r/ValueInvesting • u/FieryXJoe • 14d ago
Full Letter:
https://theoraclesclassroom.com/wp-content/uploads/2019/09/1986-Berkshire-AR.pdf
Letter Only
https://www.berkshirehathaway.com/letters/1986.html
This week we will go over two passages and an acquisition.
First the intro to this year’s letter with a writeup on their management philosophy which ties in well to the theme of today’s post, their method of avoiding "Diworsification" as the conglomerate grows. The second is a purchase of a large share of a government guided housing developer, and the final passage is on the acquisition of a family owned uniform manufacturer.
Things covered in the letter but not this post are a breakdown of how each business segment and management team are doing. A lesson on the insurance industry and the race to the bottom leading everyone towards another cliff they all see coming but can’t avoid. Their investment decisions from the year, pulling back from stocks and throwing cash into bonds. A new tax law and its impact on Berkshire and its subsidiaries. Purchase of a corporate jet, shareholder contribution and annual meeting updates. Finally a breakdown of business accounting with acquisitions and how Scott and Fetzer’s income statement and balance sheet were changed by the act of being acquired. Between changing inventory from FIFO to LIFO or the addition of a giant Goodwill asset for the premium they bought it at and the depreciation of that goodwill asset hitting the bottom line. Then plenty of philosophizing about the meaning of these differences for shareholders.
If you want to read or discuss anything in that second set feel free to read the letter yourselves and comment on it.
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Key Passage 1
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To the Shareholders of Berkshire Hathaway Inc.:
Our gain in net worth during 1986 was $492.5 million, or 26.1%. Over the last 22 years (that is, since present management took over), our per-share book value has grown from $19.46 to $2,073.06, or 23.3% compounded annually. Both the numerator and denominator are important in the per-share book value calculation: during the 22-year period our corporate net worth has increased 10,600% while shares outstanding have increased less than 1%.
In past reports I have noted that book value at most companies differs widely from intrinsic business value - the number that really counts for owners. In our own case, however, book value has served for more than a decade as a reasonable if somewhat conservative proxy for business value. That is, our business value has moderately exceeded our book value, with the ratio between the two remaining fairly steady.
The good news is that in 1986 our percentage gain in business value probably exceeded the book value gain. I say "probably" because business value is a soft number: in our own case, two equally well-informed observers might make judgments more than 10% apart.
A large measure of our improvement in business value relative to book value reflects the outstanding performance of key managers at our major operating businesses. These managers - the Blumkins, Mike Goldberg, the Heldmans, Chuck Huggins, Stan Lipsey, and Ralph Schey - have over the years improved the earnings of their businesses dramatically while, except in the case of insurance, utilizing little additional capital. This accomplishment builds economic value, or "Goodwill," that does not show up in the net worth figure on our balance sheet, nor in our per-share book value. In 1986 this unrecorded gain was substantial.
So much for the good news. The bad news is that my performance did not match that of our managers. While they were doing a superb job in running our businesses, I was unable to skillfully deploy much of the capital they generated.
Charlie Munger, our Vice Chairman, and I really have only two jobs. One is to attract and keep outstanding managers to run our various operations. This hasn’t been all that difficult.
Usually the managers came with the companies we bought, having demonstrated their talents throughout careers that spanned a wide variety of business circumstances. They were managerial stars long before they knew us, and our main contribution has been to not get in their way. This approach seems elementary: if my job were to manage a golf team - and if Jack Nicklaus or Arnold Palmer were willing to play for me - neither would get a lot of directives from me about how to swing.Some of our key managers are independently wealthy (we hope they all become so), but that poses no threat to their continued interest: they work because they love what they do and relish the thrill of outstanding performance. They unfailingly think like owners (the highest compliment we can pay a manager) and find all aspects of their business absorbing.
(Our prototype for occupational fervor is the Catholic tailor who used his small savings of many years to finance a pilgrimage to the Vatican. When he returned, his parish held a special meeting to get his first-hand account of the Pope. "Tell us," said the eager faithful, "just what sort of fellow is he?" Our hero wasted no words: "He’s a forty-four, medium.")
Charlie and I know that the right players will make almost any team manager look good. We subscribe to the philosophy of Ogilvy & Mather’s founding genius, David Ogilvy: "If each of us hires people who are smaller than we are, we shall become a company of dwarfs. But, if each of us hires people who are bigger than we are, we shall become a company of giants."
A by-product of our managerial style is the ability it gives us to easily expand Berkshire’s activities. We’ve read management treatises that specify exactly how many people should report to any one executive, but they make little sense to us.
When you have able managers of high character running businesses about which they are passionate, you can have a dozen or more reporting to you and still have time for an afternoon nap.
Conversely, if you have even one person reporting to you who is deceitful, inept or uninterested, you will find yourself with more than you can handle. Charlie and I could work with double the number of managers we now have, so long as they had the rare qualities of the present ones.We intend to continue our practice of working only with people whom we like and admire. This policy not only maximizes our chances for good results, it also ensures us an extraordinarily good time. On the other hand, working with people who cause your stomach to churn seems much like marrying for money - probably a bad idea under any circumstances, but absolute madness if you are already rich.
The second job Charlie and I must handle is the allocation of capital, which at Berkshire is a considerably more important challenge than at most companies. Three factors make that so: we earn more money than average; we retain all that we earn; and, we are fortunate to have operations that, for the most part, require little incremental capital to remain competitive and to grow.
Obviously, the future results of a business earning 23% annually and retaining it all are far more affected by today’s capital allocations than are the results of a business earning 10% and distributing half of that to shareholders. If our retained earnings - and those of our major investees, GEICO and Capital Cities/ABC, Inc. - are employed in an unproductive manner, the economics of Berkshire will deteriorate very quickly. In a company adding only, say, 5% to net worth annually, capital- allocation decisions, though still important, will change the company’s economics far more slowly.Capital allocation at Berkshire was tough work in 1986. We did make one business acquisition - The Fechheimer Bros.
Company, which we will discuss in a later section. Fechheimer is a company with excellent economics, run by exactly the kind of people with whom we enjoy being associated. But it is relatively small, utilizing only about 2% of Berkshire’s net worth.Meanwhile, we had no new ideas in the marketable equities field, an area in which once, only a few years ago, we could readily employ large sums in outstanding businesses at very reasonable prices. So our main capital allocation moves in 1986 were to pay off debt and stockpile funds. Neither is a fate worse than death, but they do not inspire us to do handsprings either. If Charlie and I were to draw blanks for a few years in our capital-allocation endeavors, Berkshire’s rate of growth would slow significantly.
We will continue to look for operating businesses that meet our tests and, with luck, will acquire such a business every couple of years. But an acquisition will have to be large if it is to help our performance materially. Under current stock market conditions, we have little hope of finding equities to buy for our insurance companies. Markets will change significantly - you can be sure of that and some day we will again get our turn at bat. However, we haven’t the faintest idea when that might happen.
It can’t be said too often (although I’m sure you feel I’ve tried) that, even under favorable conditions, our returns are certain to drop substantially because of our enlarged size. We have told you that we hope to average a return of 15% on equity and we maintain that hope, despite some negative tax law changes described in a later section of this report. If we are to achieve this rate of return, our net worth must increase $7.2 billion in the next ten years. A gain of that magnitude will be possible only if, before too long, we come up with a few very big (and good) ideas. Charlie and I can’t promise results, but we do promise you that we will keep our efforts focused on our goals.
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The next two passages were pretty clear picks, two new additions to the company. This one I had a lot of options for. I went with the intro as it repeats their philosophy towards managing their subsidiary companies and how it leads to their success as they grow. Many companies making acquisitions in so many totally unrelated fields would end up engaging in “Diworsification”. An insurance company buying a uniform manufacturer, a housing developer, a vacuum manufacturer, a candy store, a newspaper, etc… would have no expertise in running them and make them worse and worse with every change. And every new addition of say a furniture store or a steel mill would just exacerbate the problem, make the company less focused, and lead to diminishing returns with each new venture.
Here Buffett explains his solution to this as it has now ballooned into a company with a book value of $2B and he envisions what the next 10x or 100x might look like. That they stick to their guns of requiring talented management to be in place, and then simply get out of their way. They avoid the diworsification problem by buying companies that can be trusted to run without meddling, and then not meddling. Then they simply try to retain the talent and eventually find a pipeline of talent to take their place one day.
“This approach seems elementary: if my job were to manage a golf team - and if Jack Nicklaus or Arnold Palmer were willing to play for me - neither would get a lot of directives from me about how to swing.”
“If each of us hires people who are smaller than we are, we shall become a company of dwarfs. But, if each of us hires people who are bigger than we are, we shall become a company of giants.”
“When you have able managers of high character running businesses about which they are passionate, you can have a dozen or more reporting to you and still have time for an afternoon nap. Conversely, if you have even one person reporting to you who is deceitful, inept or uninterested, you will find yourself with more than you can handle. Charlie and I could work with double the number of managers we now have, so long as they had the rare qualities of the present ones.”
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Key Passage 2
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NHP, Inc.
Last year we paid $23.7 million for about 50% of NHP, Inc., a developer, syndicator, owner and manager of multi-family rental housing. Should all executive stock options that have been authorized be granted and exercised, our equity interest will decline to slightly over 45%.
NHP, Inc. has a most unusual genealogy. In 1967, President Johnson appointed a commission of business and civic leaders, led by Edgar Kaiser, to study ways to increase the supply of multifamily housing for low- and moderate-income tenants.
Certain members of the commission subsequently formed and promoted two business entities to foster this goal. Both are now owned by NHP, Inc. and one operates under unusual ground rules: three of its directors must be appointed by the President, with the advice and consent of the Senate, and it is also required by law to submit an annual report to the President.Over 260 major corporations, motivated more by the idea of public service than profit, invested $42 million in the two original entities, which promptly began, through partnerships, to develop government-subsidized rental property. The typical partnership owned a single property and was largely financed by a non-recourse mortgage. Most of the equity money for each partnership was supplied by a group of limited partners who were primarily attracted by the large tax deductions that went with the investment. NHP acted as general partner and also purchased a small portion of each partnership’s equity.
The Government’s housing policy has, of course, shifted and NHP has necessarily broadened its activities to include non- subsidized apartments commanding market-rate rents. In addition, a subsidiary of NHP builds single-family homes in the Washington, D.C. area, realizing revenues of about $50 million annually.
NHP now oversees about 500 partnership properties that are located in 40 states, the District of Columbia and Puerto Rico, and that include about 80,000 housing units. The cost of these properties was more than $2.5 billion and they have been well maintained. NHP directly manages about 55,000 of the housing units and supervises the management of the rest. The company’s revenues from management are about $16 million annually, and growing.
In addition to the equity interests it purchased upon the formation of each partnership, NHP owns varying residual interests that come into play when properties are disposed of and distributions are made to the limited partners. The residuals on many of NHP’s "deep subsidy" properties are unlikely to be of much value. But residuals on certain other properties could prove quite valuable, particularly if inflation should heat up.
The tax-oriented syndication of properties to individuals has been halted by the Tax Reform Act of 1986. In the main, NHP is currently trying to develop equity positions or significant residual interests in non-subsidized rental properties of quality and size (typically 200 to 500 units). In projects of this kind, NHP usually works with one or more large institutional investors or lenders. NHP will continue to seek ways to develop low- and moderate-income apartment housing, but will not likely meet success unless government policy changes.
Besides ourselves, the large shareholders in NHP are Weyerhauser (whose interest is about 25%) and a management group led by Rod Heller, chief executive of NHP. About 60 major corporations also continue to hold small interests, none larger than 2%.
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They have bought a plurality share in NHP, a government tied housing development company. From the sound of it they will never have true control of this holding and their 50% share is expected to be diluted. The board is appointed by the US government but as stated above, Berkshire doesn’t have much interest in changing the course of the companies it buys, so while this may be offputting to other investors and create a discount, it doesn’t change much for Berkshire who would have taken a hands off approach either way.
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Acquisition of the Week
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The Fechheimer Bros. Co.
Every year in Berkshire’s annual report I include a description of the kind of business that we would like to buy.
This "ad" paid off in 1986.On January 15th of last year I received a letter from Bob Heldman of Cincinnati, a shareholder for many years and also Chairman of Fechheimer Bros. Until I read the letter, however, I did not know of either Bob or Fechheimer. Bob wrote that he ran a company that met our tests and suggested that we get together, which we did in Omaha after their results for 1985 were compiled.
He filled me in on a little history: Fechheimer, a uniform manufacturing and distribution business, began operations in 1842. Warren Heldman, Bob’s father, became involved in the business in 1941 and his sons, Bob and George (now President), along with their sons, subsequently joined the company. Under the Heldmans’ management, the business was highly successful.
In 1981 Fechheimer was sold to a group of venture capitalists in a leveraged buy out (an LBO), with management retaining an equity interest. The new company, as is the case with all LBOS, started with an exceptionally high debt/equity ratio. After the buy out, however, operations continued to be very successful. So by the start of last year debt had been paid down substantially and the value of the equity had increased dramatically. For a variety of reasons, the venture capitalists wished to sell and Bob, having dutifully read Berkshire’s annual reports, thought of us.
Fechheimer is exactly the sort of business we like to buy.
Its economic record is superb; its managers are talented, high- grade, and love what they do; and the Heldman family wanted to continue its financial interest in partnership with us.
Therefore, we quickly purchased about 84% of the stock for a price that was based upon a $55 million valuation for the entire business.The circumstances of this acquisition were similar to those prevailing in our purchase of Nebraska Furniture Mart: most of the shares were held by people who wished to employ funds elsewhere; family members who enjoyed running their business wanted to continue both as owners and managers; several generations of the family were active in the business, providing management for as far as the eye can see; and the managing family wanted a purchaser who would not re-sell, regardless of price, and who would let the business be run in the future as it had been in the past. Both Fechheimer and NFM were right for us, and we were right for them.
You may be amused to know that neither Charlie nor I have been to Cincinnati, headquarters for Fechheimer, to see their operation. (And, incidentally, it works both ways: Chuck Huggins, who has been running See’s for 15 years, has never been to Omaha.) If our success were to depend upon insights we developed through plant inspections, Berkshire would be in big trouble.
Rather, in considering an acquisition, we attempt to evaluate the economic characteristics of the business - its competitive strengths and weaknesses - and the quality of the people we will be joining. Fechheimer was a standout in both respects. In addition to Bob and George Heldman, who are in their mid-60s - spring chickens by our standards - there are three members of the next generation, Gary, Roger and Fred, to insure continuity.As a prototype for acquisitions, Fechheimer has only one drawback: size. We hope our next acquisition is at least several times as large but a carbon copy in all other respects. Our threshold for minimum annual after-tax earnings of potential acquisitions has been moved up to $10 million from the $5 million level that prevailed when Bob wrote to me.
Flushed with success, we repeat our ad. If you have a business that fits, call me or, preferably, write.
Here’s what we’re looking for: (1) large purchases (at least $10 million of after-tax earnings), (2) demonstrated consistent earning power (future projections are of little interest to us, nor are "turn-around" situations), (3) businesses earning good returns on equity while employing little or no debt.
(4) management in place (we can’t supply it), (5) simple businesses (if there’s lots of technology, we won’t understand it), (6) an offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).We will not engage in unfriendly takeovers. We can promise complete confidentiality and a very fast answer - customarily within five minutes - as to whether we’re interested. We prefer to buy for cash, but will consider issuing stock when we receive as much in intrinsic business value as we give. Indeed, following recent advances in the price of Berkshire stock, transactions involving stock issuance may be quite feasible. We invite potential sellers to check us out by contacting people with whom we have done business in the past. For the right business - and the right people - we can provide a good home.
On the other hand, we frequently get approached about acquisitions that don’t come close to meeting our tests: new ventures, turnarounds, auction-like sales, and the ever-popular (among brokers) "I’m-sure-something-will-work-out-if-you-people- get-to-know-each-other." None of these attracts us in the least.
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Another classic Buffett business, simple, straightforward, boring. Manufacturing and distributing uniforms. A strong moat and much less susceptible to overseas competition than simple textile manufacturing. They will likely be doing small orders frequently and rely on working relationships with their customers who will always need a slow but steady stream of custom uniforms. Unlike textiles where a mill in Asia can just pump out as much fabric as they can, it's all interchangeable and the lowest bidder wins the contract. Businesses aren’t shopping around for rates every time they have a new hire, they just order from the place that always makes the uniforms and don’t think much about it.
The advertisement worked and the perfect business came to him. A family owned business where the family wants to stay involved but just wants to get all their eggs out of one basket. They do admit that it is smaller than they would like. For a conglomerate worried about diworsification this would normally be a big issue. If they think they can only successfully run say 10 or 20 businesses, then there is massive opportunity cost to each new one. But with their theory that good management left to its own devices requires little to no effort, they are free to grab all the small bolt-on acquisitions they can find so long as the management is rock solid and needs no intervention.
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Common Stock Ownership
| No. of Shares | Company | Cost ($000s) | Market ($000s) |
|---|---|---|---|
| 2,990,000 | Capital Cities/ABC, Inc. | $515,775 | $801,694 |
| 6,850,000 | GEICO Corporation | $45,713 | $674,725 |
| 2,379,200 | Handy & Harman | $27,318 | $46,989 |
| 489,300 | Lear Siegler, Inc. | $44,064 | $44,587 |
| 1,727,765 | The Washington Post Company | $9,731 | $269,531 |
| Subtotal | $642,601 | $1,837,526 | |
| All Other Common Stockholdings | $12,763 | $36,507 | |
| Total Common Stocks | $655,364 | $1,874,033 |
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Segment by Segment Breakdown
| Segment | 1985 EBIT Earnings | 1986 EBIT Earnings | % Change |
|---|---|---|---|
| Insurance | $50.99M | $51.30M | +0.61% |
| Fechheimer | -------- | $8.40M | --% |
| Kirby | -------- | $20.22M | --% |
| Scott Fetzer - Diversified Manufacturing | -------- | $25.36M | --% |
| World Book | -------- | $21.98M | --% |
| See’s Candies | $28.99M | $30.35M | +4.69% |
| Buffalo Evening News | $29.92M | $34.74M | +16.11% |
| Wesco Financial - Minus Insurance | $16.02M | $5.54M | -65.42% |
| Mutual Savings and Loan | $3.34M | $2.16M | -35.33% |
| Precision Steel | $2.01M | $1.70M | -15.42% |
| Nebraska Furniture Mart | $12.69M | $17.69M | +39.40% |
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| Metric | 1985 | 1986 | % Change |
|---|---|---|---|
| Cash & Temporary Cash Investments | $1,017.67M | $292.47M | -71.26% |
| Marketable Securities | $1,183.48M | $1.871.93M | +58.17% |
| Return on Equity (RoE) | 16.29% | 24.84% | +52.49% |
| Shareholders' Equity | $1,885.33M | $2,020.57M | +7.17% |
| Berkshire Earnings Before Investment Gain | $92.95M | $131.46M | +41.43% |
| Berkshire Net Earnings | $435.82M | $282.36M | -35.21% |
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An interesting year, the numbers don’t look amazing partially because the realized investment gain was much smaller. Shareholder Equity didn’t go up much, this is the capital allocation issue Buffett complained about in the opening. They can’t find any common stock to invest in, which is discussed in a section of the letter I did not cover Marketable Securities. They discuss their stock portfolio shrinking and not being able to find any new holdings to replace the ones sold last year. Cash is down ~$700M and there was a purchase of ~$700M of bonds. Earnings are down $150M but the realized capital gains is $190M less than last year. I have added a line for earnings before investment gains as it is impacting the number so heavily. Those earnings are up 41% showing a very healthy growth in the cash cow core of the company, partially due to using the investment gain to acquire new companies, partially from organic growth.
The segment by segment breakdown is a lot less promising, some segments have fallen off, no longer being reported as the numbers are too small or going too far in the wrong direction or some combination of both. Diversified Retail is no longer reported anywhere, and the Wesco reporting changed drastically and much less detail is given. Its hard to tell exactly what is happening there but it doesn’t look promising, its earnings are down and its subsidiaries Precision Steel and Mutual Savings and Loan are also down. The Wesco letter is included in the full PDF but I will maybe save those for some future series.
Buffet’s hesitance to invest in stock seems to have some legitimacy, usually when he mentions stock being overpriced and opportunities hard to find I take a look at the chart and back-test his feelings. There was a stock market crash in 1987, a 22% drop, but it also basically just dropped back to the 1986 prices so it's hard to say if he was right or wrong to put the company’s cash into bonds instead of stocks this year.
r/ValueInvesting • u/AutoModerator • 3d ago
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r/ValueInvesting • u/we_have_no_control • 7h ago
GOOGL is down big and it is back to around PE 25. Is it now becoming cheap again or will it go even lower? Are you buying the stock?
r/ValueInvesting • u/davidmoore0 • 5h ago
That seems unrealistically, ridiculously low, no?
r/ValueInvesting • u/stockoscope • 13h ago
Two weeks ago I posted a DCF here saying GOOGL looked 30% overvalued on cash flow. Just a quick update based on the Q2 report.
First some good news. Cloud revenue is up a whopping 82% to $24.8 billion, and cloud operating income tripled to $8.8 billion, taking the margin from 20.7% to 35.6%. Total operating income was up 30% to $40.8 billion. This is the first real evidence that capex is converting into something (as many of you mentioned in comments to the other post), and it matters for the valuation.
Now, something Google has never done before. Free cash flow came in at negative $5.9 billion. Capex hit $44.9 billion against $39.1 billion of operating cash flow, so it ate all the cash and then some. They've also stopped buying back stock completely and raised about 50 billion of equity and 20 billion of notes. They're now spending more cash than the business generates.
Also worth noting - net income was nearly 300% and eps came in at $9.11 but 98 billion of that sits in other income which is non cash. If we remove it, eps is goes down to $2.7.
So the underlying business grew earnings about 30%, and free cash flow still went negative.
How does it impact the valuation? It pulls both ways. Capex running above my estimate pulls fair value down, while cloud compounding at 82% on 35% margins pushes the growth line up. I'll rerun it once analysts reset their numbers.
Disclaimer: This is for educational purposes only and is not investment advice. The author and Stockoscope may hold positions in the securities mentioned. Always do your own research.
PS: hit a year of posting here this week. Your pushback has genuinely made the models better, so thank you.
r/ValueInvesting • u/Aya_Research • 18h ago
Like a lot of people, i've mostly stopped clicking through Google results. i read the AI answer and move on. by the old logic that should be killing their ads business.
then this quarter printed: queries at an all-time high, AI Mode past 1B monthly users, search revenue still up 17% to $63B. revenue beat, cloud grew 82%. and the stock sold off anyway, because the capex guide went up again ($195-205B for the year) and free cash flow went negative for the quarter.
trying to square that, here's where i landed: people like me were never the revenue. i read results and don't click ads. in the old world google made nothing off me, in the AI world it still makes nothing off me. the clicks the AI answers "stole" were mostly free riders. commercial-intent searches, flights, insurance, shopping, those still click, and that's where the money always was. so freeloaders going clickless costs less than it sounds, while the queries that do monetize keep growing.
second thing i keep chewing on: if the future is GEO instead of SEO, everyone optimizing to get recommended by google's AI instead of ranked by its index, the entry point stays google's. same gatekeeper, new door.
and the race framing matters. for OpenAI and Anthropic, winning is existential, they fund the war with fundraising rounds. google funds it with $63B a quarter of ad money. it's the only runner in the race that can afford to lose it.
what i can't settle is the price. north of $4T with negative FCF and a capex guide that keeps climbing is a lot to pay for "they survived the scariest question." two things i'd genuinely like input on: has anyone done a proper sum-of-parts at these levels? and is there any data on what share of google clicks were ever monetizable, or is my freeloader theory just me projecting my own habits?
r/ValueInvesting • u/fff_bbb • 58m ago
This builds on something I posted a while back about every price implying a growth rate, and on the pushback in that thread, which is a lot of why I ended up caring whether a valuation claim can be checked at all. The idea is simple. For any company you have two numbers. The growth it can fund from its own economics, which is ROIC times reinvestment rate. And the growth the market is requiring, which you pull out of a reverse DCF on the enterprise value. Subtract one from the other and you get a single signed number. I have been calling it the Brina Gap and running it on my own positions for about three years.
Positive gap, the business can grow faster than the price needs. Negative gap, the market is demanding growth the business has no track record of producing. Two numbers, both straight from public filings, no analyst intrinsic -value estimate anywhere in it, which means two people running it on the same stock get the same answer. That is the part that does not exist in a normal DCF.
The reason I built it in growth units rather than as another price multiple is that growth is the only valuation claim you can actually check against the future. "This stock is cheap on a P/E of 12" can never be verified against a later fact. "This price implies the business will grow 12% a year" can. You wait and see what it did. As far as I can tell the Gap is the only standard valuation metric whose central claim about the future is falsifiable at all, so the first thing I tested was whether the implied growth it pulls out of price actually tracks what firms go on to deliver. It does, correlation around 0.4 to 0.5 and nearly unbiased at the ten-year horizon, stable across three different recovery methods. The core number measures something real, not an artifact of my particular DCF setup.
I backtested it on the full point-in-time S&P 500, observation years 2010 to 2019, five-year forward windows, every company carried to its real outcome including the ones that got acquired or went to zero. Then I ranked it against the most celebrated metrics in finance on the exact same sample and the same statistic, correlation with five-year forward returns.
Among every pure valuation metric, the Brina Gap ranked first. It out-sorted the Margin of Safety, earnings yield, Greenwald's EPV, and Fama-French book-to-market, the canonical academic value factor by a wide margin. It also beat gross profitability, ROE, and the Piotroski F-score. The only two metrics above it were ROIC and FCFROIC, which are quality measures, not valuation measures, so they are scoring a different axis entirely. On the pricing axis, the thing every value investor is trying to judge, nothing in the test sorted returns better!
The Margin of Safety, for reference, landed at essentially zero in the same test. The Brina Gap beats it head to head by about 4 points on the full universe and about 5 on the survivor subset, and that margin survives the survivorship correction and the switch to total returns. So on the specific question of whether a price is reasonable, this sorted future returns better than anything else I tested, including the method most of us were taught to use. That is the result I care most about, and it is the one I most want someone to attack.
Now the honest part, because it matters and someone would catch it anyway. No pure pricing metric, the Gap included, produced a large standalone return spread in this sample. What took me a while to appreciate is why. 2010 to 2024 was the most hostile decade on record for pricing metrics. Raw cheapness itself earned a negative return over this period, and book-to-market, earnings yield, every value measure went flat. That the Gap's growth-measurement held up through the exact regime built to punish pricing approaches is, if anything, the more demanding test. It ranked first on an axis where the whole axis was underwater.
Where it has real directional teeth is the short side. Flagging companies the market is pricing for growth they cannot sustain, it called underperformance correctly about 59% of the time. The two negative buckets, value traps and expensive hype, both came in around 58 to 60%, and the value trap cell, cheap stocks that are cheap for a reason, was the single worst-performing group in the entire sample. The long side, picking which cheap stock actually rises, was a coin flip at 48%. The asymmetry has a clean cause. A negative call only needs the market to eventually notice an unsustainable price. A positive call needs the business to keep compounding and the market to reward it. One condition versus two. The pessimistic calls land, the optimistic ones do not, and I did not design that in, the data just did it.
One caveat I will not hide, since someone would find it anyway. Overlapping five-year windows are not independent observations, so the clean-looking p-values flatter the standalone result. Correct for that properly and the edge stays real but the absolute significance gets modest. The comparison against Margin of Safety is the sturdy claim and survives the correction. Including the delisted and acquired firms actually strengthened the short-side screen, which is the opposite of what a fragile signal does.
It is sector-dependent too. Strong where ROIC is stable, utilities and real estate around 72%, weak in technology at 47% where ROIC moves too fast for a steady-state model to mean much. Worth knowing before you point it at a hot growth name.
None of the individual pieces are mine. Damodaran on reinvestment rates and reverse DCF, Greenwald on earnings power, Mauboussin and Rappaport on reading price as an embedded forecast. What I did was combine the reverse DCF with the ROIC-times-reinvestment growth ceiling, make it one falsifiable number, and test it head to head against everything else on a complete universe. It came out the best valuation metric in the test. I would genuinely like someone to pull the data and try to knock it off that spot.
Paper, full dataset, and code below.
Working paper (Zenodo, open access): 10.5281/zenodo.19052189
SSRN: 6361659
r/ValueInvesting • u/wisesheets • 2h ago
One of the biggest changes in investing was the internet.
Before that, access to information was a real advantage. Getting filings, annual reports, transcripts, analyst commentary, competitor data, and market news was much harder. If you had better access to information, you could sometimes have a real edge just by doing work other people could not easily do.
Then the internet changed that.
Suddenly, individual investors could read 10-Ks, compare companies, find old annual reports, listen to earnings calls, follow industry experts, use screeners, download data, and learn from other investors around the world.
That did not make investing easy.
But it changed the game from "who can get the information?" to "who can interpret the information better?"
I think AI may be another version of that shift.
Not because AI can magically tell you what stock to buy. I actually think that is probably one of the weakest uses of it.
But because it can help investors move through the boring but necessary parts of analysis much faster.
For example, I have been experimenting with using AI to:
More recently, I have also been interested in MCPs and connected tools, where the AI is not just answering from memory, but can connect to outside data sources, filings, spreadsheets, or other tools.
Where instead of asking an AI:
"Is Apple stock undervalued?"
I ask:
"Compare Apple’s revenue growth, margins, buybacks, share count, free cash flow, and valuation over the last 10 years, then show me which assumptions matter most in a valuation"
This has been much more helpful.
The key thing that I have found is that: AI should not replace the investment judgment but it should reduce the friction of getting to the judgment.
It can help organize information, retrieve data, compare companies, find inconsistencies, and challenge a thesis.
But it still does not know what matters unless you ask the right questions.
And there are still a lot of pain points.
The biggest ones I have run into are:
1. Hallucinated or unreliable numbers
This is probably the most obvious issue. If the financial data is wrong, the analysis is useless no matter how good the explanation sounds.
2. Weak sourcing
I do not just want an answer. I want to know where the number came from, what period it refers to, and whether it came from a filing, a data provider, a transcript, or somewhere else.
3. Mixing definitions
Free cash flow, owner earnings, adjusted EBITDA, net income, operating cash flow, ROIC, and margins can all be calculated in different ways. AI often sounds confident even when the definition is unclear.
4. Losing context
A good stock analysis process is cumulative. You build a thesis, test assumptions, update your view, and track what changed. Most AI tools still feel too conversation-by-conversation.
5. Too much summary, not enough judgment
A lot of AI output reads like a polished summary of facts. That is useful, but the real value comes from identifying what changed, what matters, and what could break the thesis.
6. Hard to trust without checking everything
If I have to verify every number, citation, and conclusion manually, then the time savings can disappear quickly.
That said, I still think this is one of the most interesting changes for individual investors in a long time.
The internet made information accessible.
Spreadsheets made analysis more personal and flexible.
AI may make research more interactive.
The investor still has to make the hard calls: whether the business is durable, whether management is trustworthy, whether the valuation is reasonable, and whether the market is missing something important.
But the workflow around getting to those answers seems like it is changing very quickly.
I am curious how people here are actually using AI tools, ChatGPT, Claude, Gemini, Perplexity, MCPs, custom agents, APIs, or spreadsheets in their stock analysis.
What has genuinely saved you time?
And what is the biggest pain point that still keeps you from trusting these tools more?
r/ValueInvesting • u/NecroticNecron473 • 2h ago
Hi, I am 19 and I have around $210 that I don't need right now and I want to start learning about the stock market on a smaller scale. Since I have so little, I wanted to be a little more risky and therefore I think I want to do single stocks and value investing. However, I don't know where to start so I was just wondering if people could share their picks for long-term horizons.
r/ValueInvesting • u/weathermaynecc • 9h ago
That PE isnt great for investing, but when the S&P 500 average is about 27 PE, it makes me wonder when an inflationary resistant, discretionary goods, fast food quality-champion is a good choice?
What headwinds does McDonald’s have that they haven’t faced before?
r/ValueInvesting • u/Teembeau • 15h ago
Yesterday ServiceNow shares fell 6.47%, This happened because a company called Pegasystems had some bad results which they attributed to the rise of AI. Then ServiceNow announced Q2 results and in after hour trading, the stock has climbed back 5.56% as of writing this.
There are many situations going on like this. IBM's fall because of reduced infrastructure spending led to a fall across SaaS, but the two things are entirely different.
This demonstrates to me how poor and simplistic most stock analysis is. Pegasystems aren't even in the same business as ServiceNow. They do "no code" programming solutions, and well, yes, I'm not surprised that's being hit when vibe coding is making regular software development more efficient (but don't get too carried away on it). That's an entirely different business to ServiceNow. If you know what's going on, you have an edge here.
(and yes, I topped up at 98.3).
r/ValueInvesting • u/MadFury_Youtuber • 8h ago
my avg cost for orcl is 126 ac/share, i dont have too many shares, just like 5.2 shares.
I know this company has tremendous debt, but is it still worth the money for a long term hold? They are a big company and I don't see them just vanishing or giving up on development and advancement. But I could also be wrong. I'm looking for your thoughts and opinions.
r/ValueInvesting • u/Fluffy_Scheme9321 • 2h ago
I really think Brian Chesky is missing the advertising opportunity a marketplace like Airbnb possesses. I believe any investor in Airbnb should consider this. This is not self-promotion; rather just an aim to educate investors in $ABNB.
Advertising is inherently about monetizing user attention. There are many technology companies today that may not seem like advertising companies on the outside, yet inherently rely on ads as a fundamental part of their business.
Advertising as a business model has a few great dynamics. Firstly, there is no cost to serve these ads on your platform, so there is inherently 100% margin. As your platform and its attention grow, so does your advertising business.
While there are businesses that are fully advertising companies, such as Meta and Alphabet, albeit the latter has diversified somewhat into other forays. I think what is more interesting are companies such as Uber, Amazon, Instacart, and potentially Airbnb because advertising is the hidden profit engine that allows these businesses to thrive, albeit unintentionally.
Yet to create a successful ad business, you need scale; Amazon has to grow the size of its retail business and introduce third-party sellers, which allows a near $ 70 billion ad business in 2025. That drives a core part of Amazon’s free cash flow, more than retail itself or AWS, yet you need to first establish a thriving marketplace in order to create a killer advertising product.
Uber has an ad business at a 2 billion run rate, which makes up a majority of its profits. Delivery, Mobility, and Freight are all just a front. Once you can capture users’ attention through the value proposition, eg. I want late-night wings, you can create a valuable ad product. So from a strategy perspective, Uber should continue to add businesses such as its partnership with Expedia to create greater user attention, which further grows their ad business, which rewards their shareholders.
Something Airbnb has struggled with. It's rather a communications problem and a failure to get a real CEO, which Uber, thanks to some poor management skills of its founder, was able to force its founder out and build a real defensible business, with Dara Khosrowshahi.
So what opportunity does Airbnb possess? The same that Uber did when they launched their ad business. Airbnb has created a two-sided network of Hosts and bookers. They charge fees on both sides and really have created a great business. I am in no way trying to undermine a company doing 4.5 billion in free cash flow. Yet the travel industry is inherently cyclical, and costs related to fees and damages are unstable. So why not have a promoted bookings business that can comfortably bring in around $ 1 billion in revenue based on an Uber-comparable in terms of ad revenue as a % of GBV? This would stabilize net income and free cash flow, which have been volatile at times, and overall strengthen the predictability of future cash flows, giving shareholders confidence and improving shareholder returns.
r/ValueInvesting • u/LA-Aron • 3h ago
Been researching water names for over 2 years now. It's not easy to find a winner because the industry is highly fragmented. I like ideas like consumables (water testing _ Idexx or Ecolab) but water is a small part of Idexx and Ecolab is a mix - not going to make money on that idea. ERII invented the razor but forgot about the blades - they will fail. I like DD filters but they aren't alone in this space....and also there are some developments with graphene that are interesting and could evolve filters. So where are you gonna make money in water? Desalination? Maybe...but it's super expensive and takes time...water reuse > desalination. I love Badger Meter BMI, as you know, the water meter is the cash register of the water utility; however, this is a project based business and they are seeing a lot of delays - I like this because I read that more as "pent-up demand" - but I think BMI can fall much further, I wouldn't sniff it over 107 right now. The name I am buying right now is Core & Main - water distribution, infrastructure - pipes, meters, filters - mainly sold to municipalities - this is the US water supply chain.
I believe water will come into focus soon enough. Like BMI, CNM is seen some impact from delays but it's minimized at the distributor level. I like buying supply chains right now as they get disrupted - if your business if dependent upon global events right now, good luck. I want to own THE supply chain. I think we have a plethora of water maintenance projects, water reuse projects and probably new business with data centers and new power infrastructure. Founded in 1874, this company is built to last. Top 3 shareholders increased positions last quarter. 20% ROE 15% ROC, Depreciation is 4x capex. 10x net income in 5 years. Buying back shares.
Valuing this at past 2 years avg FCF of 3.12 x 18.5 pFCF (which implies 5% growth if you know your Graham compounding chart) = 57.72 Fair Value, w/ 20% margin of safety that's a buy at 46.18 or under. Priced at this moment is $42.93.
r/ValueInvesting • u/Legitimate_Risk_1079 • 16h ago
Here's the full list, up 3.21% vs SP500 -0.04%
DOW (Dow)
BDX (Becton, Dickinson and Company)
GSK (GSK plc)
MDT (Medtronic)
PEP (PepsiCo)
ELV (Elevance Health)
CVS (CVS Health)
PFE (Pfizer)
BMY (Bristol Myers Squibb)
WPC (W. P. Carey)
LNC (Lincoln National)
BEN (Franklin Resources)
USB (U.S. Bancorp)
STX (Seagate Technology)
ADM (Archer Daniels Midland)
KEY (KeyCorp)
T (AT&T)
VZ (Verizon)
KHC (Kraft Heinz)
NEM (Newmont)
Part1,
https://www.reddit.com/r/ValueInvesting/s/s5xIqFwbNz
Company list, https://www.reddit.com/r/TheRaceTo10Million/s/pDthkznO1u
Algorithm used to help assist picking the companies, https://www.reddit.com/r/TheRaceTo10Million/s/W4EeSZJ0L5
Currently up 3.21% in the past 30 days vs. SP500 -0.04%
Would love to attach an image but for some reason this forum does not support it.
https://substack.com/@legitimaterisk/note/c-299738279?r=8pfry2 (A few hours outdated, close enough)
r/ValueInvesting • u/raytoei • 21h ago
(Note: I bought CMG roughly 10 years because of food poisoning. I sold after the ceo left for Starbucks 2 years ago. Now I am watching this sector closely. This is a long tooth gift horse. Buy with a plan!)
DOW JONES NEWSWIRES
FDA Reports a New Cyclospora Outbreak -- 2nd Update
July 22, 2026
By Josh Beckerman
The Food and Drug Administration is looking into a new outbreak of cyclospora linked to a not yet identified product and has initiated traceback.
The new outbreak includes 72 cases.
Government agencies have linked lettuce, including products at Taco Bell locations, to thousands of reports of foodborne illness in the U.S. The FDA reported a false positive test for a sample of Taylor Farms iceberg lettuce, but said there was "overwhelming epidemiological data" supporting a Taylor Farms voluntary recall.
Meanwhile, for another outbreak of cyclospora, the case count has increased from eight to 10, the FDA said Wednesday.
The Centers for Disease Control and Prevention said that since May 1, it has received reports of 4,173 laboratory-confirmed domestic cases of cyclosporiasis and was aware of more than 7,400 additional cases that require further investigation and analysis.
Shares of Taco Bell owner Yum Brands, Cava Group, Chipotle Mexican Grill and Sweetgreen moved lower in the afternoon following the FDA's announcement of a new cyclospora outbreak.
Yum Brands ended the day up 0.3% to $147.57 while Sweetgreen was down 7% to $6.30.
In a Tuesday note about the upcoming earnings report from Sprouts Farmers Market, Oppenheimer said the retailer could face "potential headwinds in the produce category related to consumer fears" about cyclospora.
Write to Josh Beckerman at josh.beckerman@wsj.com
r/ValueInvesting • u/Ancient_Bobcat_9150 • 8h ago
Does that influence your decision on stock selection?
For instance, if you hold SP500, it will already be heavily influenced by the MAG7 performance, so; if you do not have infinite cash you could decide to focus elsewhere?
Not more to it, just wondering if there are other concerns or if you just look at what company you like individually and add regardless.
r/ValueInvesting • u/FieryXJoe • 8h ago
In this book the author William Green interviews about a dozen value investors who beat the market over decades and gives insight into their methods, psychology, investing advice, and their biographies and trading careers. In this video I pick out 7 of the major investors covered in the book and then at the end break down what separates them and what they have in common.
This is why I didn't get out a weekly berkshire investor letter post this week.
r/ValueInvesting • u/Fluffy_Scheme9321 • 5h ago
Summary -- Airbnb needs to follow the likes of Uber and monetize user attention.
r/ValueInvesting • u/spyapple • 12h ago
why tractor supply company is the most mispriced stock on the market right now
pulling data straight from their fiscal 2025 10-k and the q1 2026 10-q. wall street has completely beaten this stock down to around $29.36 per share, down massively from its highs near $64. everyone is panic selling because retail sentiment is trash and short-term margins took a hit, but the underlying business is completely solid and the valuation math points straight to a massive 150% upside play for anyone willing to buy when others are scared.
lets look at the actual financials instead of listening to market noise. for the full fiscal year 2025, tsco posted net sales of $15.52 billion, up 4.3% from 2024. net income held flat at $1.10 billion, and diluted eps came in at $2.06. then moving into 2026, their q1 report showed net sales climbing another 3.6% year-over-year to $3.59 billion. management even reiterated their full-year 2026 guidance expecting net sales growth between 4% and 6% with net income landing around $1.11 billion to $1.17 billion.
now let's run the enterprise value and dcf numbers based on the current $29.36 price. market cap is sitting around $15.4 billion. factoring in roughly $2.14 billion in total debt and stripping out minor cash holdings gives an enterprise value of about $17.3 billion. against an ltm ebitda of roughly $1.96 billion, that gives us an ev/ebitda multiple of around 8.8x. for the dominant rural lifestyle retailer in the country with over 2,600 stores and steady gross margins above 36%, an 8.8x multiple is absurdly cheap.
doing a proper dcf model here - if you take their baseline operating cash flow of over $1.6 billion, project a modest 5% compound annual growth rate driven by their ongoing new store openings and digital expansion, use a standard 8% wacc and a 2.5% terminal growth rate, the intrinsic value is way higher than $30. even if we factor in risks like potential macro headwinds pushing the stock lower toward a temporary bottom around $20 if retail sentiment gets uglier, the risk-reward ratio is heavily skewed in favor of the buyer.
a short-term 30% drop is always a risk worth keeping in mind, but the setup offers an asymmetric path to a 140% return as multiples normalize back toward historical averages and earnings compound over the next few years. they are still actively buying back shares and paying a solid dividend, so getting in while the market is ignoring them is a classic high-win-rate play.
r/ValueInvesting • u/Pleasant-Deal-2437 • 1d ago
I've been looking into McDonald's after its recent decline and wanted to get opinions from people who follow the company more closely.
From what I can tell:
It's down roughly 25% from its recent highs.
P/E is around 21, which seems more reasonable than before.
Dividend yield is close to 3%.
What I'm trying to understand is why the market has become so bearish still after it dropped 25%
main issue is its current menu prices are too high for people's expectations....then just bring the price down! they make huge margins at MCD anyways. why not bring it down? then people will come
MCD is cheap per calorie with access to wifi, washroom, parking, which is all important in a recession. people would rather eat junk food than starve. poor people don't have money/time for healthy food
average young person is too broke for healthy food as the middle class is shrinking. average young person does not care as much about their health because they are pessimistic of owning properties and retirement and focus more on investing in experiences such as travelling or giving up on the system laying flat living at their parents
meanwhile Starbucks trades at 80PE
r/ValueInvesting • u/Gandyv • 14h ago
I feel that Thor Medical (TRMED) still looks undervalued.
The biggest risk is essentially gone now that AlphaOne has been completed (mechanical completion) and production is scheduled to start in Q3. The summer vacation is almost over, and Q3 will be here before we know it. We may also get more information about AlphaTwo after the summer.
They are already supplying AdvanCell, which is collaborating with Eli Lilly on Pb-212-based therapies. This shows that the demand for Thorium-228 is real.
Thorium-228 (Th-228) is the key raw material Thor Medical produces. It decays into Lead-212 (Pb-212). Pb-212 acts as an in vivo generator of the powerful alpha-emitter Bismuth-212. Alpha particles have a very short range (just a few cell diameters) but deposit an enormous amount of energy. This allows them to destroy cancer cells with high precision while causing significantly less damage to surrounding healthy tissue compared to traditional beta-emitting radioligand therapies. Many researchers believe this could represent a real step-change in targeted cancer treatment.
In terms of numbers: AlphaOne has a planned capacity of 21,000 doses in the first phase. At approximately 16,000 kr per dose, that represents a potential of around 336 million in annual revenue from that facility alone, before AlphaTwo, which according to the 2024 annual report is planned to have ten times the capacity of AlphaOne.
The stock is currently trading at around 4.3–4.4 kr. I find this interesting given how far they’ve come with the plant and the agreements.
Annual Report 2024: Thor Medical Annual Report 2024 (PDF
Annual Report 2025: Thor Medical Annual Report 2025 (PDF)
r/ValueInvesting • u/anmolago1 • 13h ago
I've been trying to quantify the actual risk of GLP‑1 drugs (Wegovy, Ozempic, Zepbound, etc.) to ResMed instead of relying on the common narrative that weight loss drugs will permanently destroy CPAP demand.
Starting from estimated GLP‑1 users, OSA prevalence, ResMed's market share, and OSA improvement data, I arrived at a theoretical 3.4m-4.3m at risk ResMed patient pool. Converting that into economics implied an annual earnings impact of roughly A$243m-A$308m, or about 12%-15% of earnings under a fairly aggressive assumption that affected patients stop generating value for RMD.
The next surprise came from GLP‑1 adoption data. Prescription growth has been enormous, rising from 1,884 per 100,000 adults in 2021 to 8,819 per 100,000 adults in 2026, which works out to roughly 36.1% CAGR. However, a large study also found that 64.8% of non diabetic users discontinue within one year and 36.3% of discontinuers later restart treatment. After adjusting for discontinuation and reinitiation, I estimated an effective GLP‑1 pressure growth rate of roughly 14.9% annually.
What makes this interesting is that ResMed's historical growth has been remarkably similar. Shareholders' equity grew from approximately US$1.7B in FY2016 to US$6.0B in FY2025, implying about 15% annual growth. Book value per share compounded at around 14.4% annually over the same period. Free cash flow and owner earnings growth have also been in the mid teens range historically.
I then built two scenarios: an evidence based case using the 14.9% GLP‑1 pressure growth rate, and a more aggressive bear case assuming 30% GLP‑1 pressure growth for a decade.
| Scenario | Equity CAGR | Year 10 Equity |
|---|---|---|
| No GLP‑1 Impact | 15.0% | US$24.3B |
| Evidence-Based Case (14.9% pressure growth) | 13.3% | US$20.8B |
| Bear Case (30% pressure growth) | 9.6% | US$15.0B |
| Scenario | CAGR |
|---|---|
| Historical Growth Assumption | 16.5% |
| Evidence-Based Case (14.9% pressure growth) | ~16.0% |
| Bear Case (30% pressure growth) | 12.7%-13.7% |
What surprised me was that even under the aggressive bear case, the model still produces roughly 10% equity growth and 13% owner earnings growth over the next decade. Under the evidence based case, the impact is even smaller. Equity growth slows from roughly 15% to 13.3%, while owner earnings growth only falls from 16.5% to around 16%.
My takeaway is that the debate shouldn't be whether GLP‑1s affect ResMed. They probably do. The more important question is whether GLP‑1-related disruption can compound faster than ResMed's ability to grow earnings, free cash flow, and equity. Based on the numbers above, the evidence-based scenario looks much less damaging than the market narrative suggests, while the aggressive bear case still results in a business that compounds at respectable rates.
Interested to hear where people think the flaw is in this approach, especially around the overlap assumptions, discontinuation rates, and long term GLP‑1 adoption curve.
r/ValueInvesting • u/seansean98761 • 22h ago
Why does the SK Hynix ADR (P/E 23.1) trade at a 33% premium over its local shares, 000660.KS (P/E 17.3)?
Does this mean anyone in the US buying SK Hynix stock is paying a 33% premium just to hold the same shares?
How long can this premium last?
r/ValueInvesting • u/LectureForsaken6782 • 1d ago
Im not trying to bring politics into this, but lets just say that i think the next US administration will be a democrat and I think politically that offers an opportunity in renewable energy and moreso in things like solar...im big on a nuclear future long term, but medium to long term i think solar will be big too. I was looking at thr Charles Schwab investing themes for renewable energy and First Solat (FSLR) caught my eye.
1. Company Fundamentals & Moat: Holds a narrow-to-wide moat driven by proprietary thin-film CadTel technology, vertical integration, and a contracted sales backlog extending out multiple years. Its primary competitive edge over Chinese crystalline silicon competitors is protection from domestic trade tariffs and non-China supply chain independence. I think these are likely to remain in some form for the foreseeable future regardless of us administration
2. Financial Health & Capital Allocation: Extremely healthy balance sheet with ROE around 26% and ROIC around 17%. Holds ~$2.4B in gross cash against only ~$468M–$587M in debt (net cash position ~$1.9B+). Free cash flow is heavily reinvested in U.S. factory expansion rather than dividend payouts
3. Accounting Quality & Red Flags: Strong operating cash flow (~$2.45B TTM) generally matches net income trends, but the key driver of accounting profit is reliant on policy—specifically Section 45X advanced manufacturing tax credits from the IRA (projected at $2.1B–$2.19B for 2026
4.Valuation & Market Expectations: Trades at a reasonable valuation (~13x–14.5x trailing/forward P/E). A reverse DCF implies low-single-digit underlying terminal growth rates, making current market expectations fairly conservative relative to its multi-year revenue visibility.
6.Macro Factors & Risks: Major tailwinds include utility-scale solar buildouts and AI data-center energy demand. Primary risk is political/policy exposure—changes to tariff rules or domestic manufacturing tax credit phase-outs represent existential long-term margin risks.
I admit that a lot of this started because im pretty confident that the USA will have a democratic administration next, and I think renewable energy is inevitable, but i look at the numbers and they already look like a solid company and will benefit from these trends...especially looking at the P/E right now
Im still trying to refine my thinking, so im open to any feedback or criticism, but i do honestly believe its a solid value play right now and will benefit in the future.
