I like Warren Buffett. I think he is a very shrewd investor and an uncommonly astute business person. Do I think he is the be-all / end-all when it comes to investing? Sorry, no.
What irritates me is his blatant self-promotion. Sure, everyone in business has to promote what they do, but when they do so by leaving stuff out ... well, it just grates on me.
From the Berkshire Hathaway (BRK.A) 2010 Shareholder Letter:
Both of us [Mr. Buffett and Mr. Munger] are enthusiastic about [Burlington Northern Santa Fe's (BNI)] future because railroads have major cost and environmental advantages over trucking, their main competitor. Last year BNSF moved each ton of freight it carried a record 500 miles on a single gallon of diesel fuel. That’s three times more fuel-efficient than trucking is, which means our railroad owns an important advantage in operating costs. Concurrently, our country gains because of reduced greenhouse emissions and a much smaller need for imported oil. When traffic travels by rail, society benefits.
What Mr. Buffett failed to mention is that Berkshire Hathaway owns a trucking company, McLane, which Berkshire purchased from Wal-Mart Stores, Inc. (WMT). This, at least to me, sort of skews the relevance of Berkshire wanting to be a "green" company that benefits society. Raspberries to you, Mr. B!
In the end, the stuff that Mr. Buffett moves on his new train set can't walk to its final destination. To get there requires a truck -- a big truck, usually one with 18 wheels -- which made me realize that I don't see trains broken down on the side of the railroad track, but I often see trucks broken down on the side of the road, and most of the time the reason they are there is because one of those 18 tires has become what the truckers call an alligator.
What surprised me as I started poking around for information to use in this article was that one of the leading roadside service companies in the world is a company that I used to hear about regularly growing up, The Goodyear Tire and Rubber Company (GT). Curious, I thought, why not?
Basis
Financial information presented in this report for The Goodyear Tire and Rubber Company is based on the company's most recent SEC Form 10-K filing for year ending December 31, 2010, as filed with the Securities and Exchange Commission on February 10, 2011.
What It Does
The company is an Ohio corporation organized in 1898, and today is one of the world's leading manufacturers of tires, engaging in operations in most regions of the world. The company develops, manufactures, markets and distributes tires for most applications. The company also manufactures and markets rubber-related chemicals for various applications, manufacturing its products in 56 facilities in 22 countries, including the United States.
Goodyear has marketing operations in almost every country in the world, employing approximately 72,000 world-wide full-time and temporary associates. In addition, the company is one of the world’s largest operators of commercial truck services and tire retreading centers, operating approximately 1,500 tire and auto service center outlets where its products are sold at retail and where it provides automotive repair and other services.
Short-Term Investment
The stock closed recently at $14.82, with Resistance at $15.45, a 4% increase from the recent close, First Support at $13.35 (a 10% decline from the recent close), and Second Support at $11.54 (a 22% decline from the recent close). Should the stock price fall beyond Second Support, the next support level is the 52-week low of $9.10, a 39% decline from its recent price.
The stock price has been trending upward since bouncing off of its December lows, recently running through days of slightly higher highs and slightly higher lows -- events that may bode well for the longer-term investor along with the short-term investor.
While we are not short-term investors, it seems to us that there isn't any reason to take a short-term position with more immediate downside risk (10%) than upside reward (4%). As a result, we are not currently interested in a short-term position.
Long-Term (5-Year Hold) Investment
With Debt at more than three times EBITDA, we were not really too excited as we began our cursory review of the company's financial metrics, only to end up ... pleasantly surprised.
The company's Current Ratio at 1.5, Quick Ratio at 0.9, and Cash Ratio at 0.4 -- while not what we consider investment quality -- were not really too bad.
Additional bright spots we noticed were the company's Inventory Turnover at just shy of five times a year, and that the company's Receivables were actually collected before its bills were paid, with Receivables outstanding an average of 53 days and Payables outstanding an average of 77 days.
Things like this lead us to conclude that management understands the needs of the company's customers as well as what is happening in the economies the company serves.
While the company generated Free Cash Flow during FY10 of $3.97 per share, a 26% year over year increase, net Debt also increased year over year by almost 5%, a potential trend that we would like to see reversed going forward.
Overall, we felt that the company's financial statements were in fairly decent shape.
Growth
We are value investors, attempting to determine the value of an entire company based on its most recent audited financial information. As such, we simply refuse to pay for earnings growth and make no inclusion of it in our valuation estimates.
However, we realize that many investors care a great deal about earnings growth and base their investment decisions on the spread between year over year earnings growth and the current PE. In the case of Goodyear, the company was able to grow year over year earnings by 56%, ending FY10 with earnings of $3.66 per share. With a current PE of 4, the spread between earnings growth and the PE is 14, meaning that for a growth investor, fair value for the stock is about $51.
Valuation
Based on our review of the company's latest annual financial information, we think a Reasonable Value Estimate for the company is between $27-30 per share, and based on that valuation have set an initial Buy Target at $16.50, an initial First Sell Target at $32, and an initial Close Target at $34.
Considering a recent close of under $15, the potential for growth, an estimated Merger and Acquisition payback of less than five years (assuming EBITDA remains the same), and Free Cash Flow of almost $4, we believe taking a position at this time is prudent, and have added the company to the Wax Ink Portfolio.
Final Thoughts
Okay, so Mr. Buffett is touting his genius at his purchase of Burlington Northern Santa Fe. Obviously, based on the information in his shareholder letter, it was a very prudent move and simply reinforces why he is such a formidable investor. But with that said, what about the rest of us? What about the little folks, the investors with a few extra dollars to invest -- what do we do?
Perhaps we should practice something I believe Mr. Buffett has done all his investing life. Perhaps we should spend more time seeing what isn't there. Instead of becoming enamored with the money Berkshire made in FY10 thanks to its train-set purchase, we should ask ourselves simply, "Does that make sense?" Or, perhaps, "What comes next?", or something along those lines.
In the case of the Berkshire letter to shareholders, whether intentioned or not, it made me feel as if trucks that haul freight were simply not going to be needed in the future because trains would be doing the job so much more efficiently. What a load! (Pun intended.)
Sure, rail can move the most amount of freight per gallon of fuel used, but it simply can't finish. I don't think I have ever seen a train unloading items at a Target (TGT) or a Wal-Mart store, and I know trains don't deliver supplies to my local grocery store. But -- miracle of miracles -- the shelves still manage to get restocked! How can that be with no train tracks?
It's questions like those that many of us as small-time equity investors simply fail to ask ourselves; because we don't, we miss out on what may become great longer-term investments.
So, Mr. Buffett, enjoy being able to blow the horn of your new engines as they pass through America; you certainly earned the right. As for me, I think I'll just stick to investing in companies that complete the job your trains can only begin.
Disclosure: I am long GT.
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