How about an ATF theme. The whole idea is actually intriguing. If we packaged this
into a portfolio or fund, we could get some diversification among these three distinct product groups, with a global bias. We could come up with a stock portfolio Jesse James or Charlie Sheen could appreciate.
When we look at a company’s growth prospects, we have to look the two growth drivers – the overall
market growth (of lack of) – for larger consumer companies over the longer term, something not too far from GDP – and within that, the subject company’s increase (or decline) in market share. We always need to be able to explain growth assumptions to ourselves in those terms. For larger consumer goods companies especially, rationalizing international growth makes sense compare to most domestic scenarios we might come up with.
Most of us who went through our formative years with some holdings in BRK got used to – make that ‘immersed in’ – the idea that we value the underlying businesses first, then look at the capitalization (or management’s holdings of cash and securities and its assumption of debt) secondarily. That’s a foundation for the two-column assessment of Berkshire that Buffett taught us, right? So why not apply that to other investment opportunities, as Buffett has always suggested.
An initial step would be to look at ROIC and the return on ‘enterprise value’ (the market’s pricing of the underlying business, excluding cash, securities and debt), rather than jump directly to PE and ROE. Again, it’s the two-step process we already use in our assessment of Berkshire. Once we get an understanding of the profitability – and the amount we’re really paying – for the underlying, unlevered business, we then would move to the next step and consider whether management is optimizing the balance sheet. If we were buying the entire business, versus a minority portion, that’s the way we’d do it.
Those two initial measures – the ‘return on enterprise value’ and ‘return on invested capital’ – are pretty much the two measurements that comprise Greenblatt’s ‘Magic Formula’. He just ranks out US non-(financial) companies based on those two measurements. There’s actually nothing particularly new or magical about the combination of those two metrics – they’ve been used since the days Buffett was in school, for appraising privately owned companies. The innovative element, if we want to call it that, is the relative combined ranking of the two measures. That's as much a sign of the times as anything else - everybody likes simple rankings.
Going off on that tangent for a moment, looking at the ‘MFI’ web-site ranking results these days, as well as the comments of the Fool MFI board, one apparent nuance - and complaint - is that Greenblatt's formula is backward-looking. We get some companies, like all thise for-profit education outfits, rising to the top of Greenblatt’s recent rankings. They are cheap relative to the trailing twelve months’ performance, which the market clearly doesn’t expect to be representative of future earnings.
One way past that is to introduce another screening element (one good suggestion has been to also screen for something like Value Line rankings). Another approach might be to substitute consensus projections of earnings in the PE-ratio-style ‘return on EV’ calculation, in place of historical earnings. (Or if we prefer, combine some of these approaches). That way we screen out those companies that may have done well last year but who everyone suspects is headed for trouble. Taking this further, if we are really into this, we might also look at a few years’ average ROIC’s, instead of just last year’s, in case that happened to be an aberration.
Back to that ATF theme, we might look an MFI-like ranking of larger-cap international alcohol, tobacco, and defense companies. For kicks – and brevity here – we might use a $3B cap minimum. That also picks up most of those alcohol stocks kicked around so far in this thread. We'd look at current market price levels as they relate to this year’s (2011) consensus earnings, with next year’s estimates included for reference. As with the MFI approach, we could also consider return on capital employed (ie, return on invested capital).
In the schedule below, PE's (based on 2011 estimated earnings) and ROE's have also included, for reference.
There’s nothing subjective here, just data – take your stabs at qualitative issues – here’s are international $3B+ market cap ATF candidates under those criteria, more or less ranked out on an MFI-type basis. MFI purists will probably have issues with this ranking application (it's a seat-of-the-pants 'MFI-style' calculation that combines the percentile ranks of 2011 EV/EBIT and ROCE to get an overall rank within the group) but it's perhaps a starting point.
Name...............Ctry.....MarketCap..PE2011e...ROE..EV/EBIT..EV/EBIT..ROCE
...............................($Mill). . . . . . . . 2011(e)..2012(e)
Lorillard Inc.... USA 15,943 14.3 n.m 8.4 8.0 336.3
KT&G Corp....... KOR 7,959 10.8 1.2 7.0 7.0 37.9
Ambev Bebidas... BRA 56,216 19.3 32.6 8.0 7.2 33.5
Raytheon Co..... USA 17,317 10.0 18.8 6.4 5.8 19.0
Grupo Modelo SAB MEX 19,607 22.2 13.2 10.0 9.2 26.6
General Dynamics USA 27,774 10.5 20.4 7.1 6.8 18.9
Altria Group Inc USA 56,291 13.1 84.3 9.6 9.3 26.2
Philip Morris Intern. USA 123,439 15.0 157.4 10.8 10.1 45.9
Souza Cruz SA... BRA 19,360 19.0 68.9 13.6 11.8 143.1
BAT-Malaysia.... MYS 4,431 18.3 157.3 13.9 13.9 125.8
L3 Communications USA 9,051 10.0 14.3 7.6 7.6 16.0
Thai Beverage PCL THA 5,624 14.5 18.6 10.1 9.8 23.1
Heineken Holding NLD 14,865 11.3 11.2 6.8 6.8 12.7
Nigerian Breweries NGA 4,357 17.2 62.7 12.4 10.6 47.4
Northrop Grumman USA 18,834 10.1 15.6 6.4 6.3 12.2
Bae Systems Plc... GBR 17,029 7.5 21.1 4.8 4.5 11.4
Reynolds American USA 22,185 14.2 17.1 9.0 8.5 18.7
British Amer Tobacco GBR 90,515 14.7 34.2 12.0 11.2 27.8
Cia Cervecerias Unidas CHL 3,715 14.2 22.2 10.8 9.7 23.2
Swedish Match AB SWE 7,480 17.8 n.m. 14.8 13.7 89.7
Flir Systems Inc USA 5,464 19.9 18.2 13.0 11.4 26.2
Brown Forman Corp. USA 10,957 20.4 28.9 13.5 12.7 33.4
Finmeccanica SpA ITA 6,501 6.6 8.5 5.7 5.6 6.1
Luzhou Laojiao Co CHN 9,961 22.7 45.2 16.9 13.0 62.4
Lockheed Martin USA 28,388 11.0 26.7 8.2 7.0 9.6
Imperial Tobacco GBR 35,348 11.6 32.5 10.3 9.8 12.2
Yibin Wulainye Co CHN 21,816 24.1 27.2 16.2 13.0 51.9
ITC............. IND 34,633 26.0 22.2 18.9 16.0 81.1
Diageo.......... GBR 52,177 15.0 45.1 13.0 12.0 20.4
Yantai Changyu.. CHN 6,944 21.0 41.7 17.7 14.3 61.8
Kweichow Moutai. CHN 34,288 26.1 30.7 19.2 14.8 67.4
Anh-Busch InBev. BEL 93,151 15.4 17.6 11.2 10.4 12.7
Shanxi Xin Hua CF CHN 4,923 39.7 27.7 20.7 15.9 56.7
Thales (exThomson) FRA 8,352 12.0 -2.9 8.5 7.0 -5.6
Japan Tobacco... JPN 38,118 18.8 9.2 10.4 9.1 9.4
Anhui Gujing Distillery CHN 3,409 20.1 33.8 27.9 16.3 43.6
Gudang Garam Perus. IDN 11,530 20.0 21.0 14.6 12.9 20.5
Molson Coors Brewing USA 8,873 12.2 9.5 10.2 9.7 7.8
Davide Campari.. ITA 4,749 18.4 13.6 13.2 12.2 13.1
Heineken........ NLD 34,850 14.5 18.4 12.0 11.3 11.9
Pernod Ricard SA FRA 26,447 14.9 11.5 10.4 9.6 7.1
Anadolu Efes..... TUR 6,007 18.0 19.4 14.4 12.4 17.7
Asahi Breweries.. JPN 9,752 14.0 9.0 10.6 10.2 7.8
Carlsberg A/S... DNK 16,301 13.8 9.0 11.1 10.2 9.0
United Spirits.. IND 3,146 25.6 -1.2 14.1 11.6 13.7
Tsingtao Breweries CHN 7,718 28.4 17.1 18.2 15.2 22.4
Constellation Brands USA 4,581 10.9 21.8 14.7 14.0 11.8
Kirin Holdings.. JPN 13,569 18.7 24.2 13.1 11.9 5.0
Remy Cointreau.. FRA 4,196 22.1 6.8 17.3 15.7 12.1
Foster's Group.. AUS 10,650 19.0 -14.4 14.1 13.5 -3.5
Sabmiller PlC... ZAF 59,004 16.9 11.5 15.4 13.8 8.5
Beijing Yanjing.. CHN 3,333 21.7 9.9 18.0 12.8 8.3
into a portfolio or fund, we could get some diversification among these three distinct product groups, with a global bias. We could come up with a stock portfolio Jesse James or Charlie Sheen could appreciate.
When we look at a company’s growth prospects, we have to look the two growth drivers – the overall
market growth (of lack of) – for larger consumer companies over the longer term, something not too far from GDP – and within that, the subject company’s increase (or decline) in market share. We always need to be able to explain growth assumptions to ourselves in those terms. For larger consumer goods companies especially, rationalizing international growth makes sense compare to most domestic scenarios we might come up with.
Most of us who went through our formative years with some holdings in BRK got used to – make that ‘immersed in’ – the idea that we value the underlying businesses first, then look at the capitalization (or management’s holdings of cash and securities and its assumption of debt) secondarily. That’s a foundation for the two-column assessment of Berkshire that Buffett taught us, right? So why not apply that to other investment opportunities, as Buffett has always suggested.
An initial step would be to look at ROIC and the return on ‘enterprise value’ (the market’s pricing of the underlying business, excluding cash, securities and debt), rather than jump directly to PE and ROE. Again, it’s the two-step process we already use in our assessment of Berkshire. Once we get an understanding of the profitability – and the amount we’re really paying – for the underlying, unlevered business, we then would move to the next step and consider whether management is optimizing the balance sheet. If we were buying the entire business, versus a minority portion, that’s the way we’d do it.
Those two initial measures – the ‘return on enterprise value’ and ‘return on invested capital’ – are pretty much the two measurements that comprise Greenblatt’s ‘Magic Formula’. He just ranks out US non-(financial) companies based on those two measurements. There’s actually nothing particularly new or magical about the combination of those two metrics – they’ve been used since the days Buffett was in school, for appraising privately owned companies. The innovative element, if we want to call it that, is the relative combined ranking of the two measures. That's as much a sign of the times as anything else - everybody likes simple rankings.
Going off on that tangent for a moment, looking at the ‘MFI’ web-site ranking results these days, as well as the comments of the Fool MFI board, one apparent nuance - and complaint - is that Greenblatt's formula is backward-looking. We get some companies, like all thise for-profit education outfits, rising to the top of Greenblatt’s recent rankings. They are cheap relative to the trailing twelve months’ performance, which the market clearly doesn’t expect to be representative of future earnings.
One way past that is to introduce another screening element (one good suggestion has been to also screen for something like Value Line rankings). Another approach might be to substitute consensus projections of earnings in the PE-ratio-style ‘return on EV’ calculation, in place of historical earnings. (Or if we prefer, combine some of these approaches). That way we screen out those companies that may have done well last year but who everyone suspects is headed for trouble. Taking this further, if we are really into this, we might also look at a few years’ average ROIC’s, instead of just last year’s, in case that happened to be an aberration.
Back to that ATF theme, we might look an MFI-like ranking of larger-cap international alcohol, tobacco, and defense companies. For kicks – and brevity here – we might use a $3B cap minimum. That also picks up most of those alcohol stocks kicked around so far in this thread. We'd look at current market price levels as they relate to this year’s (2011) consensus earnings, with next year’s estimates included for reference. As with the MFI approach, we could also consider return on capital employed (ie, return on invested capital).
In the schedule below, PE's (based on 2011 estimated earnings) and ROE's have also included, for reference.
There’s nothing subjective here, just data – take your stabs at qualitative issues – here’s are international $3B+ market cap ATF candidates under those criteria, more or less ranked out on an MFI-type basis. MFI purists will probably have issues with this ranking application (it's a seat-of-the-pants 'MFI-style' calculation that combines the percentile ranks of 2011 EV/EBIT and ROCE to get an overall rank within the group) but it's perhaps a starting point.
Name...............Ctry.....MarketCap..PE2011e...ROE..EV/EBIT..EV/EBIT..ROCE
...............................($Mill). . . . . . . . 2011(e)..2012(e)
Lorillard Inc.... USA 15,943 14.3 n.m 8.4 8.0 336.3
KT&G Corp....... KOR 7,959 10.8 1.2 7.0 7.0 37.9
Ambev Bebidas... BRA 56,216 19.3 32.6 8.0 7.2 33.5
Raytheon Co..... USA 17,317 10.0 18.8 6.4 5.8 19.0
Grupo Modelo SAB MEX 19,607 22.2 13.2 10.0 9.2 26.6
General Dynamics USA 27,774 10.5 20.4 7.1 6.8 18.9
Altria Group Inc USA 56,291 13.1 84.3 9.6 9.3 26.2
Philip Morris Intern. USA 123,439 15.0 157.4 10.8 10.1 45.9
Souza Cruz SA... BRA 19,360 19.0 68.9 13.6 11.8 143.1
BAT-Malaysia.... MYS 4,431 18.3 157.3 13.9 13.9 125.8
L3 Communications USA 9,051 10.0 14.3 7.6 7.6 16.0
Thai Beverage PCL THA 5,624 14.5 18.6 10.1 9.8 23.1
Heineken Holding NLD 14,865 11.3 11.2 6.8 6.8 12.7
Nigerian Breweries NGA 4,357 17.2 62.7 12.4 10.6 47.4
Northrop Grumman USA 18,834 10.1 15.6 6.4 6.3 12.2
Bae Systems Plc... GBR 17,029 7.5 21.1 4.8 4.5 11.4
Reynolds American USA 22,185 14.2 17.1 9.0 8.5 18.7
British Amer Tobacco GBR 90,515 14.7 34.2 12.0 11.2 27.8
Cia Cervecerias Unidas CHL 3,715 14.2 22.2 10.8 9.7 23.2
Swedish Match AB SWE 7,480 17.8 n.m. 14.8 13.7 89.7
Flir Systems Inc USA 5,464 19.9 18.2 13.0 11.4 26.2
Brown Forman Corp. USA 10,957 20.4 28.9 13.5 12.7 33.4
Finmeccanica SpA ITA 6,501 6.6 8.5 5.7 5.6 6.1
Luzhou Laojiao Co CHN 9,961 22.7 45.2 16.9 13.0 62.4
Lockheed Martin USA 28,388 11.0 26.7 8.2 7.0 9.6
Imperial Tobacco GBR 35,348 11.6 32.5 10.3 9.8 12.2
Yibin Wulainye Co CHN 21,816 24.1 27.2 16.2 13.0 51.9
ITC............. IND 34,633 26.0 22.2 18.9 16.0 81.1
Diageo.......... GBR 52,177 15.0 45.1 13.0 12.0 20.4
Yantai Changyu.. CHN 6,944 21.0 41.7 17.7 14.3 61.8
Kweichow Moutai. CHN 34,288 26.1 30.7 19.2 14.8 67.4
Anh-Busch InBev. BEL 93,151 15.4 17.6 11.2 10.4 12.7
Shanxi Xin Hua CF CHN 4,923 39.7 27.7 20.7 15.9 56.7
Thales (exThomson) FRA 8,352 12.0 -2.9 8.5 7.0 -5.6
Japan Tobacco... JPN 38,118 18.8 9.2 10.4 9.1 9.4
Anhui Gujing Distillery CHN 3,409 20.1 33.8 27.9 16.3 43.6
Gudang Garam Perus. IDN 11,530 20.0 21.0 14.6 12.9 20.5
Molson Coors Brewing USA 8,873 12.2 9.5 10.2 9.7 7.8
Davide Campari.. ITA 4,749 18.4 13.6 13.2 12.2 13.1
Heineken........ NLD 34,850 14.5 18.4 12.0 11.3 11.9
Pernod Ricard SA FRA 26,447 14.9 11.5 10.4 9.6 7.1
Anadolu Efes..... TUR 6,007 18.0 19.4 14.4 12.4 17.7
Asahi Breweries.. JPN 9,752 14.0 9.0 10.6 10.2 7.8
Carlsberg A/S... DNK 16,301 13.8 9.0 11.1 10.2 9.0
United Spirits.. IND 3,146 25.6 -1.2 14.1 11.6 13.7
Tsingtao Breweries CHN 7,718 28.4 17.1 18.2 15.2 22.4
Constellation Brands USA 4,581 10.9 21.8 14.7 14.0 11.8
Kirin Holdings.. JPN 13,569 18.7 24.2 13.1 11.9 5.0
Remy Cointreau.. FRA 4,196 22.1 6.8 17.3 15.7 12.1
Foster's Group.. AUS 10,650 19.0 -14.4 14.1 13.5 -3.5
Sabmiller PlC... ZAF 59,004 16.9 11.5 15.4 13.8 8.5
Beijing Yanjing.. CHN 3,333 21.7 9.9 18.0 12.8 8.3
