UPDATE: Fixed a tiny grammar mistake for being suggested by the audience Guest. A little significantly less than a month ago, I e-mailed Geoff Gannon and inquired about Lexmark (LXK). I don’t usually do that but decided to ask him about his opinion of Lexmark because he was wrong with his initial view a couple of years back.
I was curious about his views of how the company has transformed (apparently for the worse if the stock price was an indication) within the last couple of years. He also took care of immediately a follow-on question and another unrelated question pertaining to Coca-Cola, which I will estimate in future blog entries. The topics of the other e-mails were slightly different, which is beneficial to read them as a stand-alone piece. I am not quoting the entire e-mail and I’ve bolded some text messages to point out what I feel are insightful factors made by Geoff Gannon. My emphasis might not be constant with what Gannon feels.
Also, note that none of the should be construed as a recommendation (either long or short) and the facts, such as prices/interest rates/etc might have changed. Because of Geoff Gannon when planning on taking the time to write up a lengthy responses-he’s a good writer BTW-and for giving me permission to liberally quote his e-mails. Lexmark is cheap based on past performance.
And varied group functions (buying a lot of stocks like Lexmark) usually workout. What cover rate in the event you connect with this? An excellent range is the produce on investment quality bonds (5.33%) to the yield on junk bonds (11.18% again thanks to Bloomberg). The multipliers work out to 8.94x at rubbish bond cap rate and 18.76x at investment-quality cap rate.
6.63 a talk about or 27.68% less than the low end of an honest appraisal predicated on past performance by itself. Book Value Per Share) you’d find that most stocks usually do not trade below the low end. I hope readers learn something from the technique utilized here. I usually simply take normalized cash flow and increase it by some low P/E multiple (usually between 8.5 and 10) but Gannon uses more of a classic value investing technique that averages various resources. It’s a fascinating technique that depends heavily on published financial statements-as Gannon highlights, it’s triangulated off all three financial statements-and hence is rooted in solid, albeit, historical, quantities.
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You can see how this technique (or any similar method that relies on historical financials) stacks against my simplistic approach to applying a somewhat arbitrary P/E multiple. In my own rough estimate from not long ago, I developed Lexmark as being around 30% undervalued. Gannon’s quick estimate produces an undervaluation of around 27.68% based on the low value. You can view the disadvantage of financial claims in this example.
Gannon’s estimate, which is comparable to my base estimate, risk turning out to be positive if sales wildly, and hence profits, fall off a Cliff. In the post with my estimation, I speculated that the share price should be worthy of much less if sales drop considerably. Since Lexmark had strong historical figures as the present market position looks poor, value investors relying intensely on financial claims may be susceptible to downward surprises. This is where qualitative judgment will come in.