Author Topic: Help me understand valuing a stock  (Read 5541 times)

Le Poisson

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Help me understand valuing a stock
« on: June 16, 2015, 08:37:04 AM »
SO I've been watching the descent of Bombardier B class stock, and trying to read between the lines while translating the good news coming out of the company against the bad news on the stock chart.

Apparently Morningstar has downgraded the stock to 2*, but in the same week the company has released performance numbers on its new C-series jets that beat all anticipated results, orders have come in from a few different airlines, contracts have been signed with maintenance facilities, and they have upsold some orders from lower class planes to the new ones.

SO - is all the good news just hype ("We're Not Dead Yet!") that belies the underlying problem of poor management, or is this a market mindset that once something is on a slide it must continue to descend. Being new to all this, I'm not sure how to translate a news story into a buy/sell position, but everything seems to read sell right now.

For the record, I threw $100 on BBD.B.TO before I posted this just to see what happens  - its this week's mad money so no great gamble. It may be a long position to see returns, but I don't think Bombardier will be folding up its tent any time soon.


dandarc

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Re: Help me understand valuing a stock
« Reply #2 on: June 16, 2015, 09:18:09 AM »
So they took a $1.4B write-off when deciding to "pause" the Learjet 85 - that explains the big drop in January.

http://www.flightglobal.com/news/articles/bombardier-pauses-learjet-85-on-1.4bn-write-off-407950/

Appears they borrowed ~$1.5B sometime during the first quarter this year - this is concerning.  CEO resigned early this year February, it appears.  Basically, the company is shaky right now.

The C-series program has also been ravaged by delays and cost-overruns.  They have yet to deliver one - this plane was supposed to be in service in 2013.  Bombardier doesn't have the resources of Boeing or Airbus to absorb this kind of thing.

So you've got major problems in the corporate-jet segment and in the commercial division at the same time.  You've got major management upheaval - CEO isn't the only one who has left recently.

Le Poisson

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Re: Help me understand valuing a stock
« Reply #3 on: June 16, 2015, 09:40:58 AM »
So with a blood in the streets mentality - isn't this buying season - forecasting that since they are now in testing and are taking orders, with prototypes shown at airshows things look optimistic at least on the production side?

Apparently the Russian leases they were expecting are being held up by international policy, but once thing settle down in the Ukraine that will get back on its feet. Or not. Yes, another shaky position.

Based on the 'too big to fail' mentality the Quebec gov't has on Bombardier, I can't see the stock descending to nothing - or is this a candidate for that? Then again, Caterpillar pulled out of Canada right after Fed. investment, so the gov't may not be interested in floating this either if it comes to that.

In my head, the stock averaged around $4 looking at the max duration charts. so buying in the $2.60 range, I would expect to see it jump back by 20% at least if/as C-Series orders start to come in, hopefully more - or am I a fool who doesn't understand how things work?

If they do restructure which some have hinted at, what would happen to the existing A and B-stock?

dandarc

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Re: Help me understand valuing a stock
« Reply #4 on: June 16, 2015, 11:08:33 AM »
I'll just point out they diluted existing shareholders by like 30% in February too.

http://www.bombardier.com/en/media-centre/newsList/details.bombardier-inc-20150219bombardiertoissuecdn750millionapproximate.bombardiercom.html

So even if we take the $4 "long-term" price per share as gospel, you've got to discount that by the recent dilution, which by itself takes that figure down to about $3.

I mean, the long-term prospects might be good, but they have to survive the short term.  Borrowing $1.7B in 2013, another $1.6B in 2015 while also raising $750M at the expense of your shareholders are not great indicators (the issuing of shares is particularly problematic - this is starting to get into last-resort territory for a large, not-so-young company). 

I'm also not much into short-term trading of individual stocks - really nobody knows what the market will do in the short term - just trying to give a counter to "all the good news".  Really its been pretty much all bad news so far in 2015.

I'm also not so sure the C-Series is going to pay off in a big way - already has racked up $5.4B in program costs, has only about 250 orders for planes that list at $60-70M per.  Don't know what the gross margin is on a regional airliner, but it would have to be on the order of 30% of list price for existing orders just to recoup the money already spent.  Then if regional jets are anything like larger planes, nobody pays list price - Boeing and Airbus seem to discount between 40-60% off list, based on what is available online.

Le Poisson

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Re: Help me understand valuing a stock
« Reply #5 on: June 16, 2015, 11:16:41 AM »
Good points - I wonder what this dog will do, but it is a pretty bleak picture now that you point out all the negative side. Well we'll see where my big gamble goes!

ETA - Apparently they just partnered with Lockheed Skunkworks to bid on a US Plane - I wonder if that was a smart move on Lockheed's part. If BBD is struggling, then why would they want to associate with them on a federal bid? http://www.prnewswire.com/news-releases/lockheed-martin-raytheon-and-bombardier-join-forces-for-jstars-recap-program-300099848.html
« Last Edit: June 16, 2015, 11:20:58 AM by Prospector »

dandarc

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Re: Help me understand valuing a stock
« Reply #6 on: June 16, 2015, 11:31:03 AM »
Good points - I wonder what this dog will do, but it is a pretty bleak picture now that you point out all the negative side. Well we'll see where my big gamble goes!
Yeah - hopefully the C-Series will revolutionize air travel, it will actually become economical to fly from smaller airports all over the world, and your $100 bet will turn into $10,000 in a decade or something.

Bombardier is actually more diversified than I thought - always think of the CRJs, as on the rare occasion it is reasonably priced to fly out of our local airport, that's what we're flying on.  But they have several lines of business jets, which dwarfs their commercial jet business on sales, a bit of military.  Half of revenue comes from rail activities.

Le Poisson

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Re: Help me understand valuing a stock
« Reply #7 on: June 16, 2015, 11:48:52 AM »
The rail side is where I'm most familiar with them, but at work I see more pressure from other competitors - for instance, in Toronto the new Union-Pearson link went with Japanese trains even though Bombardier is in our backyard.

Wikipedia:
"The Union Pearson Express uses Nippon Sharyo DMU trains. The fleet consists of 18 diesel multiple unit (DMU) cars, as four three-car and three two-car sets.[30] On 1 March 2011, Metrolinx announced that it had chosen to buy 12 DMU cars (six two-car trains) from Nippon Sharyo at a cost of C$53 million, for the service.[31] This was later expanded to 18 DMU cars (adding one car to each train) via an option order. This brought the cost to US$75 million.[32][30] The DMUs were manufactured in Japan, assembled in Chicago, and towed by rail to Toronto.[29]"

Why would a Canadian gov't contract go offshore? Price. BBD just couldn't compete. They did train the crews though - whatever that is worth.

seattlecyclone

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Re: Help me understand valuing a stock
« Reply #8 on: June 16, 2015, 01:32:28 PM »
Based on the 'too big to fail' mentality the Quebec gov't has on Bombardier, I can't see the stock descending to nothing...

I wouldn't be so sure about that. When the government bailed out GM, they did it to save the business, not the value of the stock. The existing shareholders were wiped out and the "new GM" ended up being owned by the US and Canadian governments, the unions, and other creditors who the "old GM" owed money to. The same could easily happen to Bombardier in the event they were bailed out by the Canadian or provincial government.

I don't know enough about the company to say whether such a bailout will even be necessary, but if it does happen you should not expect to get back any of your investment in their stock.

JetBlast

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Re: Help me understand valuing a stock
« Reply #9 on: June 16, 2015, 03:20:53 PM »
There are a lot of question marks about Bombardier's future, and frankly I have no idea how I'd try to put a value on a company with so much in doubt right now.

Liquidity is the biggest concern right now. Between the c-series cost overruns and the Lear 85 debacle, they've burned a lot of cash. Thankfully for them the costs of development on the c-series are winding down, but there's still costs associated with ramping up production. Then the more modest costs of developing the second c-series stretch, the CS500.  They should be funding this with aircraft sales, but the sales hopes of the CRJ are all but non-existent while the Q400 is selling in ok but not great numbers.

C-series sales have been un impressive so far, hence the new sales team. I have no idea what improvement we will see in sales from that change. It seems like airlines want to see in service data before committing to a new platform like the C-series. The current order book is pretty weak. Lots of questionable orders from startup airlines, small leasing companies, and the largest order is from an airline that can't operate the aircraft due to pilot scope clauses (long story). The only orders from "top tier" airlines are Swiss and Korean Air. That's a problem because the big lessors likely won't buy without a few more big name airlines in the order book. Bombardier desperately need a couple big orders from major airlines.

If rumors are correct, the Learjet 85 is done. Structural problems with the fuselage have supposedly doomed it to the scrap heap.

I like the C-series. If it can really deliver the performance numbers being claimed it should have a bright future. Can it deliver once it enters service? Can Bombardier survive long enough to see that day?  I don't know. Right now Bombardier stock is a lottery ticket, not an investment.

hodedofome

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Re: Help me understand valuing a stock
« Reply #10 on: June 16, 2015, 04:10:19 PM »
I'm not a good value investor but I would think a real money manager that thought the long term prospects of Bombardier would be better, would be buying their bonds (as you have a better chance of getting your money back in bonds than the stock) if they are trading a pennies on the dollar, or buying long term options if they are cheap.

Many times, even amateur investors can find the right situation. But the pros know it's just as much HOW you structure the trade as it is WHAT you are trading. That's what separates the noobs from the pros - the pros know all the different financial products out there and what has the best chance of success with the least amount of risk.

beltim

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Re: Help me understand valuing a stock
« Reply #11 on: June 16, 2015, 05:53:43 PM »
I'm not a good value investor but I would think a real money manager that thought the long term prospects of Bombardier would be better, would be buying their bonds (as you have a better chance of getting your money back in bonds than the stock) if they are trading a pennies on the dollar, or buying long term options if they are cheap.

Many times, even amateur investors can find the right situation. But the pros know it's just as much HOW you structure the trade as it is WHAT you are trading. That's what separates the noobs from the pros - the pros know all the different financial products out there and what has the best chance of success with the least amount of risk.

I know nothing about Bombardier, but sometimes with stocks like this the common stock acts as a non-expiring option. 

innerscorecard

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Re: Help me understand valuing a stock
« Reply #12 on: June 16, 2015, 09:58:44 PM »
The funny thing is that this thread has in its title "valuing a stock," but in all the posts, I still don't know what you think the stock is actually worth. What do you think is the per-share intrinsic value of the common stock of the company?

Le Poisson

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Re: Help me understand valuing a stock
« Reply #13 on: July 14, 2015, 09:17:30 PM »
So its been a while, and My Bombardier hasn't completely tanked yet. I'm down by 21% since I started this thread, and its been a learning experience watching the dive.

1. The company is putting out press release after press release about new contracts, but no one seems to react. The stock just continues to tank.
2. Morningstar upgraded the stock to 3 stars, but again, no one cares. It continues to tank.
3. Today's nuke announcement coming out of Iraq brought a mention of BBD in the news - something along the lines of "If Canada were to follow the USA in easing sanctions, Canadian firm BBD could see orders for as many as 400 Jets to replace Iraq's aging fleet." Unfortunately PM Harper has no intent to ease Canadian sanctions so other suppliers will likely beat Canada to the market. Thanks Steve.

I now have about 5 co workers joining in my daily BBD checkup and offering their guesses on what the stock will do tomorrow. Most of the guesses involve words like "plummet."

Overall my couch potato portfolio is holding its own, but BBD continues to amaze me. How bad will it get before senior management changes finally happen?

innerscorecard

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Re: Help me understand valuing a stock
« Reply #14 on: July 15, 2015, 02:18:32 AM »
So its been a while, and My Bombardier hasn't completely tanked yet. I'm down by 21% since I started this thread, and its been a learning experience watching the dive.

1. The company is putting out press release after press release about new contracts, but no one seems to react. The stock just continues to tank.
2. Morningstar upgraded the stock to 3 stars, but again, no one cares. It continues to tank.
3. Today's nuke announcement coming out of Iraq brought a mention of BBD in the news - something along the lines of "If Canada were to follow the USA in easing sanctions, Canadian firm BBD could see orders for as many as 400 Jets to replace Iraq's aging fleet." Unfortunately PM Harper has no intent to ease Canadian sanctions so other suppliers will likely beat Canada to the market. Thanks Steve.

I now have about 5 co workers joining in my daily BBD checkup and offering their guesses on what the stock will do tomorrow. Most of the guesses involve words like "plummet."

Overall my couch potato portfolio is holding its own, but BBD continues to amaze me. How bad will it get before senior management changes finally happen?

What do you think is the value per share of common stock you own? Alternatively, what do you think is the total value of the company's equity?

forummm

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Re: Help me understand valuing a stock
« Reply #15 on: July 15, 2015, 05:33:57 AM »
So its been a while, and My Bombardier hasn't completely tanked yet. I'm down by 21% since I started this thread, and its been a learning experience watching the dive.

1. The company is putting out press release after press release about new contracts, but no one seems to react. The stock just continues to tank.
2. Morningstar upgraded the stock to 3 stars, but again, no one cares. It continues to tank.
3. Today's nuke announcement coming out of Iraq brought a mention of BBD in the news - something along the lines of "If Canada were to follow the USA in easing sanctions, Canadian firm BBD could see orders for as many as 400 Jets to replace Iraq's aging fleet." Unfortunately PM Harper has no intent to ease Canadian sanctions so other suppliers will likely beat Canada to the market. Thanks Steve.

I now have about 5 co workers joining in my daily BBD checkup and offering their guesses on what the stock will do tomorrow. Most of the guesses involve words like "plummet."

Overall my couch potato portfolio is holding its own, but BBD continues to amaze me. How bad will it get before senior management changes finally happen?

Welcome to the roller coaster of individual stock investing. My index portfolio has gone up during this time. And I haven't expended any energy worrying about it. Some very rare people can do well with individual stocks, but they spend a huge amount of time doing it and are more emotionally involved and are still taking on more risk. Hopefully you're learning which kind of investor you want to be.

Le Poisson

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Re: Help me understand valuing a stock
« Reply #16 on: July 15, 2015, 05:43:53 AM »
Honestly Innerscorecard - I still have no idea even after these months of watching.

Anyone can look up the company numbers: http://www.theglobeandmail.com/globe-investor/markets/stocks/summary/?q=bbd.b-t  but I haven't figured out how to translate those numbers into a meaningful stock price. Its been months, and I still haven't made it through an investing book beyond about chapter 3, so its not likely that I will ever be a wily investor like most of you are. But its still fun being a spectator, and a $100 bet is still cheaper than going to a Jays game.

Going for the coles notes approach to life, Wikipedia gives 13 different methods and 4 approaches to finding a stock valuation. I think the most common approach is using the EPS or P/E ratio. From Wiki (I'm sure you know this already, but other casuals like me may not):

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https://en.wikipedia.org/wiki/Stock_valuation

Earnings per share (EPS)
EPS is the net income available to common shareholders of the company divided by the number of shares outstanding. Usually there will be two types of EPS listed: a GAAP (Generally Accepted Accounting Principles) EPS and a Pro Forma EPS, which means that the income has been adjusted to exclude any one time items as well as some non-cash items like amortization of goodwill or stock option expenses. The most important thing to look for in the EPS figure is the overall quality of earnings. Make sure the company is not trying to manipulate their EPS numbers to make it look like they are more profitable. Also, look at the growth in EPS over the past several quarters / years to understand how volatile their EPS is, and to see if they are an underachiever or an overachiever. In other words, have they consistently beaten expectations or are they constantly restating and lowering their forecasts?

The EPS number that most analysts use is the pro forma EPS. To compute this number, use the net income that excludes any one-time gains or losses and excludes any non-cash expenses like stock options or amortization of goodwill. Then divide this number by the number of fully diluted shares outstanding. Historical EPS figures and forecasts for the next 1Ė2 years can be found by visiting free financial sites such as Yahoo Finance (enter the ticker and then click on "estimates").

Price to Earnings (P/E)
Now that the analyst has several EPS figures (historical and forecasts), the analyst will be able to look at the most common valuation technique used, the price to earnings ratio, or P/E. To compute this figure, one divides the stock price by the annual EPS figure. For example, if the stock is trading at $10 and the EPS is $0.50, the P/E is 20 times. A complete analysis of the P/E multiple includes a look at the historical and forward ratios.

Historical P/Es are computed by taking the current price divided by the sum of the EPS for the last four quarters, or for the previous year. Historical trends of the P/E should also be considered by viewing a chart of its historical P/E over the last several years (one can find this on most finance sites like Yahoo Finance). Specifically consider what range the P/E has traded in so as to determine whether the current P/E is high or low versus its historical average.

Forward P/Es reflect the future growth of the company into the future. Forward P/Es are computed by taking the current stock price divided by the sum of the EPS estimates for the next four quarters, or for the EPS estimate for next calendar or fiscal year or two.

P/Es change constantly. If there is a large price change in a stock, or if the earnings (EPS) estimates change, the ratio is recomputed.

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I can calculate these numbers, but havcing done that, how do I decipher an EPS into a stock value?

dandarc

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Re: Help me understand valuing a stock
« Reply #17 on: July 15, 2015, 05:57:05 AM »
You basically pick your multiple that you think is reasonable.  Say you decide that a reasonable P/E for this company is 15.  You'd look at the firm's growth prospects, its industry, the market as a whole to pick this number.  If the stock is trading at a price below that P/E, then you think it is a good deal and will buy more.  When it is at or above, you think it is over-priced so you'll hold or even sell based on that.

The market is not rational, particularly in the short term, so the market price is what the market price is.  Even if it were, who is to say the collective decision on "this company is worth X" would agree at all with your own analysis.  All you can do is decide if that is a good price for you or not.

innerscorecard

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Re: Help me understand valuing a stock
« Reply #18 on: July 15, 2015, 07:09:26 AM »
There's many ways to value a company.

For a company in transition like this, using the trailing twelve months' earnings might not be that useful, if it doesn't reflect the true normalized earnings power of the company (I don't know if that's the case here - I don't particularly care to spend the time to look at the financial statements for Bombardier right now).

I think a more important point is Warren Buffett's quote:

Quote
"I donít try to jump over 7-foot hurdles: I look for 1-foot hurdles that I can step over."

You don't have to pick the most difficult distressed companies to buy stocks in. You can buy companies where you can predict the value of the company with some certainty given study of the company's past and prospects. Why not start there, rather than with something very difficult to analyze?

And you don't have to come up with an exact value for the company either. You can simply know it's cheap. But you have to have at least an idea of what a company is worth, to be an investor.

Now, not everyone has to be an investor. You can speculate, too. And speculate intelligently. People do make money riding momentum, for example, without looking at the underlying fundamentals. But you have to be clear what you are doing. The title of this post was about valuing a stock!

It's quite important to have at least a general idea in your mind, because otherwise you won't know when you should sell, when you should hold, and when you should buy more.

Le Poisson

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Re: Help me understand valuing a stock
« Reply #19 on: July 15, 2015, 08:02:59 AM »

It's quite important to have at least a general idea in your mind, because otherwise you won't know when you should sell, when you should hold, and when you should buy more.

That's probably a good starting point for me. Next time I see an uptick in BBD, I'll likely get out and move the wee bit of cash over to something more "real." This has been fun, but not really profitable or smart.

innerscorecard

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Re: Help me understand valuing a stock
« Reply #20 on: July 15, 2015, 03:12:39 PM »
Or you could just sell now. Could just as easily go down as up, to you, if you don't have a clear grasp on either short-term sentiment or the drivers of value.