Morning, after yesterday's numbers and share price fall, is a less profitable Tesco getting into value territory?

Price 318 pence
P/E 8.77
Forecast P/E 9.07 (this may go higher as estimates are reduced)
Prc/Book 1.55 (I don't have PTB figure to hand)
Gearing 67% (excludes shop leases)
Dividend Yield 4.62% (looks to be twice covered)

52 week high/low 423/315p

Looks interesting to me at these levels.

Mid-market Tescos UK which is the cash cow for the intl growth strategy appears to have underperformed rivals Morrisons and Sainsburys. Persuing a purely cheap price offering probably won't work as they have competition from the discounters and Asda, whilst the likes of Waitrose/M&S grab customers at the premium end.

Incidentally, yesterday's news looks like classic business school case study material. TSCO - one of the FTSE's most well known 'blue chips', very widely covered in the professional analyst community, and yet we get a big earnings surprise (despite recent leaks to the press) and an 18% share price fall on the day. Thats followed today by a lot of the equity analysts revising their guidance on the stock ("reduce to Hold from Buy" etc.)

Rgds

Hello Tommo.

I'm not sure. Personally I would not be buying Tesco now. Forecasts for this year's earnings were around 34p from memory, so before yesterday's TS, the shares were trading at around 12-12.5 times earnings. That to me, in todays market, seems to be at a premium to most retail stocks, and the premium I would suggest is due to the perception that Tesco was a reliable plodder that would never disappoint.

The fact is that now they have disappointed and it has sent a real shock through the market. Earnings forecast to be at the lower end of consensus forecasts is what they said yesterday - so let's say roughly 30p/share? That means the shares are currently on a P/E of more than 10 and given the fact they've disappointed I would expect the market to be cautious about them for a while. So whilst they might not (and note I said might not- I think personally they will) fall farther, I wouldn't expect them to rise much either.

Just my view, and it may be unnecessarily negative. But I think if you want to buy cheap, there's better out there and it isn't in the retail sector....

Cheers,
Steve.

Hi

I think that's Tesco de-rated for the time being and so what would cause it to reverse? I don't think it will be quick.. Also, from what I have seen, usually companies don't have one blip of bad news and then come back do they?

Also as mentioned its not value compared to the current FTSE PE.

Sainsbury has better metrics in terms of Yield, p/tbv & gearing..

but... isnt p/s important in retailers and Sbry wins that..


On the other hand Tescos has better ROE so might be a chance to get in a good company at a reasonable price?

cheers
Faz

sorry some numbers (from sharelock)

SBRY Yield 5.49 (increase of 4% ), p/e 10.6, gearing 39%, p/tbv 0.98, ROE 8.7, p/s 0.25

TSCO Yield 4.81 (increase of 7.5%, might get revised?), p/e 9.2, gearing 60%, p/tbv 2, p/s, 0.43.

I can't see any reason for TSCO as a value play just because it has fallen. That alone don't mean dick.

It was overpriced before against SBRY and still is on most criteria, particularly the lead value filters of P/TBV and gearing as fazm shows. Gearing is of course not price related so the fall in TSCO does not improve this ratio.

The possible reason it was relatively overpriced is that many saw it as having superior "quality" or "management", those useless, misleading, unquantifiable criteria that so many seem to think can be judged. These don't exist but it is surprising how often one sees them mentioned as a reason to buy a share. I wonder if all those who viewed TSCO as possessing outstanding quality and management still have that opinion.

If for some reason you want a supermarket play out of these two, then it has to be SBRY even after the fall in TSCO. As an aside, SBRY has long been the superior HYP share too and still is now.

For me, Tesco was priced for a growth premium that has now righly been removed. The mark back is only to around the market averge based on P/E. There is no EPS growth or rebound story here, perhaps the reverse.

I quite like it as High Yield share but it is not or even near Value territory for me. Warren Buffet bought in at around £3.80. Some might call that a value signal (his record is not bad is it?).

A near efficient market doing its job effectively.

I don't hold.

Regards,

MV

The possible reason it was relatively overpriced is that many saw it as having superior "quality" or "management", those useless, misleading, unquantifiable criteria that so many seem to think can be judged. These don't exist but it is surprising how often one sees them mentioned as a reason to buy a share. I wonder if all those who viewed TSCO as possessing outstanding quality and management still have that opinion.

Very much a strawman point. Most people I've seen recommend Tesco have done so on the basis of their international expansion potential.

What is they say - "don't try and catch a falling knife".

was down today as well - although that might be neutral given it was bad market day

I infer nobody much rushing in to fill up

I believe the Chairman bought a number earlier today

I believe the Chairman bought a number earlier today

Only because he got 3 for the price of 2!

I believe the Chairman bought a number earlier today

Yesterday actually, and the number was 30,149

at 329.98p each that makes £99,485

on 12 January 2012, the following Director purchased Ordinary Shares of 5p each in the Company at a price of 329.98 pence per share:
Director - No of Shares
R Broadbent - 30,149
http://www.investegate.co.uk/Article.aspx?id=201201131243435...

If I wanted a solid Warren Buffet type business which for example:
still be doing business in 50 yrs
easy to understand
has some form of competitive advantage
a large market capitalisation
relatively low debt
increasing profit, sales, eps,
ETC ETC

What are current better buys than Tesco?

Thanks in advance.

(As a relatively novice investor and been reading a few basic books on Warren Buffet, Im just curious as to what might be recommended).

Personally I really like the look of Tesco at current prices (have decent size holding already), I also like Sainsburys (small holding), but to a lesser extent, and personally Id rather have Tesco anyday.

Hi

I think its Buffett's holding that made me shoot from the hip and start this thread. Knowing that he bought at higher levels and has a very good record. That probably accounts for some of the premium investors place in the stock. As others highlighted, SBRY is a better candidate on the numbers right now.

Actually, I think the supermarkets have less of a 'moat' these days than they used to. Price-comparison websites and internet deliveries increase competition, and it seems like the market is pretty saturated (certainly in London it is).

Conversely, maybe the 25% Qatari holding of SBRY is seen as a bid-blocker which keeps it at a discount to TSCO?

Regards

...Personally I really like the look of Tesco at current prices (have decent size holding already), I also like Sainsburys (small holding), but to a lesser extent, and personally Id rather have Tesco anyday.

Why? Out of these two, SBRY is the better value play on the numbers as has been shown and that has long been the case too. The relative price fall in TSCO has whittled away SBRY's value advantage to some extent, as far as the price related ratios are concerned, but the latter is still well ahead on most criteria so I see little case on value grounds for preferring TSCO.

Your message indicates that you are probably on the wrong board because this one deals with short term trading of value shares, not Warren Buffet style 50 year holds that you were asking about. That's more of an HYP approach though that strategy focuses specifically on long term income, not gains as such.

Hi mark88man

I infer nobody much rushing in to fill u???

Not what this article is saying!

http://www.investorschronicle.co.uk/Page/b6d9d5e8-3def-11e1-...

I think one has to be careful with a company like Tesco. It is all too easy to try and scuttlebutt and count mince pie boxes outside supermarkets, but Tesco is not a UK retailer per se.

Does this headline sound familiar?

The world's nnn-largest retailer has admitted that half-year profits from its domestic operations could fall by xx% and it has appointed a new executive to draw up a "recovery plan" for the business. Why is ??? struggling at home?

That was Carrefour, a much better comparison for Tesco that Sainsburys or Morrisons.

http://www.just-food.com/hot-issues/carrefours-problems-at-h...

Just saw that there is a Fool article from y'day too ...
http://www.fool.co.uk/news/investing/2012/01/17/carrefour-wo...

That article does not mention that Carrefour has also been struggling with its international expansion plans in China ...

http://www.internationalsupermarketnews.com/news/4791

Although Carrefour has denied rumours regarding alleged withdrawing of stores in China, the world’s number two supermarket group has long past its glorious days in the region.

It strikes me as a very similar story to Tesco - Domestic market is bankrolling expansion strategy, so the whole viability of that approach is called into question if there is a loss of domestic market share.

The sad part of the fall from grace of a company like Tesco is that we are unperturbed! If we had some sort of national pride then I think we should all be a bit disappointed that a UK company is unable to compete on the global stage.

"The sad part of the fall from grace of a company like Tesco is that we are unperturbed! If we had some sort of national pride then I think we should all be a bit disappointed that a UK company is unable to compete on the global stage."

huh? The sad part is we weren't short.

huh? The sad part is we weren't short.

Fair enough, but what happens to the parasite when its host dies? Still don't understand why it is such a strange concept to want Tesco to be a success.

huh? Tesco is the parasite.

FWIW, I agree with pyad on this. If you want a supermarket, Sainsbury's is the choice purely on the numbers.

The notion that Tesco had better management or processes or whatever is not a sound basis for an investment decision, especially in this sector. Anyone remember when Sainsbury's was king pin? Anyone remember how Walmart was going to take over Germany, only to run away with its tail between its legs? Anyone remember Safeway? The battlefield is littered with corpses of grocers. The current travails of Carrefour is a timely reminder.

Of course, if Tesco really does have superior management, its rivals are going to examine its business and steal what ideas, training and even personnel they can so they too can have that superior management. If Tesco has superior processes, well they'll just copy those. If Tesco has better purchasing, they'll just copy that too. And if Tesco has just been lucky, luck changes.

My guess is that Tesco has had its day in the sun, now it's someone else's turn.

freekNomad

<<My guess is that Tesco has had its day in the sun, now it's someone else's turn.>>

Nothing like basing your thoughts "purely on the numbers" is there?

;-)

G12

Nothing like basing your thoughts "purely on the numbers" is there?

I note the smiley, but you seem to be confusing 1) making a decision on the numbers and, 2) musing what might be behind the numbers.

These are different. I was sort of saying why, in my view, the meme floating round these boards that Tesco has some sort of super-dooper management, is not a sound basis for buying shares in that company. But I was just passing the time typing pointless stuff which has no import whatever on anything.

My fingers are now tired of typing and I am bored of this topic.

If you wanted to quantify 'good management' to me the number to use would be return on equity. This basically measures what return management are getting on each pound retained by the business and not paid out to shareholders, so is obviously a good indication of how well the management can allocate capital to achieve a good return. As profits may fluctuate depending on the business, this ROE figure may need to be averaged over the business cycle to determine the 'true' ROE of the business.

Businesses that spend money on overpriced acquisitions and expensive assets have poor returns on equity as the assets are accounted for on the books at full price but these assets don't generate a good level of income relative to their cost (and that is the accounting definition of an 'asset' - something that is expected to generate a future cash return). However, businesses that only invest & acquire prudently and return surplus cash to shareholders wisely have correspondingly high returns on equity.

The most interesting link between ROE and share returns was explored by the famous value investor Joel Greenblatt in his book 'The Little Book that Beats the Market' in which he created a 'magic formula' designed to look for businesses that a) were cheap relative to profits, so a low P/E effectively and b) generated high returns on equity. He defines this as approach as trying to find businesses that are both 'cheap' and 'good'. This approach has done very well over time, beating its market benchmarks by some margin. To quote the website (www.magicformulainvesting.com):

First, there is nothing "magical" about the formula. Similar formulas also work quite well. Over the last 30 years we have seen many studies that demonstrate that "value" strategies-such as buying stocks with low price/earnings (P/E) ratios can outperform the market averages. In the case of the Magic Formula system, we are screening for stocks with low P/E ratios ("cheap stocks") that also achieve high returns on capital ("good companies"). We then make some slight accounting adjustments to these commonly used ratios in order to be more accurate for comparison purposes across various companies.

Anyhow, bearing in mind that little discussion, let's have a look at the supermarkets...

Comparing the big three of Tesco, Sainsburys and Morrison the average return on equity for each of these for the last 5 years and the last year we get:

5 year average ROE:
Sainsburys: 7.8%
Morrisons: 8.4%
Tescos: 17.6%

2011 ROE:
Sainsburys: 9.1%
Morrisons: 11.2%
Tescos: 17.4%

As you can see, by this metric, Tesco are far ahead of their competitors. However, it should be pointed out that both Sainsburys and Morrisons have been playing catch up - Morrisons especially which has gone from an ROE of 5.6% in 2006 to 11.2% today. This implies that the most recent capital investments of these two (i.e. the marginal return on equity) have been good for shareholders (very good in the case of Morrisons), generating good profit returns.

So what's the story behind these ROEs? Morrison's ROE plummeted in 2004 after the acquisition of Safeway - before that it was doing 15.8% ROE - and has been recovering after management have slowly improved operations. As they aren't yet back to their previous heights there may be a case to expect further improvement, especially given the recent trend in ROE and earnings.

Tesco's ROE has been pretty consistently high for the last 10 years and has actually been improving slightly. Such consistently good ROEs can only occur through sensible capital allocation and this has been reflected in Tesco's growth over the past 10 years.

As for Sainsbury's I can't quite work it out what the story is here. One 'component' of return on equity is leverage, and at first I wondered if it could be that but it appears Sainsbury's has similar debt:profit and interest cover ratios as Tescos. I can only conclude that management just haven't been as good at capital allocation and correspondingly growth over the past decade has been poor compared to MRW and TSCO.

Of the three today, Tesco has lowest forward P/E (according to sharelockholmes anyway, not sure if forecasts have been updated recently or not..) and the highest ROE so would come top of a 'Magic Formula' value screen for the three.

So what does the future hold? Past good capital allocation performance doesn't guarantee
good future performance but it's one of the only reliable indicators we have to go on compared to the rhetoric and press hearsay which most of the investing public seem to rely on instead of quantitative measures like ROE.


I'm with Joel Greenblatt (and for that matter, Warren Buffett) on this one - Tesco looks to be both 'good' and 'cheap'.

CEV

Of the three today, Tesco has lowest forward P/E (according to sharelockholmes anyway, not sure if forecasts have been updated recently or not..) and the highest ROE so would come top of a 'Magic Formula' value screen for the three."

FYI, On REFS revised estimates for TSCO have been provided by 4 of the 11 brokers that cover them

Consensus:
2012 PBT, EPS and Divi are £3723m, 33.9p and 15.0p
2013 PBT, EPS and Divi are £3944m, 34.3p and 15.1p

Hope that is of use.

Cheers, Martin

Forecast P/E is one of the weaker value indicators. Far stronger is P/TB and on that TSCO is about 2.1 and SBRY at 1.0 with tangible assets derived from their most recent accounts, interims in both cases.

TSCO may well have had better RoE in the past but in a sense that was its downfall. The bigger they come, the harder they fall. What I mean is that it was over rated, possibly because that RoE reason gave rise to the falsehoods of "quality" and "good management", but when a share is over rated the slightest stumble tends to cream it.

the falsehoods of "quality" and "good management"

The notions that Tesco was worth a premium because of it's quality and management may have shown to have been mistaken in this instance. Share prices don't lie, after all, whether it's Tesco or Aviva. But if you're trying to say that the concepts of quality and good management are always "false" or not worthy of constituting value, then I'd have to disagree with you.

They are worth tangible amounts even if they can't be easily, directly or conveniently measured or quantified. It's just that the skill of valuing such properties is a very different process than merely screening for numbers like yield, P/E, P/B and so on.

In fact, one could say it's really a matter of investment style rather than objective truth. Some investors (presumably the more left-brained ones) prefer using traditional value metrics because quite simply they are better at understanding them. While growth properties like quality of management or, for that matter, what a company does and how well placed it is in the market, aren't just a matter of looking up some numbers, and therefore requires a different mind-set - one that perhaps value investors aren't as good at.

Simplifying, one might argue (as you have done in the past, Pyad) that what a company does and how they do it doesn't matter. It's all in the numbers. While a more right-brained investor might use more intuitive and inductive skills to perceive good prospects for growth, based on broader factors.

So the endless growth versus value debates that never get resolved are really a false problem. There are just investors who are good at determining value and those who are good at determining growth. And the problem of investment then becomes not a "which is best" exercise but rather a "who am I" exercise.

Forecast P/E is one of the weaker value indicators. Far stronger is P/TB and on that TSCO is about 2.1 and SBRY at 1.0

Tesco's property is worth alot more than the the accounts show as they do not normally do property revaluations.

http://www.investegate.co.uk/article.aspx?id=201104190700151... <i/>
At the same time, we create sustainable, long-term value for shareholders from the development and management of prime retail property and this also provides the strong asset-backing to our balance sheet with the market value of our property currently exceeding £36.0bn (compared with a net book value of £26.3bn).

Per TDW NTAV per share is 145p at feb 11
If we say there is an extra £9.7 billion of additional tangible assets and 8 billion of shares in issue this brings the NTAV per share up from 145p to 265p, not as good as Sainsburys 1.0 but much better than 2.1

Tesco's property is worth alot more than the the accounts show as they do not normally do property revaluations.

That's true but the same can be said about Sears Holdings in the U.S., yet that has proven to be a disasterous value investment in the retail space:

http://seekingalpha.com/article/319842-sears-poor-prospect-f...

http://seekingalpha.com/article/319243-sears-seems-trapped-i...

http://seekingalpha.com/article/319149-has-the-end-begun-for...

It's a stodgier store chain than Tesco, perhaps. But it shows that the "land bank" argument by itself can't save a retail chain if the core business goes rotten.

Without doing much digging it looks like in your example some of the assets are intangible - for Tesco we are talking about TNAV so all goodwill has been excluded.

As we can see, once you start looking at shareholder's equity, you're getting a little bit of property and equipment, but almost excluisively goodwill, trade names/other intagibles, and other assets.

Tesco makes £3 billion a year profit sears is forecast to make losses this year and next.Have NTAV eroded by estimated future losses will always mean a lower estimated share price, Tesco simply doesn't have this problem.
http://www.nasdaq.com/symbol/shld/earnings-forecast

FWIW, I agree with pyad on this. If you want a supermarket, Sainsbury's is the choice purely on the numbers

This is the value board so I know the numbers play a large part in the choice of a share. However I think that too much emphasis is being placed on them. I have learnt this by bitter experience when before the financial crisis I started building my HYP. I wanted a bank as they appeared to have stable, growing earnings and good yields. I chose HSBC, I have to say against the prevailing opinion at the time, which was that RBS was the obvious share to buy "based on the numbers". RBS had higher yield, lower p/e, etc.

But I chose HSBC because I liked its spread of international business, in the developed west, the far east and emerging markets. It was also the biggest and by default I instinctively favour the market leader, all other things being equal (or near enough equal). To me it seemed lower risk and its p/e, yield, etc, whilst not being as attractive as RBS, were good enough. Everything would have been fine if I'd stopped there. However eventually I succumbed to the noise around me (totally my fault, not the noise's fault) and bought a reasonable holding in RBS (and Barclays and Lloyds I have to say, not for my HYP but as value investments). You know the ending to this story.

My point is that a good value investment isn't always the one with the best numbers. Sainsburys has had the best numbers for a long time but what have the shares done? The only time it moves is if the Arabs start talking about buying it again. It has no overseas business, and was late into non-food (which right now is an advantage but not forever). I have added to Tescos after the recent fall because I want it for my HYP. But as a value investment I would argue that its numbers are 'good enough' and it has the potential to bounce back.

PYAD always says you have to look at a 20%+ fall (it was over 400p a few weeks ago) and decide is it a real crisis or an overdone market reaction? Right now every man and his dog are putting the boot into Tesco. All analysts are downgrading. But it is still the UK market leader by a mile, with good profits, has a substantial and growing international business and 'good numbers'. Isn't this precisely the buying opportunity value investors look for?

For what its worth I just saw this headline:

"Tesco Says Berkshire Hathaway Increased Stake to 5.1% From 3.2%"

...My point is that a good value investment isn't always the one with the best numbers...

Given the choice between two shares as we are discussing here, it will come down to the numbers from a value viewpoint. There may well be other ways of comparing them for other strategies, but for value, and this is the value board, the numbers are far and away the principal method of determining value. There may be a bit of smell etc. around a share but above all it is a numbers game.

Some people here are considering the share from other viewpoints, I'm not saying that that's wrong just that this board is concerned only with value arguments.

...Sainsburys has had the best numbers for a long time but what have the shares done?...

Neither TSCO nor SBRY were or are particularly great value plays when considered against the whole market. But this discussion is only about the relative value merits of the two. SBRY is clearly ahead of TSCO on most value criteria. Further, it doesn't matter at all for value what the historical share price movements have been. In fact it is common to find that a value share has been declining, that's why it has become a value share on price related ratios.

None of which means TSCO won't do better than SBRY over say the next couple of years, we don't know, but what I'm saying is that it is not logical for a value player to prefer TSCO even after its recent fall. That's injecting emotion into it, running on tilt as poker players call it.

Value doesn't always work, no strategy does, but it aims to win on balance. It works out precisely because it is a numbers game, precisely because it rejects most irrelevancies like past price action and subjective emotional ideas about quality and the rest of it.

There may well be other ways of comparing them for other strategies, but for value, and this is the value board, the numbers are far and away the principal method of determining value.

That's not the dictionary definition of 'value.'

Your definition of value appears to be very rigid, and based on a Ben Graham-style method of finding shares selling cheap relative to the underlying business's assets.

In today's world,that's a method as likely to find a good short as a good long.

That's not the dictionary definition of 'value.'

Have you read the FAQ?

It is linked to over there ----------------------------------------------------->>

That's not the dictionary definition of 'value.' Your definition of value appears to be very rigid, and based on a Ben Graham-style method of finding shares selling cheap relative to the underlying business's assets. In today's world,that's a method as likely to find a good short as a good long.

Yes, I think Pyad's theory of investing distills everything down to numbers. Then he goes on to claim that "investing by numbers" is better. It's a rather circular argument, since it assumes it's conclusion as a premise and then uses that as evidence for it's conclusion!

A better way of putting it is that Pyad doesn't know how to value factors that aren't strictly numberic and that can be easily read. Determining the "other stuff" is harder so Pyad decides that it "doesn't matter". It's rather like a schoolboy who answers just the exam questions he knows, and then claims that the other questions on the test are "irrelevant".

But that's not the whole story of course. It tells us more about his skills and limitations than it does about how to beat the market.

Have you read the FAQ?

Oh yes, but in the context of the debate over Tesco, as this is, we can't let that stifle opinion.

T0MM0

I just saw this headline:
"Tesco Says Berkshire Hathaway Increased Stake to 5.1% From 3.2%"

It is accurate.

..Mr Buffett, who has held Tesco shares since at least 2007, said in November he wanted to increase his stake from above his current 3.6%. Back in September he bought another 34m shares in Tesco when the share prices was 371p, taking his stake from 3.2%. Asked then whether he saw attractive valuations for a long-term investor in Europe, Mr Buffett said: “Not in the debt space but certainly in the equity space." He singled out Tesco as his top pick. "If the price came down some on Tesco I’d buy some more of that.”

Mr Buffett bought his shares on the day of the profit warning, when the shares crashed from 386p to 323p. Tesco's shares moved up 2.18p to 323p on the disclosure of Mr Buffett's buy.

http://www.telegraph.co.uk/finance/newsbysector/retailandcon......

ATB
Tom
(OOR)

Oh yes, but in the context of the debate over Tesco, as this is, we can't let that stifle opinion.

If you want to discuss Tesco as a GARP share, where to buy fresh veg, as an insurance provider or whatever, this isn't necessarily the most suitable place

Yes, I think Pyad's theory of investing distills everything down to numbers. Then he goes on to claim that "investing by numbers" is better. It's a rather circular argument, since it assumes it's conclusion as a premise and then uses that as evidence

You need to read and re-read what he meant.

For clarification, he meant, for value trading (not investing), it's a numbers game (and a bit of "smell") and this is a value board not qualiport, rule maker, HYP or rule breaker board. Tesco might be a better share to invest but no way it's better than SBRY in purely value metrics.

BTW, didn't RBS have high ROE, ROCE (and others) and great management 5 years ago? Would you have invested in RBS when Fred Goodwin and his management could do no wrong? Wasn't RBS at one stage bigger than HSBC, when, if I remember correctly, HSBC had better value numbers?


Maybe board needs to be renamed to value trading to avoid confusion.

Regards
M.

InvestElf,

Your definition of value appears to be very rigid, and based on a Ben Graham-style method of finding shares selling cheap relative to the underlying business's assets.

In today's world,that's a method as likely to find a good short as a good long.

You serious? You suggesting that we should find an undervalued company and consider going short - a la SBRY? I suppose you're entitled your views.


In today's world and forseeable future value is and going to be more important than ever.


Regards
M.

For clarification, he meant, for value trading (not investing), it's a numbers game (and a bit of "smell") and this is a value board not qualiport, rule maker, HYP or rule breaker board.

Again, that assumes the very question at issue i.e. whether value investing is purely a numbers game or not. Even you admit that there is also "a bit of smell" and, if so, then we're quibbling how much is a bit, and not on the principle itself.


Tesco might be a better share to invest but no way it's better than SBRY in purely value metrics.

Even if for the sake of argument I accept that only "metrics" matter, what about CantEatValue's post that garnered 43 rec's and shows how on various neasures Tesco looks like better value? While if you take into account more intangible measures, Tesco looks way better value.


Maybe board needs to be renamed to value trading to avoid confusion.

Are you saying we need two boards? One for trading and one for investing? Generally such splits cause more problems than they solve, as anyone reading the HYP boards will know. Moreover, a common response here to a value numbers play that goes wrong is an assertion that it hasn't yet been held long enough! I'm sure you don't want a rehash of the Aviva debate, but I'm reminded of an old trader's saying:

"A long-term investment is a short-term trade that went wrong".

Hello Lootman,


Tesco might be a better share to invest but no way it's better than SBRY in purely value metrics.

Even if for the sake of argument I accept that only "metrics" matter, what about CantEatValue's post that garnered 43 rec's and shows how on various neasures Tesco looks like better value? While if you take into account more intangible measures, Tesco looks way better value.

So? Not sure your correlation between number of recs and discussion. I regularly rec posts not because I agree them but I appreciate the time and analysis. Does not mean I agree with what they write. Heck, I even rec your posts, sometimes :o)


Intangible assets? is that not an oxymoron?


Maybe board needs to be renamed to value trading to avoid confusion.

Are you saying we need two boards? One for trading and one for investing? Generally such splits cause more problems than they solve, as anyone reading the HYP boards will know. Moreover, a common response here to a value numbers play that goes wrong is an assertion that it hasn't yet been held long enough!

This board has always been about Ben Graham's style of value (not necessarily PYAD's) and by and large, before the demise of Qualiport and other boards, the rules were adhered to. What I mean is we hardly ever discussed the ARMs, Logicas , WPPs of this world on this board. It was usually discussed in Qualiport, Rule Makers or Rule Breakers.

If the rules have changed then fair enough I may have missed the announcements.

Regards
M.

You serious? You suggesting that we should find an undervalued company and consider going short - a la SBRY?

Since you asked, yes -- Serious that shopping in the waste-paper basket is the best way to find shorts, and metrics are the thing to help with that.

However, not suggesting that SBRY is a short.

Also serious that value (as more widely defined) is the best basis for going long on shares, too.

I also think 'value,' as defined by this board, is closer to the definition of 'cheap' in the wider world. With cheap there are usually risks attached, and that often means failure due to lack of fitness for purpose.
In terms of shares that means they can go either way, hence the 'you can't win 'em all' mantra.

Investing takes more than a little sniff - a good deal of thinking is what's needed.

Intangible assets? is that not an oxymoron?

I agree that things like like intellectual property, brand names and human capital aren't so easy to measure.

I don't agree that they have no influence over future performance and returns.

I think we could all do with reading the FAQ -------->

In particular this question:
Q. Does that mean that only shares that meet very strict criteria can be discussed here?
A. Not at all. Within that broad definition of Value, many styles and variations are possible. It would be helpful, however, if you could discuss here only shares which do fit broadly into that definition. You will not win friends or influence on this board by trying to convince readers that your own definition, which might include highly leveraged growth shares, really constitutes "value".

As long as we are discussing within the "broad definition of Value", our points are valid. I hope that would end the discussion about whether it is valid to discuss pyad, Ben Graham, Warren Buffett etc., and whether it is valid to discuss trading or investing with a more long-term view, and whether only the naked numbers are valid, or whether the numbers should be accompanied with caveats, margins-of-safety or some non-numerical thinking.

Regards
sgc

I think the most interesting thing here is whether "return on equity" is a good "extra" value measure, in addition the the usual ones we use here ( P/E, dividend yield, P/B, debt ).

I'd say it is certainly worth considering - what it means (I think) is that retained earnings are better invested, so over time it's a better investment.

There is of course the assumption that past ROE is some guide to the future - but that's the case with any historic measure.

The objection might be that the benefits of a high ROE take a (relatively) long time to come through.

And also that it is already in the figures - I don't see how you can have high ROE, low P/B and low P/E simultaneously? Is that right? It's the eternal conundrum - low P/B implies a poor ROE, doesn't it?

Maybe someone would like to set up a "toy" example, showing what would happen over 5 years with a "model" company.

Hi Geebee2

I reckon return on capital employed (ROCE)is a better starting point as it compares a measure of profitability (the return) against all the capital employed, including debt. Debt can flatter return on equity figures.

ROCE is simple to use, high is good, low is bad. Then, comparing the gap between ROCE and ROE gives an indication of how much of the return is due to debt. Big gap - risky, small gap - less risky.

What do 'return on' ratios tell us? Basically, how hard the net capital employed is working. In the case of ROCE that means the figure at which the balance sheet balances.

The 'return on' ratios compare the income statement to the balance sheet and thus have nothing to do with the share price or market cap.

Generally speaking, 'return on' ratios are quality indicators for a business, and 'price to' ratios are 'cheapness' ratios.

Of course, the purple patch is to get quality cheaply thus providing value.

Oh darn, I need an edit facility!

Ignore the line that reads 'In the case of ROCE that means the figure at which the balance sheet balances.'

The balance figure is ROE.

ROCE is Total Assets - Current Liabilities.

My apologies.

Even that looks confusing.

This article provides a fuller treatment if you're interested:

http://www.fool.co.uk/news/investing/2011/06/15/how-to-ident...

(I'm the author btw)

Investelf

What I'm saying is that say have 2 companies, both on a P/E of 10.

Let's say Market cap of each is 10bn, so earnings of each are 1bn.

Company A has P/BV = 2, so Equity is 5bn, return on equity is 20%.

Company B has P/BV = 1, so Equity is 10bn, return on equity is 10%.

To Pyad, company B is better, because P/BV is lower.

To ROE fan, company A is better, because ROE is higher.

But for the same P/E, you cannot have it both ways!

( If ROE is defined slightly differently, please correct me, I have assumed it is just E/BV )

Hello geebee2

That's the right definition for ROE, I reckon.

The variable is the book value, and the ROE percentage thrown up must be viewed in the context of the nature of the assets.

ROE and ROCE figures are not directly comparable between businesses or industries. It's not a one size fits all and judgement is required there. See the article for more.

So, ROE figures should prompt examination of two things: the debt and the assets. It's the point at which analysis begins to depart from the numbers to become more qualitative, perhaps.

It's probably worth one last stab at this.

I don't see how you can have high ROE, low P/B and low P/E simultaneously? Is that right? It's the eternal conundrum - low P/B implies a poor ROE, doesn't it?

Given that 'return on' ratios and 'price to' ratios are free to move independently, one showing profitability of the business and the other how cheap the shares are pricing that business, it's an idea to look at examples that fix the ROE and the asset value.

So, for equity of £10m and profit of £2m the ROE would be 20% - quite high.

However, for price to book of one, the PER would be 5 (10 divided by 5) - quite cheap.


If, on the other hand, the shares were selling more expensively, you would see equity of £10m and profit of £2m giving a ROE of 20% - the same.

But the price to book could be 3, say, making the PER 15 (30 divided by 2) - quite expensive.

Therefore, you can have high ROE, low P/B and low P/E simultaneously. Equally, you can have high ROE, high P/B and high P/E simultaneously.

low P/B implies a poor ROE, doesn't it? - No, it doesn't.

Sorry if I've laboured the point, and please pick me up if I've misunderstood your point.

To me, ROCE and ROE are very important components of value.

For (10 divided by 5) in the above, please read (10 divided by 2).

A very interesting post Canteatvalue! I'd just like to add that one can also boost the ROE figure by writing down goodwill (not that I expect that this is the case with Tesco) since ROE=E/BV.