PowerPoint PresentationJoel Litman
September 2019
Valens Research
[email protected]
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2
wealth-creation process as an equity investor.”
Mitch Julis Canyon Capital
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4
wealth-creation process as an equity investor.”
Mitch Julis Canyon Capital
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"If the rating agencies will downgrade only when we can all see the
losses, then why do we need the rating agencies?“ - Jim Chanos, the
head of Kynikos Associates
“…the ratings that were developed by the credit rating agencies
were a major factor in the cause of the problems…” - Federal
Reserve Chairman Alan Greenspan re: the 2007-2009 crisis
"The ratings agencies, basically, without looking at the underlying
bond, they just pretty much gave almost everything that came out
AAA ratings,“ - Smith, West Virginia Labourers Trust Fund, $300
million pension fund
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issuer defaults
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? PRIVATE AND CONFIDENTIAL: This document is confidential and
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CDS vs. Avg Credit Rating 1,216 Companies Worldwide with CDS and
Credit Rating
0.00
500.00
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
4,500.00
Credit Rating from AAA+ to C-
C re
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D e
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AMD
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Stock Price
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Stock Price
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14
ADVANCED MICRO DEVICES
-40%
-20%
0%
20%
40%
1999 2000 2001 2002 2003 2004 2005 2006 2007 LFY+1 LFY+2 LFY+3
LFY+4 LFY+5
ROI'
-6%
3%
0%
-20%
-10%
0%
10%
20%
30%
1999 2000 2001 2002 2003 2004 2005 2006 2007 LFY+1 LFY+2 LFY+3
LFY+4 LFY+5
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15
ADVANCED MICRO DEVICES
-40%
-20%
0%
20%
40%
1999 2000 2001 2002 2003 2004 2005 2006 2007 LFY+1 LFY+2 LFY+3
LFY+4 LFY+5
ROI'
-6%
-20%
-10%
0%
10%
20%
30%
1999 2000 2001 2002 2003 2004 2005 2006 2007 LFY+1 LFY+2 LFY+3
LFY+4 LFY+5
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16
AMD: If cash flow will really grow, why 600bps CDS?
ADVANCED MICRO DEVICES
-40%
-20%
0%
20%
40%
1999 2000 2001 2002 2003 2004 2005 2006 2007 LFY+1 LFY+2 LFY+3
LFY+4 LFY+5
ROI'
-6%
-20%
-10%
0%
10%
20%
30%
1999 2000 2001 2002 2003 2004 2005 2006 2007 LFY+1 LFY+2 LFY+3
LFY+4 LFY+5
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17
AMD: Months later, CDS continued to climb to over 1000bps
Stock Price
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what that means for the credit.”
Mitch Julis Canyon Capital
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$2.50
operations was over
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As-reported CFFO is terribly
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Referring to The Statement of Cash Flows
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in the Cash Flow Statement?
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in the Cash Flow Statement?
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in the Cash Flow Statement?
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Acquisitions in the Cash Flow Statement?
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Warren Buffett PRIVATE AND CONFIDENTIAL: This document is
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“It is not clear why investors suddenly came to accept EBITDA as a
measure of corporate cash
flow.
EBIT did not accurately measure the cash flow from a
company‘s
ongoing income stream.
Adding back 100% of depreciation and amortization to arrive at
EBITDA rendered it even
less meaningful.” Seth Klarman
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DAL
• Pens Exp 885mm vs. 603mm vs. ZERO
• ROA of 6% versus Adjusted ROA’ of 14%
• P/E of 9 versus Adjusted P/E of 20.5
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Source: Valens Credit Analysis
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Source: Valens Credit Analysis
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Source: Valens Credit Analysis
“It's in the interest of Wall Street, enormously, to focus on
something called EBITDA because it results in higher borrowing
power, higher
valuations, and all of those sort of things.”
Warren Buffet Chairman and CEO, Berkshire Hathaway
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STX
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Actual
Intrinsic
Price
0
5
10
15
20
25
30
35
40
Price
0
200
400
600
800
1000
1200
Actual
Intrinsic
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PALM
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CDS vs. Avg Credit Rating 1,216 Companies Worldwide with CDS and
Credit Rating
0.00
500.00
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
4,500.00
Credit Rating from AAA+ to C-
C re
d it
D e
fa u
lt S
w a
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U.S. Corporate Return on Assets (ROA’) U.S. Corporate
Value/Earnings Ratio (V/E’)
7% 8% 7% 6% 8% 8% 9% 10% 10% 9%
8% 10% 11% 11%
11%
0%
5%
10%
15%
20%
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019E Mkt
Imp
ROA'
Source: Capital IQ, Valens Research Analysis (2,767 US Corporation
Aggregate) Data Date: 3-May-2019
27.7 31.5 30.8
20.5 18.5
22.7 22.5 21.9 21.9 21.5 21.4
0
10
20
30
40
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019E
Fwd V/E'
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U.S.Corporate Return on Assets (ROA’) U.S. Corporate Value/Earnings
Ratio (V/E’)
2,771 U.S. companies (non-financial)
7% 8% 7% 6% 8% 8% 9% 10% 10% 9%
8% 10% 11% 11%
11%
0%
5%
10%
15%
20%
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019E Mkt
Imp
ROA'
Source: Capital IQ, Valens Research Analysis (2,767 US Corporation
Aggregate) Data Date: 3-May-2019
27.7 31.5 30.8
20.5 18.5
22.7 22.5 21.9 21.9 21.5 21.4
0
10
20
30
40
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019E
Fwd V/E'
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Joel Litman
September 2019
Valens Research
[email protected]
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