Tuesday, 10 August 2010

$BP, life after the spill?

Now there appears to be some relief in the stock the Raven thought it would be worth having a look at his revised estimates on $BP.

86 days of spill at 60k flow rate = 5.16mm barrels of oil
cost to $BP of clean up $30mm per day, and cleanup lasting another 172days = $8bn
litigation cost = $28bn from Exon Valdez figures inflation adjusted
aditional fines of $22bn from Water agencies etc.
so $58bn all in.
valuing the stock on its historic multiples that would make it worth 425p a share, $40.8 an adr. pretty much bang on where its trading now...

(the Raven does note, that he thinks those cost estimates are too low, especially the litigation cost, given that most estimates are based on the Exxon Valdez figures, which had less human impact than the BP spill, given that its not impossible that the litigation could be more like 3x that figure (but who knows??) in which case the Raven thinks its more like ~ 215p and $20.65, on the other hand there could be m&a as JPM have indicated that could get built into the stock? the one thing the Raven does know, is that there is more action in the name going forward)

Thursday, 5 August 2010

An interesting point from Zecco on $WDC and $STX

The Raven read this and thought it was interesting;


Basically it points out that data storage is cheap ie. $100 for a terabyte now. It doesn't explicitly say it, but the argument is then that 1Terabyte is enough space for you to store everything you could want and therefore that you'd just buy the cheaper version of the 1TB. Now it would be easy to dismiss this argument by regurgitating a quote about a desktop PC being everything you could need in the 90s. The Raven thinks it more interesting to wonder where the actual limit might be using a bit of imagination. As we're only really looking at personal data storage what items do people like to store? (and a point he's going to dig some more into offline)
photos, music, films, books? software? personal documents

photos, music and films all have the potential to upgrade again to higher resolution formats requiring more storage space, books less so, but software and the personal documents they produce if anything produce larger and larger files. Without even looking at the massive increase in commercial data that will be stored in the future its easy to make an argument that the size of files will expand to fill the space available to store them.

The other point that really should be thought about is what percentage of the population actually store this kind of data on their pc's, and if there is a potential generational effect, as stupid as this sounds the Raven would have a rather good punt that penetration of these sorts of products is much lower with consumers the older they are. ie. Your average 50yr old isn't going to have as many digital photos as your 30 something, or as many photos as that 30 something will have in 20yrs. Just to make the maths easier, lets say people only buy storage when they get to 20, and that penetration really only goes up to 40, thats 20yrs of the population that could be 40yrs in 20yrs time. Not a huge growth rate, but certainley not a stagnating industry at 3.5% p.a. growth for 20yrs.

It still looks like a situation to sit on one's hands. Especially given his other previous thoughts on WDC and STX...



Wednesday, 4 August 2010

share buybacks


Imagine there are two shares in a listed company, the intrinsic value of the company is $400 lets say made up of $250 of hard assets and $150 of cash, the company has no liabilities. So the intrinsic value of one share is $200.

Lets say the company decides to buy back 1 share, ie. 50% of the shares issued. if they pay $x for that share to you as a shareholder. If they pay $100 for the share, you as a shareholder then have $100 of cash, and 1 share left in the company, which then has an intrinsic value of ... $50 of left over cash+$250 of hard assets = $300. So as a shareholder you're left with $400. If they pay $1 for the share, then you have $1 cash + 1 share worth $250+$149 = $400.

WOW its the same.

STX translation of WDC comments

Given the view the Raven has as to where $WDC should trade (in yesterdays post), then its relatively simple to make the same sort of read across in valuation terms to $STX given the belief that the "third party" drives margins down to 15% for these two players.

(the Raven is thinking that would be a great name for an activist hedge fund, you wouldn't need to be writing caustic letters with such an ominous name)

Reducing STX margins to 15%, then applying the same prop. adjusted EV/ebitda multiple then a stock price of $7.50 compares to $23. ($28.73 -> $10.67) a lot lower than its current price. Keeping its 3% margin premium that it had to $WDC then you have $9 and $13, so that tells you that the market is expecting them to be able to keep that premium, whether that's wise or not is a much more difficult call to make.

If the Raven is going to be buying anything in the near term future its going to be $WDC rather than $STX.

a bit of playful thinking;

ok just some left field thoughts from the Raven on things as crazy as the gold dow ratio...

just looking at spx vs $GLD back to 1975 some stats using the following ratios you get an SPX based on current gold prices;

min 154

25% 682

50% 1217

75% 2716

max 6505

average 1833

we currently stand at 45th percentile, so not extreme at all.

if we look at the price of gold, fixing the SPX and using the lowest SPX/GLD ratio from the last gold bubble, we see a SPX inflation adjusted price of $8,353. whooooah indeed.

Sunday, 1 August 2010


This is a stock that the Raven has been keeping quite a close eye on the last couple of weeks (he's traded around a small punter sized position). The company makes hard drives, the Raven actually uses one of their external hard drives to back up all his data.

This stock is cheap, by whatever metric you'd look at it classically, if you're using historic data it looks cheap. EV/ebitda(ttm) its 1.84x, p/e(ttm) 4.5, p/s 0.6, p/b 1.32, forward p/e 5.7.

This looks like a three legged dog with fleas. a blind three legged dog. Its fallen 41% since its high towards the end of April. Its done 40% more volume than one would have expected in that period as well. The 200dsma is 44% higher, basically its ugly, and looks oversold, but thats not a reason for it turn tomorrow.

Index funds, mutual funds and relatively passive money, so who's been selling??
4.3% of the float is short, 1.8 as a SR. (as of the middle of the month - so not very informative), not particularly high.

Going through some of the fears;
1) SSD tech becomes cheap enough to shut out HDD
2) inventory build up and volatile ASP (normal hardware producer risk really)
3) the "cloud"
4) areal growth rates too high or too slow (too high drives down the margin, too slow and SSD becomes cheaper relatively)

There is a lot of uniformed speculation as to what the fear is in the stock, the Raven doesn't claim to be any wiser than the street on this one, so its best to go through the obvious angles and see if it makes a bit more sense. SSD technically just isn't cheap enough to be competition just yet, the Raven also knows enough about the street to realize that this isn't a risk that has suddenly been priced in since April!! Neither is the cloud, or projected areal growth rates. So clearly by process of ellimination, investors are worried about inventory build up, pricing, etc. A "normal" fear in this sort of stock.

Listening to $STX and $WDC's earnings calls, its pretty clear that they both saw the same thing, the rather ominous sounding "third player" in their space producing an excess of 5mm units. They both speculate whether this is because the TP doesn't have as much control as they do, ie. aren't able to dial down their production as quickly, OR whether this is a deliberate shot at trying to gain market share with a limited number of OEM (original equipment manufacturers) that the TP is particularly close with. To the Raven the latter makes sense. In which case one should go and give the margins and balance sheet a good kicking to check how cheap the stock really is?

Ok, so looking at the suspected TP's driving down prices, the Raven thinks 'they' are running on a gross margin of ~15%, but also with higher r&d costs, and probably lower net margins than either STX or WDC. It does mean however that pricing could be quite weak, with bloody noses all round (although quite STX and WDC management seem quite aware of the danger of chasing market share thankfully). The Raven does think that the most conservative level is a 15% drop in ASP (average selling price). In which case WDC becomes break even, and worth ~ $11 of the cash its got on the balance sheet.

Realistically its easy to see WDC's margins get compressed down to 15% in the short term to match our TP's lower margins. That would mean EPS ttm of $1.95 ish. Putting that on a "value" p/e of 10x and you've got $19.50+$11cash = $30.50. So its only 16% higher than Friday's close. Certainley not bargain basement valuation in this scenario, putting a margin of saftey of 25% on that and you're at $23. (if you're a real punter though you could argue that you should use a market multiple of 14x and a 25% discount then you're looking at $28.73)

The other general trading point the Raven would make is that there seems little point being a hero, or draw a line in the sand, its much easier to trade the right hand side of a U than the left hand side, or "don't catch a falling knife", or "monkey's don't pick bottoms", etc, etc. Basically IF the Raven thought this was a screaming buy from a valuation standpoint, he's nimble and small enough to wait until the stock starts to move up before starting to buy. He's had a quick run of some quantitative screens and he'd only buy this stock when it broke throught its five day moving average on the shortest time frame.

So to sum up;
Looking in the rear view mirror, WDC is cheap. However the stock is telling traders and investors that there are worries about the future, by process of elimination it is 'clear' that market level inventory build up and weak margins going forward are a big risk given other market participants increasing supply and being less responsive to demand. The Raven believes that as a worst case scenario the stock trades at $11, at a realistic downside the stock is worth $30.50, so the Raven would look to buy a meaningful portfolio sized position if the stock went below $23 with the condition that the stock broke above its 5dma after that.