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Would You Buy This Business?

Stock-Markets / Stock Market Valuations Jan 13, 2010 - 12:45 AM GMT

By: Graham_Summers

Stock-Markets

Best Financial Markets Analysis ArticleHi there,

I would like to sell you my business. Of course, you’re going to want to know a little bit about it before buying, so let’s look at the numbers.


For starters, you should know that my business is no longer growing. Actually, sales and profits are both down. Indeed, my Third Quarter 2009 sales are down 12% from those for 3Q08: a time when the entire financial world was collapsing. So despite all the claims of “recovery,” my business’s top line is still down in the double digits even compared to a period in which the whole world was falling off a cliff.

Similarly, profits at my business are down year over year too. My business DOES pay dividends… but they’re down 17% from 3Q08 levels. I mention dividends because I don’t want you to focus on the fact that operating earnings are down 43% year over year. I’ve laid off a bunch of people, down-sized inventories… but I’m still producing WAY less cash than I was in 2008… which again was a ROUGH time for business.

However, don’t let all of this dissuade you. I realize these numbers are a little too “recent,” so I thought I’d give you some longer-term data with which to consider your purchase. You’re a savvy investors, so you should consider my business’s results when there isn’t a Crisis going on. After all, the Fed has saved the world and ended the Financial Crisis, hasn’t it?

Ok, here’s the good news: my business’s cash levels have increased 74% in the last four years. That’s a heck of a lot more money! Unfortunately, my business’s debt has increased nearly three times as fast as its cash (270% as fast, in fact). So while my business “appears” to be producing more cash, the reality is that it’s really become more and more shackled with debt. By the way, if you buy my business, the debt will be YOUR responsibility, not mine.

I think that’s about it. Oh wait, I should also mention that several divisions of my business simply “make up” their accounting numbers. Yes, you heard me correctly, these guys just sort of mark their assets and liabilities whatever they want. I realize this probably sounds a little worrisome… but you shouldn’t give it too much thought. The guys running these divisions are the smartest executives around. Sure, they needed the Government to make an emergency loan to keep them in business… but that was a one-time deal. They’re all doing great now, which is why they are paying their employees record salaries and bonuses (I’m a  generous business owner).

Anything else? Of course, the price! We’ve got to decide what you’ll buy my business for.

Well, given the quality of my business as well as the diversification of its segments (there are 500 different segments to my business), I WILL be demanding a premium price if you decide to buy.

How much of a premium?

Well, if you want to go by operating earnings (earnings before taxes), I want you to pay at least 20X that number. I realize this all sounds a bit complicated so let me phrase it this way: if you buy my business today, it will take you at least 20 years to break even on the deal if the business doesn’t grow from its current levels.

Given that both sales and profits are down, it’s likely going to take you more than 20 years to make back the money you spent to buy my business. But I’m sure you’ll figure out a way to make the business grow, even if I haven’t in more than 12 months.

I realize this sounds like a ridiculous price, but you have to remember, my business has been around for more than 100 years. It’s diverse, large, and has a proven track record in terms of sales and profits. Many of my brands are well established in their respective markets. And you get some exposure to international markets too!

Ok, if you don’t want to go by operating earnings, let’s talk about net-earnings (earnings after taxes and other accounting issues are settled). Given how great my business is, I’d demand a price of 100X earnings if you decide to meet my asking price.

To return to my earlier example, if you pay corporate taxes (and I know you will), it’ll take you more than a century to break even on the deal. Actually, the reality is that it would be your grandchildren who’d break even on the deal since you definitely won’t be around 100 years from now. Sorry to be morbid, but that’s my asking price.

So what do you say? Have we got a deal?

Oh, you want to know the name of my business?

It’s called the S&P 500.

Good Investing!

Graham Summers

PS. I’ve put together a FREE Special Report detailing THREE investments that will explode when stocks start to collapse again. I call it Financial Crisis “Round Two” Survival Kit. These investments will not only help to protect your portfolio from the coming carnage, they’ll can also show you enormous profits.

Swing by www.gainspainscapital.com/roundtwo.html to pick up a FREE copy today!

http://gainspainscapital.com

Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets. 

Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.

Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.

    © 2010 Copyright Graham Summers - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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