I received an email the other day from Brian, who felt that I could get into more detail on how to redo the sticker price of a company on a quarterly basis.
As Brian pointed out,
"…It completes the entire process of investing in a wonderful company at an attractive price and following the company quarterly until it is no longer a desirable investment. Without knowing the value of a company on a quarterly basis after doing the initial research, one would be investing blindly. Essentially, you would only be left with the 3 Tools as your only means of protection against loss until you are able to evaluate the company again. This evaluation would only come once every fiscal year since it appears that MSN Money only publishes this data on an annual basis. Will you help us out in determining the quarterly value of a business?"
Thanks, Brian, for staying on me to get this issue clarified. We DEFINITELY want to keep up on the Big Five Numbers on the businesses we own or are watching on a quarterly basis. It's just part of the homework of owning a business, gang, so get used to it.
One of the most important things you can do as an owner is to catch problems before they bite you. Checking the ROIC and Growth Rates quarterly is the most efficient way to see changes and challenges happening.
It is also important to revalue the business on a quarterly basis, but
maybe not give it too much weight. A business's value shouldn't change
suddenly on the basis of a good or bad quarter. Sometimes I'll
substitute numbers for TTM EPS if my company just had a horrible one
time bad quarter, just so I don't undervalue the business for no good
So how do you know that the quarter is just one bad one, or if it's maybe
the beginning of a mess?
The first and best way to know is to listen
to every quarter's conference call with analysts. Yes, you and I can
listen in. Or if we miss it, which happens to me all the time, they
put the latest call on the website so you can listen in later.
Listening to the questions from the pros and the answers from the
people running the biz is a great education in your business (and this
is your business, right?). In the conference call at the beginning of
the year a couple of years ago, the CEO of Whole Foods told the analysts
that they were going to have a bad 3rd quarter because of investing in
new stores. And sure enough the third quarter came along and it was
bad. And the stock price dropped like a brick, creating a great buying
opportunity in WFMI since the problem was thought to be limited to one
quarter. In this case, I kept my valuation the same and pretty much
ignored that quarter's earning results.
A year later, in another conference call, the CEO told the analysts
that competition was cutting into WFMI's margins and therfore the long
term growth rate for WFMI was not going to be sustained as high as he
thought. Using that information I changed my valuation of WFMI
The first quarterly conference call is an example of a situation where
we don't change the value. The second call was an example of a
situation where we do respond and change the value of the business.
At the end of the day, one of the primary responsibilities of a CEO is
to report to investors – the people who own the business – the
information they need to determine the value of the business. So while
we watch each quarter carefully, we determine the value of a business
with a longer term view.
Now go play!
- How to Read a Quarterly Conference Call Part One, Part Two, Part Three
- How to Read a 10Q
- When to Re-Do the Big Five Numbers
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.