Most Important Choice by John Maxwell

I would like to share with you one of the greatest wisdom of John Maxwell, which I think everyone should apply to his or her life.

John Maxwell said "The only true freedom each of us has in life is the freedom to choose." And, "The most important choice is who we will become."

I have been reflecting hard on these statements..... and I hope fellow readers will do too.

All the best,
Dah Hui Lau (David)
dahhuilaudavid@gmail.com

Berkshire Hathaway; BRK.A Reasons I love Berkshire April 2006

Well, as you know, Berkshire is a huge, huge business, with many subsidaries and holdings. It is so, so great that I couldn't possibly list out all the reasons why I love Berkshire. It takes me years to learn about Berkshire, and so I will list out reasons why I love Berkshire slowly over many days or weeks.

Reason 1:
Significant holding in Coca Cola. 8.4% of total outstanding shares of Coca Cola, which is worth about $8B.

These are what Warren Buffett said about Coca-Cola company over the years........

• “Yes, competition there was in 1938 and in 1993 as well. But it's worth noting that in 1938 The Coca-Cola Co. sold 207 million cases of soft drinks (if its gallonage then is converted into the 192-ounce cases used for measurement today) and in 1993 it sold about 10.7 billion cases, a 50-fold increase in physical volume from a company that in 1938 was already dominant in its very major industry. Nor was the party over in 1938 for an investor: Though the $40 invested in 1919 in one share had (with dividends reinvested) turned into $3,277 by the end of 1938, a fresh $40 then invested in Coca-Cola stock would have grown to $25,000 by yearend 1993.” (1993)

• “I can't resist one more quote from that 1938 Fortune story: "It would be hard to name any company comparable in size to Coca-Cola and selling, as Coca-Cola does, an unchanged product that can point to a ten-year record anything like Coca-Cola's." In the 55 years that have since passed, Coke's product line has broadened somewhat, but it's remarkable how well that description still fits.” (1993)

• “The businesses in which we have partial interests are equally important to Berkshire's success. A few statistics will illustrate their significance: In 1994, Coca-Cola sold about 280 billion 8-ounce servings and earned a little less than a penny on each. But pennies add up. Through Berkshire's 7.8% ownership of Coke, we have an economic interest in 21 billion of its servings, which produce "soft-drink earnings" for us of nearly $200 million. Similarly, by way of its Gillette stock, Berkshire has a 7% share of the world's razor and blade market (measured by revenues, not by units), a proportion according us about $250 million of sales in 1994. And, at Wells Fargo, a $53 billion bank, our 13% ownership translates into a $7 billion "Berkshire Bank" that earned about $100 million during 1994.”

• “It's far better to own a significant portion of the Hope diamond than 100% of a rhinestone, and the companies just mentioned easily qualify as rare gems. Best of all, we aren't limited to simply a few of this breed, but instead possess a growing collection.”

• “Companies such as Coca-Cola and Gillette might well be labeled "The Inevitables." Forecasters may differ a bit in their predictions of exactly how much soft drink or shaving-equipment business these companies will be doing in ten or twenty years. Nor is our talk of inevitability meant to play down the vital work that these companies must continue to carry out, in such areas as manufacturing, distribution, packaging and product innovation. In the end, however, no sensible observer - not even these companies' most vigorous competitors, assuming they are assessing the matter honestly - questions that Coke and Gillette will dominate their fields worldwide for an investment lifetime. Indeed, their dominance will probably strengthen. Both companies have significantly expanded their already huge shares of market during the past ten years, and all signs point to their repeating that performance in the next decade.”

• “Obviously many companies in high-tech businesses or embryonic industries will grow much faster in percentage terms than will The Inevitables. But I would rather be certain of a good result than hopeful of a great one.”

• “Of course, Charlie and I can identify only a few Inevitables, even after a lifetime of looking for them. Leadership alone provides no certainties: Witness the shocks some years back at General Motors, IBM and Sears, all of which had enjoyed long periods of seeming invincibility. Though some industries or lines of business exhibit characteristics that endow leaders with virtually insurmountable advantages, and that tend to establish Survival of the Fattest as almost a natural law, most do not. Thus, for every Inevitable, there are dozens of Impostors, companies now riding high but vulnerable to competitive attacks. Considering what it takes to be an Inevitable, Charlie and I recognize that we will never be able to come up with a Nifty Fifty or even a Twinkling Twenty. To the Inevitables in our portfolio, therefore, we add a few "Highly Probables."

• "With soft drinks, there has been no decrease in demand for decades. 30% of liquid consumption of Americans is soda and 40% of that is Coke products, so 1/8th of U.S. liquid consumption is Coke products." (2001 Annual Meeting)

• "Coffee and milk consumption has been declining every year -- it's clear where preferences go once people start drinking soda." (2001 Annual Meeting)

• "These trends are almost impossible not to happen in developing countries, where the consumption of Coke products is 1/50th what it is in the U.S. -- though Coke could screw it up by pricing too high." (2001 Annual Meeting)
  

• "Coke has also benefited from its relative price. Since 1930, its cost per ounce has only doubled. This very low price inflation has contributed to the increase in per capita consumption." (2001 Annual Meeting)
  

• "Coke's market share is about 50% of the worldwide soft drink business, and Gillette has about 71% by revenues of the worldwide razor blade business -- both are higher than they were when I called their businesses 'inevitables' five years ago." (2002 Annual Meeting)
  "With the world's population growing 2% annually, it is crazy to think they can grow profits at 15-18% per year, or even 10%, when unit grow is sure to be slower. But people got carried away, due to Wall Street and to some extent, company pronouncements." (2002 Annual Meeting)

Reason 2:

Ownership of Larson-Juhl.

These are what Warren Buffett has said about Larson-Juhl.......

• “On December 17, 2001, Berkshire Hathaway announced that it was acquiring Albecca (known as Larson-Juhl), the nation's leading provider of custom picture frames. Buffett was asked to talk about this business (these comments are from the annual meeting, plus those made at another presentation)”: (2002 Annual Meeting)

• "Craig Ponzio, the owner of Larson-Juhl called me, told me about his business, its sustainable competitive advantages, its financial characteristics, and the price he wanted. Shortly thereafter, he came to visit me at 9am and by 10:30 we had a deal. I haven't seen him since." (2002 Annual Meeting)

• "The company has $300 million in revenues, earns $50 million in pre-tax profits, ties up no capital, is growing slowly, and distributes every dime of profit." (2002 Annual Meeting)
  "There are about 18,000 picture framing shops in the United States, mostly very small businesses with a few hundred thousand dollars per year in sales. They can't afford to have much inventory, so they show a catalogue to a customer who chooses the frame. Then, if they call Larson-Juhl before 3pm, 85% of the time the frame will be there the next day. Larson-Juhl and its customers are focused on service, not price." (2002 Annual Meeting)

• "Larson-Juhl calls on its 18,000 customers an average of five times/year. It has an incredible distribution system. Tell me how you'd attack that business? You wouldn't want to anyway, as the market's not big enough. Larson-Juhl has a HUGE moat. I always ask myself how much it would cost to compete effectively with a business. With businesses like these, nothing's going to go wrong. If you bought 20 of them, 19 of them would work out well." (2002 Annual Meeting)

• "Craig wanted to sell to me because he didn't want to waste a year doing a deal that might fall through at the end. With us, it's 100% certain that the deal gets done, and he can enjoy life." (2002 Annual Meeting)

• "The only thing that's unfortunate is that it's a small business." (2002 Annual Meeting)

Reason 3:

Ownership of Nebraska Furniture Mart.

These are what Warren Buffett has said about Nebraska Furniture Mart.........

• “We now move on to the high point of 1983 - the acquisition of a majority interest in Nebraska Furniture Mart and our association with Rose Blumkin and her family. Last year, (1982), in discussing how managers with bright, but adrenalin-soaked minds scramble after foolish acquisitions, I quoted Pascal: “It has struck me that all the misfortunes of men spring from the single cause that they are unable to stay quietly in one room.””
  

• “Even Pascal would have left the room for Mrs. Blumkin. About 67 years ago, Mrs. Blumkin, then 23, talked her way past a border guard to leave Russia for America. She had no formal education, not even at the grammar school level, and knew no English. After some years in this country, she learned the language when her older daughter taught her, every evening, the words she had learned in school during the day. In 1937, after many years of selling used clothing, Mrs. Blumkin had saved $500 with which to realize her dream of opening a furniture store. Upon seeing the American Furniture Mart in Chicago - then the center of the nation’s wholesale furniture activity - she decided to christen her dream Nebraska Furniture Mart.”
  

• “She met every obstacle you would expect (and a few you wouldn’t) when a business endowed with only $500 and no locational or product advantage goes up against rich, long-entrenched competition. At one early point, when her tiny resources ran out, “Mrs. B” coped in a way not taught at business schools: she simply sold the furniture and appliances from her home in order to pay creditors precisely as promised.”
  

• “Omaha retailers began to recognize that Mrs. B would offer customers far better deals than they had been giving, and they pressured furniture and carpet manufacturers not to sell to her. By various strategies she obtained merchandise and cut prices sharply. Mrs. B was then hauled into court for violation of Fair Trade laws. She not only won all the cases, but received invaluable publicity. At the end of one case, after demonstrating to the court that she could profitably sell carpet at a huge discount from the prevailing price, she sold the judge $1400 worth of carpet.
  

• Today Nebraska Furniture Mart generates over $100 million of sales annually out of one 200,000 square-foot store. No other home furnishings store in the country comes close to that volume. That single store also sells more furniture, carpets, and appliances than do all Omaha competitors combined.”
  

• “One question I always ask myself in appraising a business is how I would like, assuming I had ample capital and skilled personnel, to compete with it. I’d rather wrestle grizzlies than compete with Mrs. B and her progeny. They buy brilliantly, they operate at expense ratios competitors don’t even dream about, and they then pass on to their customers much of the savings. It’s the ideal business - one built upon exceptional value to the customer that in turn translates into exceptional economics for its owners.”
  

• “Mrs. B was wise as well as smart and, for far-sighted family reasons, was willing to sell the business. I had admired both the family and the business for decades, and a deal was quickly made. We purchased 90% of the business - leaving 10% with members of the family who are involved in management - and have optioned 10% to certain key young family managers.”

• “And what managers they are. Geneticists should do handsprings over the Blumkin family. Louie Blumkin, Mrs. B’s son, has been President of Nebraska Furniture Mart for many years and is widely regarded as the shrewdest buyer of furniture and appliances in the country. Louie says he had the best teacher, and Mrs. B said she had the best student. They’re both right. Louie and his three sons all have the Blumkin business ability, work ethic, and, most important, character. On top of that, they are really nice people. We are delighted to be in partnership with them.”
  

Reason 4:

Ownership of McLane.

These are what Warren Buffett has said about McLane......

• “Yesterday we announced a deal to buy McLane from Wal-Mart. Wal-Mart announced that the price for the two deals it did -- one was a small trucking company -- was $1.5 billion. [It's been reported that the purchase price McLane was $1.45 billion.] McLane is a wholesaler to convenience stores, quick-serve restaurants, Wal-Mart, movie theaters and so forth. It will have about $22 billion in revenues this year. Wal-Mart had owned it since 1990 and it grew substantially while they owned it. It is run by a terrific manager, Grady Rosier, and under his leadership, it grew from $3 billion to $22 billion.” (2003 Annual Meeting)

• “Wal-Mart, for very good reasons, wants to specialize on what they do extremely well. We were approached by Goldman Sachs to buy the business a week ago. It makes sense for both sides. It was a sideline business for Wal-Mart. Their ownership of McLane resulted in certain people who would be logical customers not to do business with McLane because they didn't want to do business with a competitor. We'll be seeing them soon to explain that they can sleep well at night buying from us.” (2003 Annual Meeting)

• “It serves presently 36,000 of the 125,000 convenience stores in the United States, and has 58% share among the largest chains. To each store, it sells about $300,000 of products/year. McLane also serves 18,000 quick-serve restaurants, mainly those operated by YUM Brands (Taco Bell, Pizza Hut and KFC).” (2003 Annual Meeting)
  

• “It's a tough business. You have Hershey and Mars on one side and 7-11 Eleven on the other side, so you have to work hard to earn 1% pretax. [If McLane earns 1% pre-tax on $22 billion in sales, that's $220 million, so Buffett may have bought this business for 6.6x pre-tax earnings. I think this is a good price, especially if the business can grow substantially under Berkshire, but not a steal -- the guys at Wal-Mart aren't fools. But I think they let it go for a below-market price to Buffett because their biggest concern is that the business continue to be a reliable supplier to their stores. Such a low-margin business has little room for error, and it could get into trouble (as other similar companies have) under the ownership of a financial buyer that used too much leverage or tried to tinker with its operations.]” (2003 Annual Meeting)
  

Reason 5:

Ownership of Clayton Homes.

These are what Warren Buffett has said about Clayton Homes......

• “Clayton Homes is the class of the manufactured home industry. The deal came about in an unusual way. Every year, a class (about 40 students) from the University of Tennessee comes to Omaha. They visit some sights and then we a have classroom session for a couple of hours. Afterward, they typically give me a football or basketball. Last year, Bill Gates happened to be in town. This year, we had a good session and when they got through, they gave me a book, the autobiography of Jim Clayton, the founder of Clayton Homes. He'd written a nice inscription. I said to the students that I was an admirer of Jim's. I read the book and called Kevin Clayton, Jim's son, and said how much I'd enjoyed his dad's book. I said if they ever decided to do anything [regarding selling the company], we'd be interested and I told him what price I'd be willing to pay. A few phone calls later, we had a deal. That's the way things tend to happen at Berkshire.” (2003 Annual Meeting)
  

• “The manufactured home industry got in a lot of trouble. They'd gone crazy with credit and when you go crazy with credit, you get into a lot of trouble. Look at Conseco and Oakwood (we owned Oakwood's junk bonds), which went into bankruptcy. The industry lost the ability to securitize receivables and was in the tank. There were 160,000 new manufactured homes this year, but there were 90,000 repossessions, so this hurts demand. For the strong, like Clayton, especially with a backer like Berkshire, it should be a good time in the industry. And it's a big industry -- about 20% of new homes are manufactured. We can put you in one for $30/square foot. Compare the prices -- that's a deal.” (2003 Annual Meeting)
  

• “Competitors admit that Clayton is the class of the field, but even for Clayton, financing was hard. The lenders had gotten burned. Clayton did a securitization earlier this year, but [to get the deal done, they] had to keep more of the risk on their books.” (2003 Annual Meeting)
  

• “[Later in the meeting, in response to a question, Buffett commented further on Clayton Homes:] In the manufactured housing industry, everyone is losing money, but Clayton is making money. Most of Clayton's houses are sold through 297 outlets that they own. Managers are in a 50/50 profit split with Clayton. This is unlike what was going on in the industry a few years ago, whereby dealers would have a floor plan and the [manufactured housing] company would finance 130% of the purchase price, so the dealer would bring in any warm body. The system was designed for disaster. At Clayton, if a dealer takes in an inadequate down payments, it's his problem and he has to take care of repossessing it. This creates the right incentives.” (2003 Annual Meeting)
  

• “If you read Jim Clayton's book [First A Dream], he tells about the first home he sold [when working for someone else] and all of the funny business and gaming of the financing. These activities are coming home to roost in a huge way among the manufacturers and those who financed them. There's such a stain that Clayton is only one that can securitize, and without us, not to the extent they wanted. They are a class player and have the right systems in place with the right incentives. We will not securitize -- we will keep it for the portfolio.” (2003 Annual Meeting)
  

• “You're right [he was speaking to the questioner] that if you see companies with lots of gains on sales, be suspicious.” (2003 Annual Meeting)

Reason 6:

Ownership of NetJets.

These are what Warren Buffett has said about NetJets.....

• "We have 265 planes and can be at any one of 5,500 airports with four hours notice." (2001 Annual Meeting)

• “We took a loss in the first quarter and will have a loss for the year. It's our only business that's losing money.” (2003 Annual Meeting)

• “The used aircraft market has excess capacity, which is pushing down prices. We bought back some planes from our owners, which we've always done and will continue to do. [Because NetJets owns both new and used aircraft -- before selling them to fractional owners -- I believe it had to take a non-cash charge in Q1 for the decline in this asset's value.]” (2003 Annual Meeting)

• “We're slightly profitable in the US and losing money in Europe. 1/2 of all [business jet] miles flown in Europe are by Americans, and this will rise. We've made a huge investment Europe and there will be no competitors behind us.” (2003 Annual Meeting)

• “There are three major competitors. We have always been the biggest and our market share is rising. At 75% recently. I believe all of our competitors are losing money on an operating basis -- not even including asset write-downs. I think some of them will exit the industry -- look at Raytheon's recent prospectus. There will be a shake out, and we will not be one of the ones shook. (2003 Annual Meeting)

• This will eventually be a huge business for us -- 10 times what it is currently.” (2003 Annual Meeting)

To be continue......

All the best,

Dah Hui Lau (David)

dahhuilaudavid@gmail.com

To visit my archive: http://dahhuilaudavid.blogspot.com/2005/11/archive-of-dah-hui-laus-blog.html

Inside the strategy of Soros and Buffett; April 8, 2006

Buffett, born in 1930, started managing funds in 1956 and has produced an annual compound rate of return of 24.7 per cent. The American has had just one "losing" year - 2001 - compared with 13 years of negative returns for the Standard & Poor's 500 index in the period. Soros was born the same year as Buffett, in Budapest, Hungary, and began the Quantum Fund in 1969. Since then, he has enjoyed an average annual rate of return of 28.6 per cent and has had just four losing years against nine for the S&P 500.

While they have both delivered stellar performances, their strategies seem to be polar opposites: Buffett buys bargain-priced stocks and business for cash - and likes to own them "forever"; Soros is renowned for his highly levelled, quick-footed bets in the currency markets.

A master investor:

1 Believes the first priority is preservation of capital.

2 As a result, is risk-averse.

3 Has developed his own investment philosophy, which is an expression of his personality. As a result, no two highly successful investors have the same approach.

4 Has developed his own personal system for selecting, buying and selling investments.

5 Believes diversification is for the birds.

6 Hates to pay taxes, and arranges his affairs to legally minimise his tax bill.

7 Only invests in what he understands.

8 Refuses to make investments that do not meet his criteria. Can effortlessly say 'no'.

9 Is continually searching for new investment opportunities that meet his criteria and actively engages in his own research.

10 Has the patience to wait until he finds the right investment.

11 Acts instantly when he has made a decision.

12 Holds a winning investment until a pre-determined reason to exit arrives.

13 Follows his own system religiously.

14 Is aware of his own fallibility. Corrects mistakes the moment they arise.

15 Always treats mistakes as learning experiences.

16 As his experience increases, so do his returns.

17 Almost never talks to anyone about what he's doing. Not interested in what others think of his investment decisions.

18 Has successfully delegated most, if not all, of his responsibilities to others.

19 Lives far below his means.

20 Does what he does for stimulation and self-fulfilment - not for money.

21 Is emotionally involved with the process of investing; but can walk away from any individual investment.

22 Lives and breathes investing, 24 hours a day.

23 Puts his money where his mouth is. For example, Warren Buffet has 99 per cent of his net worth in shares of Berkshire Hathaway; George Soros, similarly, keeps most of his money in his Quantum Fund. For both, the destiny of their personal wealth is identical to that of the people who have entrusted money to their management.

Thank you GuruFocus for the above article.

Source: http://www.gurufocus.com/forum/read.php?1,1424

All the best,

Dah Hui Lau (David)

dahhuilaudavid@gmail.com

To visit my archive: http://dahhuilaudavid.blogspot.com/2005/11/archive-of-dah-hui-laus-blog.html

Bruce Berkowitz Interview; March 31, 2006

Consuelo Mack WealthTrack - Original Air Date: March 31, 2006

Source: http://www.wealthtrack.com/transcripts.php

Here are some statements made by Bruce Berkowitz:

BRUCE BERKOWITZ: The investment field is a mine field, and the non-professional person, the person who is not 100% involved investing has some very serious issues. I believe it is very important who they pick and how they find a financial advisor or fund which is going to make all of the difference in the world. That's why when people ask me what they should do with their money, I talk about funds. Our strategy has been to really become a silent partner with who we consider to be the great business people in the United States. People that have tremendous paper trails, over long periods of time. Very successful, especially during adverse periods. People that eat their own cooking. They take their family net worth and put it into the same ideas they're recommending their clients to do. Situations where companies have a level playing field, where if you do well, the manager does very well, and if you don't do well, they get hurt.

And of course, you want to find someone with a level of honest and integrity and with a philosophy and strategy you can understand. Because during the most difficult periods, that's the time you may get shaken, and that's the time when you have to stay with these people.

BRUCE BERKOWITZ: As I was saying before, it feels good to have cash. The older I get, the more I want it. I can't predict the future. I can only react to what happens. And you need the cash to take advantage of the opportunities. And the same way we look for solid balance sheets with companies, I take a lack at our fund and I want to fund a company to have a solid balance sheet, and that liquidity is very important.

All the best,

Dah Hui Lau (David)

dahhuilaudavid@gmail.com

To visit my archive: http://dahhuilaudavid.blogspot.com/2005/11/archive-of-dah-hui-laus-blog.html

Berkshire Hathaway Inc; BRK.A April 6, 2006

Price per share: $90,000
Market Cap (intraday): 138.60B
Trailing P/E (ttm, intraday): 16.25
Forward P/E (fye 31-Dec-07) 1: 18.70
PEG Ratio (5 yr expected): N/A
Price/Sales (ttm): 1.70
Price/Book (mrq): 1.52
Enterprise Value/Revenue (ttm)3: 1.34
Enterprise Value/EBITDA (ttm)3: 7.877

Profit Margin (ttm): 10.44%
Operating Margin (ttm): 15.20%

Return on Assets (ttm): 4.18%
Return on Equity (ttm): 9.62%

Source: http://finance.yahoo.com/q/ks?s=BRK-A

Today is an important day for me. It’s my Birthday. I’m 26 years old today. Therefore, I’m going to share something special with all investors.

I am going to discuss one of my top holdings, which I truly believe is undervalued and will provide good returns over the long-term.

I am sure you have read a lot about Berkshire Hathaway and its legendary CEO, Warren Buffett. There are so many great things to talk about this company, and its subsidiaries, as well as its CEO and Vice Chairman.

Whitney Tilson, a hedge fund manager, has discussed in great details why Berkshire is undervalued. Mohnish Pabrai has done a good article on ValueInvestor Club about Berkshire too. I personally couldn’t do much better analysis than that anymore.

Please read: My favourite Stock Idea: Berkshire Hathaway

Please read: Berkshire:Your Biggest Holding? March 6, 2006

Please read: Shareholders’ Letter

I will discuss in my next posting what I like about Berkshire.

At current price of $90,000 per share, a lot of superinvestors believe that Berkshire is worth at least $120,000 per share, which means there is a 33% upside to it before considering growth. Happy investing.

All the best,
Dah Hui Lau (David)
dahhuilaudavid@gmail.com

To visit my archive: http://dahhuilaudavid.blogspot.com/2005/11/archive-of-dah-hui-laus-blog.html

Fighting an investing slump; April 2, 2006

Robert Olstein compares his job of picking stocks to a slugger stepping up to the plate in Major League Baseball. In both jobs, you have to be tough enough to take the strikeouts along with the home runs. You may even hear jeers from the crowd if you are in a slump.

"A great hitter in baseball has a .333 average," Olstein said in a recent interview. "On the other hand, a great hitter on Wall Street is probably at .700. So the fact is that when you go through your .300 period and underperform as a fund manager, you have to hang in there.

"Right now, we find ourselves in the very same boat as a number of respected value managers," Rogers said in a recent letter to his investors.

"Hopefully until I am 100," he said. "I have fun doing this. I take annual reports on my vacation. I love tennis and golf and fishing. I am a big outdoorsman. But there is only so much time that you can spend outdoors."

To read the complete article: Fighting an investing slump

All the best,
Dah Hui Lau (David)
dahhuilaudavid@gmail.com

Please visit: Olstein Financial Alert Fund Decade E-Book
Please visit: The Price of Victory; Feb 22, 2006

WPS Resources Corp; WPS April 5, 2006

Price per share: $51.00
Market Cap (intraday): 2.05B
Trailing P/E (ttm, intraday): 12.55
Forward P/E (fye 31-Dec-07) 1: 12.06
PEG Ratio (5 yr expected): 2.68
Price/Sales (ttm): 0.29
Price/Book (mrq): 1.56
Enterprise Value/Revenue (ttm)3: 0.45
Enterprise Value/EBITDA (ttm)3: 7.629

Profit Margin (ttm): 2.26%
Operating Margin (ttm): 2.64%

Return on Assets (ttm): 2.66%
Return on Equity (ttm): 13.27%

Source: http://finance.yahoo.com/q/ks?s=WPS

Total Cash / Investments = $0.03B
Total Liabilities = $4.099B (including Account Payable)

Enterprise Value (EV)
= Market Cap + Total Liabilities – Total Cash/Investments
= $2.05B + $4.099B - $0.03B
= $6.119B

Free Cash Flow (FCF)
= Negative for the last 3 years consecutively.

I received an email asking for my opinion regarding WPS Resources Corp.

So, what does WPS Resources Corp do?

WPS Resources Corporation, through its subsidiaries, operates in the energy and energy related businesses. It generates and distributes electric energy in northeastern Wisconsin, as well as provides electric energy to various customers, including municipal utilities, electric cooperatives, energy marketers, other investor-owned utilities and municipal joint action agencies in Michigan's Upper Peninsula. The company also distributes regulated natural gas to nearly 300 municipalities in northeastern Wisconsin and adjacent portions of Michigan's Upper Peninsula. In addition, WPS Resources provides energy management and consulting services to retail and wholesale customers primarily in the northeastern quadrant of the United States and adjacent portions of Canada. The company was founded in 1883 and is based in Green Bay, Wisconsin. From Yahoo.com

What I don’t like about WPS Resources Corp?

This company has very small margin, low ROA and ROE. Also, I don’t like companies that don’t generate Free Cash Flow. For the last 3 years, it has negative free cash flow.

Conclusions:

I would avoid this capital intensive company, which has low margin, ROA and ROE.

Let me end my thoughts with another Warren Buffett’s quote……

“Before looking at new investments, we consider adding to old ones. If a business is attractive enough to buy once, it may well pay to repeat the process.”

All the best,
Dah Hui Lau (David)
dahhuilaudavid@gmail.com

To visit my archive: http://dahhuilaudavid.blogspot.com/2005/11/archive-of-dah-hui-laus-blog.html

Telstra Corporation; TLS April 4, 2006

Market price: $13.47
Market Cap (intraday): 33.32B
Trailing P/E (ttm, intraday): 11.82
Forward P/E (fye 30-Jun-07) 1: 14.64
Price/Sales (ttm): 2.07
Price/Book (mrq): 3.44
Enterprise Value/Revenue (ttm)3: 2.60
Enterprise Value/EBITDA (ttm)3: 5.442

Profit Margin (ttm): 17.17%
Return on Assets (ttm): 12.36%
Return on Equity (ttm): 27.10%

Source: http://finance.yahoo.com/q/ks?s=TLS

Total Cash / Investments = $1.179B
Total Liabilities = $17.22B (including Account Payable)

Enterprise Value (EV)
= Market Cap + Total Liabilities – Total Cash/Investments
= $33.32B + $17.22B - $1.179B
= $49.36B

Free Cash Flow (FCF)
= Total Operating Cash Flow – Capital Expenditure
= $6.22B – $2.282B
= $ 3.938B

FCF/EV yield
= $3.938B / $49.36B
= 7.98%

Treasury yield (30-years)
= 4.56%

One investor alerted me to this company Telstra.

Telstra has plunged from about $20 per share to current price of below $14 per share in less than a year, a 30% drop. From my quick and simple analysis, Telstra seems to be an interesting company to be investigated further. Telstra’s FCF/EV yield is 7.98%, which is a lot higher than treasury yield of 4.56%. It also has good ROA and profit margin.

My major concerns are……

Although Telstra has been very profitable in the past, future profitability is difficult to judge. Telstra would be required to give rivals below-cost access to its network by new regulations. I couldn’t imagine how a company could survive if it is required to give below-cost access to its network.

Revenue from its high-margin fixed-line business, which accounts for a third of total sales, fell a faster-than-expected 7.6 per cent. From FT.com Feb 8, 2006

Cost is increasing 3X faster than revenue growth. From FT.com Feb 8, 2006

Conclusion:

It would be much safer to invest in companies with moat. In Telstra case, moat is being eroded by regulations to provide below-cost access to rivals, and increasing competition from other telecommunication providers. Current wonderful yield may evaporate if management couldn’t reduce costs and stop customers’ defection to other companies.

I would avoid this company, and focus on other strong, dominant companies, which would provide me with good returns in a safe manner.

Having said that, if you have more knowledge and deeper understanding in telecommunication industry, and think Telstra is undervalued, please send me an email. I would love to hear and learn from you.

I love to end my article with Warren Buffett's quote..... “It is more important to say "no" to an opportunity, than to say "yes".”

All the best,
Dah Hui Lau (David)
dahhuilaudavid@gmail.com

To visit my archive: http://dahhuilaudavid.blogspot.com/2005/11/archive-of-dah-hui-laus-blog.html

Gannett Corp; GCI April 2, 2006

A few weeks ago, I did a simple analysis on Gannett Corp based on Knight Ridder selling price to McClatchy, and concluded that Gannett is undervalued and has potential to rise up to 27% or more. At the time of analysis, Gannett was selling at $61.26 per share. Since then, its share has slided down to current price of $59.92 per share.

I would like to reiterate that Gannett is a good buy at current price. As expected, a few superinvestors, who are tracked by GuruFocus, started to invest in this wonderful company. Among these superinvestors are Arnold Van Den Berg (3.64% of Assets), Bruce Sherman (3.46% of Assets), Bill Nygren (1.6% of Assets), Robert Olstein (1.28% of Assets), Warren Buffett (0.49% of Assets), and others.

Good management is critical for improving shareholders' return. It is extremely hard to avoid paying excessively for acquisition. Gannett Corp has once again proved that it has superb management by avoiding purchase of Knight Ridder. Selling at 22X Enterprise Value/Normalised Free Cash Flow was overpriced.

Rather than buying Knight Ridder, Gannett could invest in itself, which it has proudly been doing over the last two years. Gannett has been repurchasing its own shares aggressively over the last two years; using more than its net income for year 2005 and 2004.

Good company, coupled with good management, selling at reasonable price is a great strategy to beat the S&P500 return.

If you have any comments or insights to share, please send me an email. Remember, sharing is the best way to learn.

All the best,
Dah Hui Lau (David)
dahhuilaudavid@gmail.com

To read my Gannett's Analysis: http://dahhuilaudavid.blogspot.com/2006/03/gannett-corp-undervalued-at-6126-march.html

To visit my archive: http://dahhuilaudavid.blogspot.com/2005/11/archive-of-dah-hui-laus-blog.html

Google; GOOG April 1, 2006

David Dreman, Chairman of Dreman Value Management of Jersey City, recently wrote in Forbes magazine saying that Google that is overpriced at 68X trailing earnings, and investors are predicting high growth many years ahead.

His advice is to steer clear from overpriced stocks.

"Don't buy glamour stocks like these. Buy solid earners at reasonable multiples."

Among his suggestions are Anadarko Petroleum, which has solid earning for year 2005 as well as this coming year. Anadrko Petroleum has also authorised share repurchase up to $1B.

His other suggestions inclue EnCana, selling at PE of 12; 3M, which has grown 13% over the last 5 years; and United Technologies.

What David Dreman said reminded me of what Warren Buffett mentioned before, that was....

"You pay a very high price for cheery consensus"

"We insist on a margin of safety in our purchase price. If we calculate the value of a common stock to be only slightly higher than its price, we're not interested in buying. We believe this margin-of-safety principle, so strongly emphasized by Ben Graham, to be the cornerstone of investment success."

All the best,
Dah Hui Lau (David)
dahhuilaudavid@gmail.com

To visit my archive: http://dahhuilaudavid.blogspot.com/2005/11/archive-of-dah-hui-laus-blog.html