car’s broken down, the AA wants to develop systems that can spot when an engine is heading into trouble. The company also wants to invest heavily into its insurance businesses. While this is very interesting, the investment case continues to be depressed by AA’s £2.7bn net debt position. Shareholders may be wary of a company that has seen its share price plummet from over 400p in 2015 to 87p today. The decision to launch a strategy that would mean less profit for three years and a sharp reduction in its dividend from 9p to 2p is certainly brave. However, major shareholders have given Breakwell their blessing. Its largest investor Neil Woodford has increased his stake in the business to 15.03% following the company’s strategy update on 21 February which also contained a profit warning. The AA wants to target younger customers to its roadside membership scheme through new products and services. Joe Brent, an analyst at broker Liberum, warns ‘breakdowns are double edged – they cost money but they validate the model, increase future retention (if handled well) and increase pay-on-use revenue’. Breakwell wants to create 65 new roadside patrols and 200 new call centre agents. Cutting the dividend will help free up cash that can be diverted to fund investments. For Calum Battersby, an analyst at investment bank Berenberg, the previous plan of the AA to sort out its debt problems has failed. Other parts of the post-IPO plan such as increasing membership have gone sideways. Since the company floated in June 2014, paid personal members have fallen by 8%. Earnings estimates going beyond 2018 have been revised downwards by Liberum. For 2019, EBITDA and earnings per share forecasts have been dialled down by 16% and 38% respectively. Liberum’s Brent is slightly more upbeat on the AA’s debt than Berenberg’s Battersby. While Brent says ‘there is no silver bullet for the debt’ he adds that with better earnings momentum and growth the market might ‘become a little more forgiving on the debt’. Battersby is unflinching, saying: ‘There is no quick fix for the AA’s substantial leverage, which we expect to remain a concern for several more years.’ "
Bill1703
02 Mar 2018
Re: charlatan on trading update "An example was Kingfisher which I bought when the price fell dramatically. It has since recovered. I rarely advise a buy as I never want to appear to ramp a share price up. Exceptionally, where I think the share price is exceptionally low I will do so - hence I advised Paddy Power as a strong buy if the price fell below £70, which it did."Fair enough, NB - but it's the same (two) examples again. From what you say, you actually own shares in KGF but not PPB... or maybe not even that? How many other shares do you own - or have you ever owned? Again, it is not a requirement for these boards, I agree - but you consistently pass off a fairly simplistic reading of balance sheet numbers as some kind of incontrovertible investment truth, so I think it useful for people to know your credentials either as an accountant or an investor - if any.And it's hard to rationalise your squeamishness about ramping shares - as any proper investor knows, nothing that any of us say on here can make the slightest difference to 99% of stocks - particularly when you show no such qualms about trashing stocks, in what can only be deliberately provoicative terms, with all your Strong Sell calls. To take the one stock you own - if it is - for full disclosure, I repeat below your ENTIRE posting history on the KGF board. Ever! One post, one para, less than 50 words, with a Weak Buy tag (from last summer). I will let others judge it... but it is a trifle... thin!? "Today's statement does not justify the fall in today's price. This is not a business that is consistent quarter by quarter. For the last four years the company has achieved positive, but small, growth. The current price of 296p suggests negative growth so provides a buying opportunity" Now, back to the AA... as I said, you could be right. You are entitled to your view, and to your freedom to express it - but I have very finely tuned antennae to the dissemination of misinformation (wittingly or not) on these boards... their integrity and thus utility is crucially dependent on the same being exposed and challenged, wherever possible. And that is precisely what I do when you say "it is certain" - as opposed to it merely being a somewhat sketchily and lightly informed opinion. "Re your mortgage analogy, banks have security in the house; they will only get nervous when the value of the house falls below the ourstanding mortgage. Because AA's liabilities exceed their assets banks don't have security in this case."The important point here, NB, is banks get nervous when the MARKET value of the house falls below, not the historic cost, not the cost to rebuild etc. And so it is with the AA, and other companies too - as proper investors know (and even some accountants), there is little correlation between reported historic-cost balance sheet asset values, and their true market value (outside of many financials and investment companies, which are a different case in point). As witnessed in the UK market trading at 3-4x market cap to NAV (with ratios up to 15-20x not uncommon, for some of our best known "high quality" blue chips).For the moment, the market value of AA's net assets exceeds the value of its debt - and yes, this can change, but in either direction. There are those who think the assets are worth quite a bit more than their current implicit market value... very possibly including those debt holders who you presume to talk for. How do you square your assertions with the investment-grade credit ratings which AA retains, and steadily reducing cost of debt? I don't believe you can.
numberbiter
02 Mar 2018
Re: charlatan on trading update Bill, if you read my posts you will know I only invest in shares where the company makes a profit, generates cash and has either no debt or little debt. I never own any of the shares in which I advise a 'strong sell' as they would have never met by investment criteria. I know that a 'profit warning' may not be as disastrous as first appeared, so when a share has a dramatic fall, I look at the latest accounts. In most cases the profits' warning is bad, but occasionally the fall in price is not justified. An example was Kingfisher which I bought when the price fell dramatically. It has since recovered. I rarely advise a buy as I never want to appear to ramp a share price up. Exceptionally, where I think the share price is exceptionally low I will do so - hence I advised Paddy Power as a strong buy if the price fell below £70, which it did.After Carillion, I would have thought that investors would realise that the biggest risk is where companies have high debt. These companies are highly reliant on their bankers supporting them. Everything is OK until there is a crisis, which requires more money. The banks will then calculate the lending risk; yes they are receiving huge amounts in interest, but will they get their money back?The AA operate in a very competitive market and their strategy plan does not add up. If you are an insurance company you have to be able to prove that you have sufficient financial backing to pay an unexpectedly high claim. Clearly, with massive debts, AA could not fulfil this requirement.Re your mortgage analogy, banks have security in the house; they will only get nervous when the value of the house falls below the ourstanding mortgage. Because AA's liabilities exceed their assets banks don't have security in this case.AA's financial position is dire and the potential for future growth is slim, so I reiterate my view that AA will either go bust or be taken over at a fraction of today's falling price of 75p.
Bill1703
01 Mar 2018
Re: charlatan on trading update "... I will give you but one example (there are many more!). I advised that Interserve was a 'strong sell' at 99p. Today it is 55p."NB - as many investors know, if a SP plunges significantly, it is most likely they will keep on going down, at least for a while. Popping up on boards "after the event" is only ever going to smack of opportunism, at best... where was your "analysis" when IRV was at £6, £7... not that long ago? That might have been genuinely valuable, rather than goading people with what they already know... might've earned real credibility. Sometimes such SPs never recover, but often they do... Interserve does indeed have big issues, and it is much more like Carillion than all the other examples you try to correlate, but what matters is where it is a year from now, then 3 years, etc. If it makes it... that one can go either way IMHO. "Share prices eventually meet up with financial reality... This is why I don't 'short' shares... in my view, it is certain AA Plc will either go bust, or be taken over at a distressed share price (much lower than the current 80p) sometime in the future..."Very wise not to short shares - best left to the professionals. But do you actually ever buy any? We know you crow about a 90% success rate in "predicting" that shares which have already dived, will then dive a bit more, in the short term... Nostradamian indeed!! But what is your record with investing (or indeed trading) real money? No crime if you have none, of course, it's not a prerequisite for opinion on here... but again, it might give you the credibility which currently is lacking.Maybe English is not your first language, in which case I understand... but when you say "it is certain", I know you are bluffing. You could say "it is possible", or even "it is probable"... but "certain"?? FWIW I think both your scenarios are possible, no more, no less (more the latter than the former IMHO) - but other scenarios are too. I can't be certain about anything here, or with pretty much any other stock - and I know you can't either. But maybe you really think you can be? Again, give us the analysis... the workings... the credentials. We know you can read a few headline numbers from a reported balance sheet. But... is that it?? "How are you going to pay the bank back? You haven't got many assets to sell and you have other liabilities... you might need to borrow more money and your bank might say no. Then you would be in deep trouble, would you not?"It's a good analogy, in fact. On your basis, millions of people in the UK (probably a majority of home owners?) would be - in your provocative (and inaccurate) language, "effectively bust" - yet relatively few ever go under? They pay their mortgages off, and banks give them time (usually a fixed period) so to do. There is a not inconsiderable risk their personal "free cash flow" dries up, the banks know this, but they have some downside protection - with security over the asset. Likewise with AA - and the relatively security of the WBS model. They can't pay off the debt, now or for some considerable time - but the lenders don't want them to, hence big penalty charges on early redemption (not unlike many mortgages). The banks - more specificially bond-holders - WANT to lend to this structure.... sure, that might change, but there is no meaningful debt maturity until 2020, and credit ratings remain investment grade.It is not the debt that "kills" you, it is the cash flow... and the serviceability of that debt. Whether you are a mortgaged homeowner or "mortgaged" plc. So far, debt serviceability is comfortable enough for AA ... maybe that changes, but it's not on the immediate horizon, and I would say the bond holders are happy enough right now. More so - by far - than the equity holders, anyway!
Johandesilva
01 Mar 2018
Re: charlatan on trading update numberbiter, if I don't skid on the ice and I pay off my mortgage I would own the house. Tell me how much would that shift the EV into the MC with a range of share price outcomes from 300p to 500p? We know there is no rush to dilute anytime soon and no need to go to the bank when you can and have cut the dividend to invest in the strategy and accelerate growth.
numberbiter
01 Mar 2018
Re: charlatan on trading update Johan, I want you to imagine you earned £34,500 per year and out of that had to pay £19, 300 per year interest. You would have £15,200 to spend on other things (free cash flow). Well, it would be free if you didn't owe your bank £262,800. How are you going to pay the bank back? You haven't got many assets to sell and you have other liabilities. Now, if something untoward happens you might need to borrow more money and your bank might say no. Then you would be in deep trouble, would you not?Now if you add four 0's to these figures (so £262,800 becomes £2,628 million) you have the financial state of AA plc (based on their latest accounts).all means buy into these shares on the basis of a new strategy, but don't be surprised when the share price collapses.
numberbiter
28 Feb 2018
Re: charlatan on trading update Bill, I will give you but one example (there are many more!). I advised that Interserve was a 'strong sell' at 99p. Today it is 55p. Share prices eventually meet up with financial reality. I had Carillion as a basket case three years before it went under. This is why I don't 'short' shares as I find it impossible to get the timing right. Now, in my view, it is certain AA Plc will either go bust, or be taken over at a distressed share price (much lower than the current 80p) sometime in the future. I just don't know when.
