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I hope that his isn't too simple a question to ask here
Old 10-12-2008, 10:23 PM   #1
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I hope that his isn't too simple a question to ask here

When you look at DOW (dow Chemical) the Price to tangible book ratio is 1.43. Does that mean that the companies tangible assets, bricks & mortar , cash, supplies etc are worth about 70% of the value of the out standing stocks?

Does that mean that if the worst case scenario and the company failed the stock holders would get 70 % of their stock price back?

Kaiser aluminum has a price to tangible book of .75. Does that mean that has an intrinsic value that is 25 % greater than the cost of it's stock8)?
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Old 10-12-2008, 10:46 PM   #2
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Price-To-Book Ratio (P/B Ratio)
is this the ratio you are talking about?
years ago, I studied ratio analysis in school. It is used to evaluate a company in relation to others in that industry - so you need to know the industry averages.
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Old 10-13-2008, 01:09 PM   #3
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That's a valuation metric, not an estimate of "what do the shareholders get if we go under."
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Old 10-13-2008, 04:54 PM   #4
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Thanks for the responses.
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Old 10-14-2008, 02:36 AM   #5
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I just finished reading Warren Buffet's Bio and while I agree the P/B is just a valuation metric, it is worth noting that Warren's mentor Ben Graham was big fan of looking for companies that were selling below book value. Buffett has bought many companies who's assets was less than the market capitalizaton and then was rewarded when market finally recognized that fact.

Unfortunately simply looking at the balance sheet only gives you a starting point. The actual market price of asset by a company can vary dramatically from the price it is carried on the book.

For example land and property are typically carried at cost - depreciation. As we know the market price of piece of property bought 10+ years ago is often significantly higher than purchase/book price. On the flip side properly valuing things like inventory is as much more difficult and company have a lot of latitude. Hence it is not uncommon for investor in technology, toy, and apparel companies to find that the large inventory balance carried on company is worth far less than the balance sheet says during bankruptcy. (e.g. the value of cabbage patch doll, 2 year old MP3 player has dropped a considerably).

Still I think the P/B is a useful valuation metric for the right type of company, such as traditional manufacturing company or a resource company (i.e. oil).
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Old 10-14-2008, 10:41 AM   #6
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Originally Posted by clifp View Post
Unfortunately simply looking at the balance sheet only gives you a starting point. The actual market price of asset by a company can vary dramatically from the price it is carried on the book.
Still I think the P/B is a useful valuation metric for the right type of company, such as traditional manufacturing company or a resource company (i.e. oil).
I think one of the advantages of value investing, especially P/B, is that very few people are willing, let alone able, to do the gruntwork to value the assets. Probably some of the most astute value investors are professional shorters, who are routinely castigated for their efforts. And I'm aware of at least two members of this board who made a living out of reading the extremely fine print in bond issues and determining their "appropriate" market values.

For example, an asset carries one value in America but the same asset would carry a completely unrelated value in Europe, where there are different accounting standards for aspects like depreciation. Or a company chooses a different inventory-accounting system, like FIFO instead of LIFO, which produces huge advantages over decades of use in their business.

Ben Graham's search for below-book and margin-of-safety companies got him a lot of "cigar-butt" companies (one step away from bankruptcy or liquidation) and "workouts" (needing a complete overhaul to recover). Buffett's contribution to the genre was passing by these profitable yet high-effort low-reward opportunities in favor of businesses with great franchises/brands (another asset whose book value is extraordinarily difficult to determine) or those with an ability to spew cash (whether or not they were actively spewing at the time).

And then we have to determine the book value of uninsured uncollateralized derivatives, collateralized debt securities, and mortgage-backed securities... a skill that apparently is still difficult to rationally execute.

But the answers to your questions, Sevo, are "Yes", "No", and "Yes". That's someone's estimate of what Dow's hard assets would sell for (in a liquid marketplace with no urgency to sell). Stockholders are the last class of investors to claim a company's assets, after investors like holders of bonds & preferred stock. Stock owners usually get zip from a liquidation or a bankruptcy. And while Kaiser may be estimated to be selling at that type of discount, the only thing that really counts is your ability to hold on to the stock until someone recognizes your prescience.

In general, though, if you buy an index of stocks selling at lower values of price/book than other stocks, over a decade or two your returns (as well as your volatility) will be higher.
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Old 10-14-2008, 02:53 PM   #7
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Yep - many of us(aka me) totally missed what Graham and later Buffett were saying relative to the infamous 'cigar butt.'

Took me at least twenty years after the 4th ed in the 70's for his 'middle way' in appdx 4 to sink in. (?1957 The New Speculation in Common Stocks?)

To loosely quote Warren Buffett from one of his University of Washington chats(with Bill Gates) - finding those wet cigar butts lying around with a few puffs left - sometimes what you really have is a wet cigar butt.

heh heh heh - er something like that. Value is a lot more elusive than a few number metrics else we'd all be rich.
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Old 10-14-2008, 03:23 PM   #8
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Wouldn't it be nice if it was that easy.
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