All I have two announcements to make first whoever borrowed my copy of the case book and swore to give it back and didn't I want it back so if you want to leave it off maybe you put it in my mailbox I haven't looked yet secondly we have I did make a mistake about the paper but maybe it's not a mistake and I'll do this democratically remember when I said the optional papers were due On April 16th that was when this was a whole term long course I still don't mind doing that as long as
you don't mind getting your Gres really late for the first half of the course I mean it's not a lot of suspense about what your grades are going to be right so I'm willing to I mean I'm willing to give you the the whole semester to basically do that paper what It means is that we will announce the winners not in this class but in the second at the end of the second class so if you want to go to the last class of that and see who won we'll announce it there uh that is
my preference for doing it because I think that late in the semester when you're getting ready to leave is a good time to give you the money whereas in the middle of semeer it'll just vanish in the anxiety of your job search if however you want us to Give the prize on the last day of this class and get the grades in soon thereafter the paper would be due on February 25th so how many people you don't be intimidated by the mob we're going to have a vote how many people would like the paper is
to be due March April 16th how many people want it February 24th the people have spoken that do Mar 16th and I'll have the T mail all the Members of the class for who the winners are all right remember we're talking about successful processes for making Market Investments the fact you can never forget about this process is it is a zero sum game every investment has a buyer and a seller and one of them in some sense is always going to be on the wrong side of that transaction that means when you think about an
investment process you have to Start with a search strategy that is a strategy for what investment opportunities you're going to investigate in detail that is more likely than not to put you on the right side of that trade Tano showed you a mountain of statistical evidence for what the opportunities look like that tend to outperform the market What in they look like is they're obscure you're the only one small caps Spinoffs boring Industries with low analyst coverage in countries nobody wants to visit you're the only one talking to a company that is a good sign
the company has 200 analysts when it has an analyst day that's obviously a much tougher environment to be on the right side of the trade on undesigned desirable is your friend and undesirable almost always means cheap low Market to book low price earnings low growth industries that have problems companies That have problems where there are large losses those are your friends sometimes too you have the government on the other side of the trade that is great when the government sells off assets without generating a lot of auction buyers as they did when they shut down
the snls in the early 90s you want to be at that auction especially if there aren't a lot of other people the privatizations in Eastern Europe where government's giving Away assets and you don't have a sophisticated buyer on the other side of the trade so you have to decide what your strategy is going to be now in addition to the statistical evidence which is historical although it's been around for a long time and nobody's learned you do want to have a rationale rooted in human behavior that means these kinds of Securities are likely to do
well in the future and there are Deeply ingrained human tendencies that presumably account for the statistical regularities that Tano showed you in the past and trust me they haven't changed first people don't like the prospect of losses and probably all aspects of life ugly things are undervalued not just in Securities markets people are loss ofers secondly lottery tickets have always sold people will overpay for the prayer and the dream and if you stay Away from those stocks because other people people are overinvestment in those stocks the coral are is that the cheap ugly boring stocks
are going to tend to be undervalued to compensate for the overvaluation of the lottery ticket stocks the last thing you have to remember is and we'll come back to this when we talk about your own personal biases and investing every investor thinks they know things with a much higher degree of Certainty than is Justified they think it's going to do well nobody comes up to you and says I have a great idea and you say well is it going to be successful and you say well maybe 60% of the time but that's the reality so
when the consensus thinks stocks are good they're going to overvalue them because they think stocks are good for sure when the consensus thinks stocks are going to do badly they're going to undervalue them because they think they're going to do Badly for sure and that's basically where you want to start now there are other strategies You' be an industry expert You' be an expert in countries if they're obscure enough but the basic strategies that seem to outperform in the long run are these cheap ugly obscure strategies now on top of the momentum also matters people
adjust slowly to new information stocks that go up tend to keep going up and there are a lot of other explanations for that Institutional as well as individual ual institutions reinforce these biases if you're a money manager the evidence is that you keep the money as long as you don't stray too far from the herd no matter how bad the performance of The Herd is hering therefore is something that reinforces the attractive stocks being overvalued because everybody then buys them and the unattractive obscure ugly stocks being undervalued institutional imperative to Look like good gray solid
investors who go to church every Sunday at least four times means buying stocks that have done well for grounding those stocks in your portfolio and therefore over investing in those kinds of stocks now there has been lately one other variation on the kinds of models that Tano told you about and it's one that I introduce to you and it's one that I recommend you use Carefully how many of you have heard of this book the little book that beats the market by Joel greenb okay it is a book that starts out with basically low PE
stocks but what it wants to do is find in those ugly collections of investment opportunities the best ones so it looks for you can think of this is the best of the worst low PE low Market to book stocks that have high Returns on invested capital or you can think of it As looking at the worst of the best high return on invested Capital companies in terms of their accounting returns that actually are selling for low pees notice that that is a compromise of the basic strategy that we talked about it is a strategy that
does well but its history of doing well is nothing like the S the 80e plus history that Tano showed you on the value premium in the case of the magic formula it was done over 17 years I would advise you to be Careful about that because what the evidence seems to indicate is that it's the extreme outliers that provide the value in these high low strategies it's the extremely low Market to book the bottom two desiles the ex that you want to invest in the extremely high Market to book the glamour stocks that you want
to stay away from the top desile or the top two desiles the best of the worst means you're not going to have the full force Of irrational investor psychology on your side it may still work but I'd advise you to be careful about it another mechanical variation of this is uh is work done by a guy called Petroski and what he did was is he looked at the universe of stocks and the bottom desile of low Market to book low the stocks that when you look at them you go yuck I'm not touching that and
tried to identify the ones that he was willing to get his hands dirty on and what he did Was pose a sequence of yes no questions about those stocks so the first question he asked is is there a positive or negative return on assets and if there was a negative return on assets there had been consistent losses over long periods of time that's a bad answer to that question positive return on assets is a good answer is there positive the second question he asked is there positive cash flow from operations again that's an Accounting category
on the cash flow statement positive is good negative is bad is the return on assets going up or down going up is good going down is bad he didn't ask how much he just asked yes or no the difference between reported cash flow on on from operations over assets minus the reported profits on assets you want excess cash flow is a good sign if you're reporting higher profits in the cash flow it's a bad sign is leverage increasing or decreasing Increasing Leverage is a bad sign is liquidity which is your cash resources minus short-term debt
increasing or decreasing increasing liquidity is good has there been an equity offering lately an equity offering lately is bad news why because I'm a manager and I look at the market price and $16 a share or $8 a share if I thought my stock was worth $20 a share would I issue Equity at 8 a share not in a million years if I think my stock is worth $6 a share I'll issue Equity all day long who knows more about that Stock's value me or you the outside investor I do so issuing Equity is a
bad sign in the asset they we've done Equity issues recently our our gross margins going up or down our asset turns deteriorating or improving and then what he did was based on the number of good answers he divided the stocks within this lower desile of Market to book into stocks he'd like to invest in and stocks he wouldn't and he Did it over a 20e period typically for a stock he wanted to invest inv in he wanted eight to nine good answers for a stock that he was going to stay away from in short he
wanted no more than one to two good answers when he overlaid that on top of the Basic Value premium he got an extra 8 to 10% in his 20year sample period just like in the magic formula period you basically get about the same amount more again be really careful here because these are Strategies that people are going to look at those stocks and they're not going to say y maybe they will but the evidence probably is if he's done a good job of identifying the best of the worst again is they're not going to say
you and you don't have the basic human irrationalities that we've talked about that have been identified in Behavioral Studies of investors and non-investors on his side but you ought to be aware that at least in these sample periods These modifications of the basic strategies that Tano talk told you about have performed reasonably well outside of the sample period they haven't performed that well I think that's so so far this is a fairly old Slide the jury is still out on these changes but you ought to be aware that that's a Temptation that you're going to
be exposed to all right what we're going to talk about next is when you found candidate Opportunities to look at and you're not just a Quant how are you going to go about finding out is this a good investment without just applying a mechanical process and that involves if you're a value investor putting a value on the company that you're buying the reason we think that this makes sense for Value investors and the Graham and God tradition is they have an approach to valuation Which you will see is very different from what you were taught
in 6301 or even I dare say in advanced corporate finance and by the end of tonight you ought to recognize that it is much much better than what you were taught to do so what we're going to start with is talking about valuation approaches and the most common by far it's not what you were necessarily taught to do in 6301 but it is what happens out there is people estimate some measure of cash flow whether it's earnings after tax evid which is earnings before interest in taxes which is what the operating business produces EV plus
amortization because amortization is usually a phony charge it's based on pass stupidities not perspective stupidities or even plus depreciation and amortization because in some businesses there really is not a lot of Maintenance cap X that's necessary to keep the business going so they take a measure of cash flow and they apply a multiple to it so they say okay this is $2 a share and I think stocks in this industry should be trading at 15 times earnings they get $3 a share for this stock and they find a company that's trading at $26 a share
and they say that's a great bark I'm going to buy that stock but that's the fundamental valuation Methodology that gets used now the problem is of course where does this multiple come from and what does it mean for the appropriate multiple for one company to be the same as the multiples at which quote comparable companies have traded either currently or in the recent past when you look at comparable there are a lot of different dimensions of potential comparable out there there are Differences in strength of economic position some companies will dominate their markets some companies
will be in weaker economic positions it's where you are in the cycle some companies have very severe cycles and their profits suffered a lot in the recent downturn other companies didn't suffer so much how much Leverage is there presumably more leverage companies are riskier like Banks and they ought to get lower multiples so the cost of capital matters And of course the growth rate matters a lot one company is growing not at all and another company is growing at 6% a year and you think that 6% growth is sustainable the second company is going to
be worth presumably a lot more the problem is that for some of these things you don't even know what the sign of the effect of these variables are are management quality is it a positive or negative should a company with a good Management have a higher or a lower multiple how many people think a higher multiple absolutely why yes exactly you got new projects coming up all the time good management doesn't kiss away the resources that they retain out of earnings and you get more money and more value creation out of them what's the argument
for bad management double P yeah good management is already in those earnings and if the management is really Good what's the only Direction it's got to go in the future down what are you an antichrist and if the red hat is suggested and if it's going to be worse in the future it means that current earnings are unusually high so sometimes you don't even know the appropriate sign of the adjustment but the big problem with this is the issue of quantification in some sense what a Multiple valuation is is it's a cash flow variable and
as you know from your terminal values in 6301 it's sort of cash flow times the difference between a growth rate and a cost of capital where all these issues of risk are buried in the cost of capital and all these issues of management quality and so on are buried in the growth rate the problem is that if a typical growth rate which is like nominal GDP which in the old days used To be 5% and a typical cost of capital is 10% the multiple is 1 over 10% minus 5% which is 1 over 5% which
is 20 but suppose you're 1% off in the growth rate is that hard to be no and you're 1% off in the cost of capital because you misestimate the leverage or something if that's the case then the cost Capital could be 11 the growth rate could be four it's 1 over 7% 11us 4 1 over 7% is 14 times not 20 times or you could have Underestimated the cost of overestimated the cost of capital and underestimated the growth rate and suppose you're off by 1% there then the cost of capital is nine one away from
10 the growth rate is six one away from five and you've got 1 over 9 - 6 which is 1 over 3% which is 33 times the Precision of these estimates ties down the value of your company within a factor of more than two from 14 to 33 for very small mistakes in that growth rate and cost of to now we Know that this is the case so what do we teach you to do and this ought to be for did you all how many of you valued companies in 6301 you still do that exercise
yeah enough this is I hope what they teach you to do right you estimate cash flows how do you estimate cash flows you estimate a market size and maybe a market share to get revenues you estimate margins that gives you a pre-tax income you do a tax rate on that Minus maybe some overhead expense that gives you net income you subtract the investment requirements for any growth that's going on or the capital recovery if it's shrinking gives you an after tax incremental cash flow you estimate a cost of capital and you do the cash flow
for five years then what do you do you do a terminal value which is a terminal cash flow times one over the difference between a cost of capital and a growth rate R and you treat that last thing as An extra cash flow the terminal value as a cash flow you discount it back to the present and you compare that value to the market value of the company does that sound right to people does that look familiar okay where was most of the value when you did this it's all in the terminal value so did
it really help when you did that only that now you had to estimate the growth rate in the cost of capital Not today but five years from today or seven years from today now it turns out the problem with approximating the DCF or discounted cash flow formula which you we teach you to do is first the right thing to do in theory if we knew what these cash flows were if we knew what the cost of capital was we would get the right answer for what this company is work secondly this is no worse certainly
than what we just did with the ratio evaluations in fact The ratio evaluations is just doing this doing the terminal value right up front on the other hand for three reasons that I'm going to describe to you while this is right in theory in practice this is an incredibly stupid way to value a company one of the reasons is absolutely clear and transparent how many how many have you really seriously looked at the balance sheet information for your companies other than to do a stupid and Irrelevant liquidation value none of you the balance sheet is
very valuable information it's if you're throwing away that information and somebody else has figured out a way to put it to good use they're going to do a lot better than you in valuation and they're much more likely to be on the right side of this trade so throwing away the valuation information is not a smart thing to do second thing is up here at the top think About what you do when you do a Net Present Value you take the sum of near-term cash flows weighted by appropriate discount factors and distant cash flows in
the future weighted by factors that if you've got any kind of growth at all are not that much lower and you add them together to get the valuation where is their good information here when you did those estimates where was your good information it was in your estimates of The near-term cash flows what do you think is the quality of your estimate of the cash flows 10 12 15 years out that are buried in the terminal value you think you have good estimates of those no so what you're doing is you're taking good information which
is your near-term cash flow estimates and bad information which is buried in the terminal value and you're adding it together and when you add bad Information to good information what do you wind up with bad information the bad information like the terminal value dominates and you would like to separate the implications of the good valuation information that you have from the implications of the bad valuation information and a DCF valuation does not do that now there is a sociological reason why that is true a lot of you are going to go out and be investment
bankers and your job is to get company Executives to do stupid things with their shareholders on to do that job well evaluation technique that produces a lot of smoke and not much light is a really good valuation technique and we know on which side of the bread Goldman Sachs applies the butter and that's probably in some sense why we teach you to do this there is however a third reason why this is a stupid way to proceed and in a Funny way it's the most important the way to think of evaluation rule in the most
abstract sense is as kind of a meat grinder you put in assumptions at the top you turn the crank and it generates a value or a range of valuations the quality of the meat that comes out obviously depends on the quality of the assumptions which is the meat that goes in and what are the assumptions that you use when you do a DCF revenue and revenue growth for the next X years profit margins starting perhaps with gross margins and then after subtracting overhead operating margins for the next several years tax rates to get after tax
income a cost of capital and capital Capital intensities to get investment requirements associated with any growth that you have those are all parametric assumptions how many of you know what Ford's operating margins are going to be five years from now anybody their growth rate I don't think so how many of you have are able to make good assumptions about any of things and the answer is not really at all is it possible to at all these are difficult assumptions to make how do you compensate for that when you did your valuations you do sensitivity analysis
but the sensitivity analyses vary one of These variables at a time so you raise the return on sales without changing the capital intensity but in practice of course they are related by economic imperatives if Capital intensity goes up and the industry is to stay viable margins are going to have to go up if Capital intensity goes down and competition therefore intensifies margins are going to go down and they vary together in a complicated Way the problem therefore with a DCF approach is that it uses exactly the wrong assumptions now there wouldn't be anything better that
you could do if there were not things that we knew about the automobile industry five years from now is there going to be a viable automobile industry five years from yes there is is Ford gonna have any technology that the other companies don't have or is it not going to have technology that they have is technology Widely available able among the big auto companies yes it is do they all have equal access to markets yes they do do all the big ones have globals the scale necessary to compete globally yes they do fundamentally do any
of those auto companies have competitive advantages over any other of those auto companies no they don't what we would like is a valuation approach that enabled us to use the those kinds of strategic assumptions not the parametric Assumptions that are embedded in a DCF calculation you don't want to have to guess whether the profit rate is going to be 6% the cost of capital in the future P investment per unit of sales 60% whether the growth rate is seven or not what you'd like to be able to use is is this industry economically viable or
not is this a situation where nobody has any competitive advantage and there's free entry if firms enjoy competitive Advantages are they sustainable and are they growing or are they stable those are the Strategic judgments you'd like to make that you would like to use in your evaluation so rather than a DCF approach what would you what you would like is an approach to evaluation that organize the information about the value of the company from most to least reliable so you could say I know this value at a minimum is there The second piece of value
may or may not be there and this last piece of value is where the hope and the dream is it's hard to do with a DCF approach you'd also like to be able to organize it by strategic assumption this is what this company is going to be worth if the industry is not viable and this is what it's going to be worth if it's viable and there are no barriers entry so it's a competitive market and this is what it's going to be worth if its existing Competitive advantages turn out to be sustainable you would
like to be able to relate your valuations and valuation approach directly to those strategic judgments that you can make and I think it's fair to say it wasn't easy to do when you guys had finished your valuations in 60301 the good news is that there is in fact an alternative approach to valuation that achieves all of that and it is in fact the approach pioneered by Benjamin Graham and David DOD at his school basically in the 1930s and 19 1940s are there any questions about your miseducation in 631 all right so let me start with
what we probably should have taught you to do so what is the most reliable information that's out there let's just start with that it is the balance sheet information why because it is tangible in principle you could go out and check every item on that balance sheet you Could look at the cash and it's there at a given moment of time in time you can look at accounts receivable which are the debts that are owed to you by your customers you could see the level of those at any given moment in time inventory you could
go out and check property planting equipment you could go out and check even in tangibles you can generally look at if the intangible is a product portfolio you can look and see if it's there and what the quality of it Looks like if the intangible is store traffic you can look at store traffic and actually ask questions about how expensive was it to build if the intangible is a trained labor force you can look today at the quality of that labor force so you can actually look at those things today and you can begin to
say what they are are worth without making any other assumptions and that's where you always want to start your Valuation then you're going to Overlay strategic assumptions on the asset value so if this is a nonviable industry how are we going to value that balance sheet liquidation value now we can do an unsophisticated liquidation value which is just go down it and see what we can recover or we could do a sophisticated liquidation value where we drive it into the ground over say the next three to Five years and look at what the cash outflow
is they're not going to be hugely different numbers but we know what to do in that case and we don't have a problem with this terminal value if in fact this is a nonviable industry newspapers are not hard to do if it's a viable industry how are you going to Value those assets reproduction value because for the industry to be viable earnings have to be sufficient to justify continued Reinvestment at the most efficient way in the most efficient way possible in capacity in that industry that means that the value of the assets you've got there
is what it would cost somebody who was entering the industry to recreate in the most efficient way possible that asset base and the earnings ought to be driven in a competitive industry by that required level of asset investment so the balance sheet is really where you're going to Start and you're going to start for a nonviable business with a liquidation value and for a viable business you're going to start with the value of reproducing the assets how many of you did that in 63301 oops then of course earnings matter but where what were your most
reliable earnings estimates they were in a sense as the company sits there today over an average cycle with An average management or an anticipated average management what would its earnings be where the earnings are the earnings we could distribute to investors after tax and still leave the company in the same position at the end of the year as it was in at the beginning of the year it's basically the after tax profit when you take out depreciation M when you don't subtract depreciation minus the required maintenance Capital Expenditures why don't we just look at that
next no speculation about growth no speculation about future profitability and ask ourselves at a reasonable required return which is what a weighted average cost of capital is what is that earnings power worth and that gives you the second most reliable piece of information you have it is the value of the current earnings power of the company now it's less reliable than the asset value Because you have to project you have to say well this is the value if these earnings are sustainable over time whereas the assets are just there but it's a hell of a
lot more reliable than the value grow those two things will in fact tell a story and it'll tell a story that is in some sense consistent because those two estimates are not independent suppose that read earnings power value instead of market value Suppose I was in the chemical just a commodity chemical business and the value of the earnings and this year was 2 billion and the value the cost of reproducing the assets is a billion what's that company going to be worth and remember the Strategic assumption is there are obviously no barriers to entry here
this is a commodity business is the $2 billion Value of earnings going to be sustainable no chemical companies are going to look at that and say I can create $2 billion worth of earnings for a billion doll investment and what are they going to do all day long they're going to invest what's that going to do to prices of this chemical it's going to drive it down what's that going to do to the value of the earnings it's going to drive it down to drive the value of the earnings down suppose it Drives it down
from two billion to a billion and a half does the entry stop there no they can still create value where is that process of Entry going to stop when the earnings power value has been driven down to the asset value if it were below the asset value what would start to happen in that industry people wouldn't be investing capacity would come offline prices would ultimately go up and they'd have to keep going up until they attracted the new investment So in a business without a commodity business what should be true of that earnings power value
if you've calculated it properly and the asset value they should be the same now for the moment I've ignored growth but I'm going to tell you how to deal with that in these businesses too what about a product that's differentiated like luxury cars is that a different business alog together does this principle only apply to Commodity businesses and the answer is no when they told you and we're going to talk about this T is going to talk about this at Great length next week when they told you the way to get yourself out of a
commodity business was to differentiate your product they lie it is not in brand terms what are the that that is in the terms of what constitutes Brands which is a luxury high quality image that you'll overpay for what are The most powerful brands in the world anybody says cocacola I just want to I dare them to show up to meet their new in-laws and expect to impress them with a sixpack of C it is the big luxury car companies they have differentiated products it's the mercedesbenz star the Cadillac Shield they've even entered the language suppose
that in luxury cars you had a situation where the asset reproduction value including the engineering the Design the dealer Network and the advertising image was 25 billion and the earnings value was 40 billion and that was basically the situation in the United States in the 1960s General Motors return on Capital was 48% what happens then first the Europeans look at that market BMW and Jaguar and danler and they which is Mercedes and they say we can get into that market and they enter now prices Don't go down but what happens to Cadillac sales at the
old price they fall you're not going to sell as much at the old price if your sales Fall what happens to your unit fix cost of product development and advertising for sustaining the brand it goes up because you're selling fewer units and if anything you probably got to spend a little more on that if your unit fixed cost goes up your variable cost isn't going down down and your Prices certainly aren't going up in the face of competition what happens to profits when those Europeans enter they go down and the earnings power value goes down
suppose it goes down from 25 from 40 sorry to 30 well the Japanese are going to look at that and say I can still create a lot of value for my $25 billion investment and now Lexus and infinity and Acura enter it is not enough to differentiate your product there have to be barriers to That process of entry and that's what by the way competitive advantages are incumbent competitive advantages which are things you can do as the incumbent the potential entrance Camp are exactly the same as barriers to entry but in the absence of barriers
to entry whether it is a commodity product or a differentiated product ultimately what is competition going to drive the value of those earnings too the cost of reproducing the Assets In fact it's generally worth I I tell one terrible joke but it's one I'm fond of because I live through this and if I could kill our dog I would but I can't how many of you are married how many of you have kids how many of the kids have pets good oh well you're too late for you the thing you have to understand about pets
is it's a hell of a lot more fun to buy a puppy than drown it later which means that once you bought That puppy you are stuck with it now the same thing applies to entry it's a hell of a lot more fun to enter and build the capacity than to get rid of it later so you spend a lot of time at excess capacity in these industries because people over Buu so if anything the returns are slightly worse than this but the basic Dynamic is that if there are no barriers to entry that earnings
power value and the asset value ultimately to Be driven to the same level so they ought to be approximately the same and that is good for you because what it means is that the Strategic judgment that there are no barriers to entry enables you to triangulate your valuation so that you can compare your earnings power value to that asset reproduction value and you get two observations which are are going to be a lot better than one but what about growth I haven't talked at all Here about the value of growth which matters in principle for
a lot of companies how many of you think growth is unambiguously good how many people think it's not unambiguously good most of you have no opinion there is one good thing about growth a growing income stream is much more valuable than a flat income stream of the same initial level the bad thing about growth is that you have to invest to support the growth it's very Very rare almost non-existent that the growth comes without any investment at all and what that means is that the average level of the stream at every point in time will
have the subtraction action of the growth investment so the initial distributable Profit Stream for the growing company will be lower than the distributable profit screen for the non-growing company the question is at what point do those two forces exactly balance and There is a very simple answer to that and what I want you to think about is not the r of growth itself and this is an advantage of thinking in Graham and God terms but think of the asset investment that you have to make to sustain the growth so let's imagine I'm investing a $100
million in growth first thing is I have to pay the investors who supplied that money whether it's from retained earnings or not I have to justify the use of that money and Suppose they could earn 10% on it elsewhere so the cost of that money is 10% of a 100 million is $10 million a year when does the growth generate returns that outweigh that cost of investment think first about a crappy management investing that million in an industry where it's operating at a competitive disadvantage where other people have scale other people have captive custom they're
not Going to make 10% on that money they'll be lucky to make 5% of that money so if they invest under those circumstances over here they make 5% which is 5 million they pay 10 million to the people who provided the money the net income created is minus5 million and they've destroyed 50 million in B so growth at a competitive disadvantage destroys value in almost every instance what about if they're investing In a competitive market like the market for luxury cars ultimately what's that return on the 100 million going to be driven to well if
it was 20% what would happen you get entry an entry would drive down the profitability so all ultimately I don't care how many real options are there ultimately competition is going to drive the return down to that 10% so now if there are no barriers to entry it's a Level Playing Field you make 10% on the 100 million which is 10 million you pay 10 million to the people who provided it the net value is zero growth in a competitive market generates zero value for the existing shareholders the cost of the capital investment exactly is
offset by the increase in income and vice versa so without barriers to entry and a reasonable quality management what is the value of Growth it is zero so we don't have to worry about growth at all all we have to worry about is the current earnings power and that asset value yes you're above you're get it is it is you do do people are going to show you how fast the reversion to the mean is and it's very fast plus remember that for every period where you have that short-term competitive advantage and the people rush
in after They've rushed in what is that industry like it really sucks for a long time you'll find that out when you have the equivalent of a 95y old human age dog who has to have every door in the house open and craps all over everything at his leisure is what I live with remember that and if I shot it my daughter would be upset my wife I'm sorry go ahead no what we're going to do okay This is the truth when does growth matter it matters when for example it's the internet and that 100
million generates 10 billion in sales and a billion in profits now if there were no barriers to entry what would that extra billion in profits do it would attract an enormous amount of competition very quickly on but if it's not there and it's sustainable there are barriers to entry which prevents the Competition then we have the old problem of how do we value grou and what we're going to learn is that the way even in the difficult circumstance where you have to worry about valuing the growth they taught you to do it in 6301 was
completely wrong in fact I'll give you a sort of preview of what you're going to learn here you were taught that there were two ways to evaluate projects right right an npv and an Irr which were you which were you taught was the most reliable thing to use npv that is right for the projects where the growth doesn't matter when the growth matters when you try and do npvs you have this extraordinary sensitivity to the Assumption about the rate of growth it has huge effects on your valuation and means that your npv valuation is very
inaccurate and very hard to cond What do you think happens what is the eff of growth on the irr well if it grows at 6% it just adds 6% to the IR return because you get a 6% capital gain all else being equal so there the connection between the growth rate and the cost of capital and the return that you get is much more transparent so it turns out when you look at Great investors like Warren Buffett or like a guy called Glen Greenberg who have extraordinary records Over long periods of time when they evaluate
growth stocks they don't look for a dollar value or the question they ask is at this current valuation with reasonable assumptions about growth and and the stability of profitability which comes back to how long is this competitive Advantage going to last what is my return Buffett's Target return is 133% Glenn Greenberg's is 15 and actually since Glenn Greenberg started in 1983 He's done slightly better than Buffet on his Investments but when we come to evaluate growth stocks it turns out we're going to have to do it entirely differently precisely because of this problem of the
extreme sensitivity of the npv value to those terminal assumptions about the growth rate and cost of capital and remember what evaluation machine does is it makes as transparent as possible the relationship between the critical Assumptions and the valuation measure that you're talking so when we come back to valuation as long as we're not operating at a competitive advantage and growing at a competitive Advantage we can ignore this very uncertain element of value which is the value attributable to growth because in the long run it's going to be reasonably small yes Sorry no hold that question
scale is a competitive Advantage provided you can defend that scale and Tano is going to talk about that next week trust me we'll teach you what a competitive Advantage is and it's not growth so in terms of growth we're basically going to prer looking at growth knowing that growth at a competitive disadvantage or With a bad management destroys value growth on a Level Playing Field neither creates nor destroys value so we can ignore it and it's only in these franchise businesses the so-called Buffet businesses that we have to worry about growth and we're going to
Value those in an entirely different way so what we're going to do is an asset value and power value and I'm just going to talk for the last half hour about the mechanics of calculating those Two things well the way you do an asset value is you just work down that balance sheet and remember if we think this is a nonviable industry how are we going to work down that balance sheet we're going to do a liquidation value if it's a viable business business what we're going to try and calculate is the cost of reproducing
those assets that are necessary to the business if I start With cash and I've got a 100 million in cash what's the cost of reproducing a 100 million in cash it's about 100 million so cash is easy what about accounts receivable remember how do you produce accounts receivable in practice if I have 200 million in accounts receivable what would it take an entrance to wanted my same scale of business to have 200 million in accounts receivable he'd have to sell about 210 Million to people why because some of those people aren't going to pay them
back so the cost of reproducing those that 200 million in accounts rece able is actually higher not lower it's not very much higher it's going to be pretty close but it's not going to be lower you're not going to take a haircut on that that's in the event of a liquidation Bill if this is an economically viable business you have to Get repaid for what you invested in those accounts receivable just like any entrance would have to so at a minimum you want to add back the allowance for bad Deb not going to be a
big adjustment but at least it will get you to think in the right way about how you're calcula this reproduction value inventory again sometimes you do have to take a haircut if it's useless inventory obsolete products input materials that you bought At two high prices you're going to have to mark it down and the accountants usually force them to do that that because an entrance would not make those stupid products you would have done their market research for them and they would not have bought the Commodities at high historical prices in general though as I
say the accountants if they're doing an honest job should do the write down for that the adjustment presumably you have to do To inventory is that when you enter a business you enter a business on the basis of first in first stuff you can't sell the stuff that you're going to produce three months from now that means that if you're doing lifeo accounting and you have a lifo reserve you have to add back the lifo reserve if you're doing fifo accounting go ahead and just use the accounting inventory number now these are not going to
be big adjustments and when you do a quick and Dirty you're just going to work down the balance sheet the harder things to get at where you want to concentrate your time are property plant equipment tangible long lived assets but increasingly importantly nowadays intangible assets and what I want to do is talk to you through about how a calculation of intangible assets might be arrived at but also we're then going To talk about getting reproduction values for first you need a listing of what the intangible assets are they will consist very often of a product
portfolio an entrant will have as a rule to develop that product portfolio now you have to be a little bit careful here because if the entrant is going to be a foreign firm that's already developed that product portfolio that part of the reproduction cost by the entrant is Going to be zero remember you're looking at the required investment here that is going to protect your earnings power if they've got to develop the product portfolio when you read the descriptions in a company they'll usually tell you how long ago their products were developed typically most of
them in cases where R&D matters at all where the product portfolio matters at all it's in the last five years well you know what the R&D budget is because that's Reported so if it's five years it's five years worth of R&D if it's three years it's three years worth of R&D now sometimes you can't do it that simply if you look at drug companies they spend enormous amounts of money on developing products on the other hand what you see today is that more than 50% of the new chemical entities are actually purchased when they buy
small startup biotech firms look at the prices that they're paying divided by the potential revenue And that'll give you an idea per dollar of Revenue what the product portfolio is wor so sometimes you can compare this 5e years of R&D or three years of R&D to what people are paying for a comparable product portfolios out there and again the more information you can get and this is all information that never occurred to any of you to look at when you did your 6301 projects is it clear the better off you're going to be because the
more Likely you're going to be to be on the right side of the trade in terms of customers customers actually don't come cheaply your sales usually represent an asset and you ought to think about what was it what might be a cost to an entrance of acquiring those sales one measure is you can just look at the sales commissions that are paid if people are selling in are paying Industrial Sales groups a 75% commission for a generated what's the value of that Sales base you've got it's about 75% times the value of the sales sometimes
there's an industry number I mean there's a huge amount of information in credit cards as to how much it costs you to get a new active credit card attemp used to be about $80 it's now about $400 and you can multiply that by the number number of credit card accounts that you have which is again the cost that an Entrant would take to build up in some cases what you can do is just look at the history so if you look at a Home Depot store and the first year at sales are 60% of average
sustainable sales the next year it's about 78% then it's 84% then it's 93% then it's 100% you know usually because the retailers will report this what the four wall economics looks like so you know how much profit they Sacrifice when they start a new store and that turns out to be about 20% of the ultimate value of the sales of the store that means the value of the sales at Home Depot is 20% of sales on the other hand if the store is a fashion store in a mall how fast do you think the traffic
build is it's almost instantaneous they're almost at full build within three months what's the value of the traffic in that case Zero because it's all in the ring so you have To have a sense of what the cost of generating the sales are and again if people are buying store chains you can see what they're paying implicitly for mature stores with mature traffic you've got trained workers companies will report their labor force and in some cases you can get how many of them are professional engineers and so on well we know what head hunters charge
as a percentage of a year salary for producing the product of a successful Search it runs from as low as 15% for secretarial workers to as high as 3 years salary for CEOs I'm sorry half a year salary for CEOs normally it's in the range of 25 to 35% add up their wage Bill and multiply it by that factor that's what it would cost somebody if the entrance is going to have to develop that labor force and that's going to be true of a foreign firm interest in the case of Brands you have a lot
of brands that are Bought uh Liz Clayborn used to buy a lot of Brands Jones New York used to buy by a lot of Brands you sort of can get a feel for what they're paying for potential sales the same time there are a lot of business plans out there that experienced people in the field have developed and business plans for new brand development typically consist of a cost part of it when you're doing the design you're lining up the suppliers you're doing the advertising and doing The selling into the store which is more or
less what people pay attention to because it drives budget and then there's the fantasy of what the revenues are going to be well the cost of developing that brand you can get from the business plan brands are typically successful and the bigger the brand the greater its reach the more expensive that is the cost by the way runs about 20 to 40 cents of mature sales brands are successful brand Introductions are successful between a half and a third of the time so you have to blow that up by two or three but you have an
average cost of developing those Brands assuming everybody has equal potential access to those markets and a lot of it comes from these private Market values which what people are willing to spend for this so what are you going to do for intangibles you're going to list them and you're going to Look item by item at a good estimate of reproducing them and if you can triangulate you have a private market value that people have paid in transactions to buy the brands and you have these direct measures of cost of development you want to do both
the more information you have the better terms of tangible assets lot of Commodities like oil reserves trade and you have a lot of information on lifting cost so you can Look at reserves of different quality and what they trade for all these big oil companies have exploration development budgets you can see how much they produce in terms of proved reserves ultimately as a fraction of what they spend it runs from about 20 cents on the dollar for kico Phillips to as high as 80 cents on the dollar historically for Apache oil that you can look
at too in terms of an themselves what you Also have by the way in a footnote is the original cost of what was in place typically on average how far through its useful life is the current plant of a company going to be that's not growing it's going to be halfway through its useful one the faster the company is growing it's not going to be much below 40% the younger the capital is going to be so say it's halfway through Its useful life the value of that property in place is half its original cost and
the only next adjustment you have to make is are the costs of New Capital Equipment going up or down there the trend typically has been downwards Capital Equipment costs have been going down because the improvements in data processing speed at four to 6% a year so if this equipment is on average five years old then you've got to write it down by about another 30 to 35% I'm Sorry 25 to 20 to 25% for the decline in value at roughly 5% of year but that's a calculation you can do and you'll get an idea of
the reproduction value of the capital for buildings you're not going to take any write down for construction in progress you're not going to take any right down sometimes the plant in place will be characterized by a capacity so you will say okay this is a Refinery with 600,000 barrels a day That's a big Refinery say 60,000 barrels per day capacity refineries get bought and sold and they'll tell you Refinery capacity gets bought and sold at X new refineries cost typically per barrel of capacity about $2,000 per barrel per year you can just multiply that rated
capacity by that cost but here you have to be extremely careful there is a big difference in how the capacity is going to come online as That industry remains viable in the future you want the lowest cost way of producing producing that capacity typically you can either build a whole new Refinery which is Green Field capacity which causes cost $2,000 per barrel per day up to 5,000 per barrel per day how many new refineries do you think have been built in the United States in the last 30 years Z zero what do you think has
happened to refining capacity in the United States It's gone up by 25 to 30% where where do it all come from ground Field capacity it's Investments that extend the capacity of what's in place and the estimates there are is that Brownfield capacity costs about not 2,000 to $5,000 per barrel but somewhere between 600 and ,000 per barrel which number are you going to use for the reproduction cost of your refiner it's going to be the Brownfield capacity because that's the most Efficient way to bring it online so you're going to work down that balance sheet
you're going to look at all the various categories of assets you're going to do the necessary research to get a reproduction value for those assets and then probably you're just going to subtract without much adjustment the value of the liabilities although you could write those down to Market too and that'll give you a reproduction value of the assets of a Viable business are there any questions about yes figure market value of the debt all right in the debt footnote they will tell you the interest rate that they're paying on all that de you will know
what rated debt is trading for today you can just do a yield calculation on the value of the stream of payments for the contractual debt at the new cost of now you should program it don't do it for every single day but it's quick to do if you've got Itog okay now there are several things you probably want to keep keep in mind management adds Val good management always adds value to the asset value and bad management always destroys value from the asset value when you use these transaction values be really careful a lot of
people got screwed because for example in cable AT&T was paying much too much for cable points of presence and then AT&T gave it up they thought They were going to get into the local telephone business ahead of their time through the cable pipe they bought a lot of Cable Systems at hugely inflated values when they decided to get out of the business the transaction values for cable customers fell by half be really careful in using those transactions values and don't have them driven by earnings sometimes Book value does almost as well that you'll notice that
in tonos regressions Market to book or Book to Market identifies good opportunities but presumably you ought to be able to do better with systematic studies of Industries and remember in nonviable Industries it's the liquidation that that you want to concentrate on all right I need a volunteer can somebody pick up my slide just fell off sorry so you've done an asset value and now you want to triangulate that with The value of the current earnings which is the value of the earnings of the company as it stands there today how are you going to measure
it it's going to be just the sustainable or earnings power the average earnings that that Enterprise should be able to produce over the cycle times one over cost of capital it's the second most reliable information how are you going to calculate earnings you're going to do the accounting income plus adjustments The cost of capital is going to be a whack what you typically want to do for reasons I'm going to describe in a second is get the value of the whole whole Enterprise don't just look at the value of the equity because if you've got
an Enterprise that's worth a billion dollars and it's got 900 million in debt on it the equity could be a real bargain but it's just because it's so risky you could be off by 10% in your estimate of the value of the Enterprise and the Equity would be worthless if it's that small stuff so look at these as an Enterprise as a whole which is why you want to do it if you then want to get the earnings power value of the equity take the earnings power value minus the value of the Deb the Assumption
here is clearly that that current profitability is sustainable all right so the first thing you have to do are the accounting adjustments Now start with earnings without the onetime charges if they then have recurring nonrecurring losses take the average value of those and just subtract it because they clearly don't occur in the year where they're recognized so first you want to clean up any accounting adjustments that they've done once you've done that and you've got a a fairly clean accounting Operating earnings then go ahead and look at average margins over a cycle now why margins
because margins vary a lot more than sales current sales are probably going to be reasonably close to sustainable sales sometimes they're inflated by 10 or 15% margin Marin can vary by a factor of two to one so start with a sustainable margin level start with the average level of those margins over one Cycle which so you've got good times and bad times and usually that's going to be at least five years more often it's going to be 10 if you looked at margins from 2002 through 2007 on Industrial companies you got a hugely inflated idea
of what sustainable margins were because Chinese and other growth steel and all sorts of other Commodities were historically High margins for the whole fiveyear period so go back and look over recycle if you can multiply it by Sustainable revenues again if oil prices are up at$ 180 $150 a barrel that's obviously not sustainable in some sense so in extreme cases like that you're going to take a write down on revenues but in general current revenues should be pretty close to what you're going to see as you do this you will get a sense of how
stable these numbers are if margins have no clear Trend to them that's a good sign if margins are deteriorating steadily you've got a Tough decision to make probably you're going to use the most recent margins if they're increasing steadily again you're going to have to make a judgment about how that compares to over the cycle so you've got an average margin you've got an average level of sales that'll give you an average level of earnings before interest in taxes now sometimes the big adjustment you're Going to make actually has to do with investment that gets
that get expensed and we'll talk about those but the simplest and first adjustment you're going to make is after you've done one minus the average tax rate to get a net operating profit after tax is to add back excessive depreciation how are you going to get excessive depreciation what you've got to do is Subtract average depreciation from an estimate or you got to subtract an estimate of Maintenance Capital expense from average depreciation maintenance Capital expense is what depreciation should be it's what you have to pay to restore the company at the end of the year
it's Capital stock at the end of the year to what it was at the beginning of the year and again since depreciation estimates are a Big source of error you want to triangulate as far as you can sometimes you can just do an estimate of how much of the capital expenses growth subtract that from the overall Capital expense and you'll be left with the maintenance comps for example growth for a stor like Tiffany or a company like Tiffany consists of what new store ownings they will tell you or you can find out What the investment
for new store opening is they typically don't own their stores it's about $3 and A5 million they opened 15 stores that year you know what the growth cap X is the remaining capex is presumably maintenance Capital expense sometimes you can look at the replacement directly if you look at cable companies how much do they have to pay to replace the cable in the ground nothing lasts forever when the rats eat It they actually have to send the repair crews out and they expense that part of it on the other hand what happens to the set
top boxes they have to be replaced they typically don't get much from reconditioning so set top boxes except for the new households coming on are almost all maintenance Capital expense so look at the number of customers they have what the church is how many of them turn over every year say it's 12% if They've got 10 million customers and the churn is 12% they got to replace 1.2 million set top boxes a year you know what set top boxes cost you can just call Scientific Atlanta you can get what that maintenance capex is actually the
cable companies and a lot of companies will break out their capital budget for you and you can see what the maintenance capital expense is sometimes the company will actually tell you so Burlington Northern which Buffett just bought reports every year maintenance capex and we don't think they're lying about it because the number of miles of track in the system have been shrinking steadily and it's typically almost all of capital expense and it's much bigger by the way than depreciation but you're going to get an estimate of the maintenance Capital expense you're going to subtract it
from depreciation and you're going to add That back to your profit number second thing you're going to do as the top line here when Home Depot opens a new store it actually sacrifices profit because it sales at that new store are 60 to 65% of total sales in the first year and they lose money but you know what that number is and that's really a form of investment and you can calculate that loss and just look at The number of new stores that got opened and you can calculate sort of directly expensed investment that way
and add it back for Intel obviously if their revenue increases over time although it's stopped doing that some fraction of the R&D budget is going to new products the old days it was probably half these days it's probably almost nothing as Revenue as I say hasn't been going so what you want to do is add back expensed investment because if the Company doesn't grow you could distribute that and you want to add back excess depreciation and that ought to be distributable distributable after tax earnings once you've got that and also by the way you also
do adjustments for non-consolidated subsidiaries where you may have if they're big you're going to report them separately then you've got an earnings power you multiply that by one over a Weighted average cost of capital and that will give you an earnings power value how do you get the weighted average cost of capital well the cost of debt is easy you all did this in 6301 it's the contractual cost more or less times one minus the tax rate it's usually a little more because there's some probability of I'm sorry a little less because there's some probability
of default and the expected payment is Slightly less than the cont multiply that by the fraction of the company that's financed by Deb how do you get the cost of equity you were taught to do the capital asset pricing model right it's a complete waste of time and I'll show you why if you look at the cost of equity from the capital asset pricing mod it's a risk-free rate which we think today we Can measure pretty accurately it's about 1% it's a little more than the average short rate because of course it's the average short
rate over the future for which you're evaluating the project plus the beta times the risk premium what do estimates of the risk premium one well some people think it's four some people think it's as high as 10 and it's varied over time in that R what's an average estimate for beta one What's the range of error in beta estimates it's actually plus or minus a half so you could get an estimate here from 1% plus 1 and a half * 10 which is 16% this is 15 two 1% plus a half * 4 which is
3% how useful is an approach that ties the cost of capital down between 3 and 16% it's a waste of time what you want to do is recognize start with what they're paying on the debt which is say six that's a lower bound on what the Cost of equity is what's an upper bound on the cost of equity well the most expensive equity and it's bizarre that this is the case because it's probably not high data but data again as Tano showed you doesn't correlate with returns the highest cost Equity seems to be venture capital
and Venture capitalists will tell you what they had to earn on their last Fund in order to sell their next fund that's Presumably the expected return that inv require and that number today is about 50 so this is the realistic range that you have the risk premium has got to be at least a couple of a percent for Equity so realistically you're doing you're going for a cost of equity between 8 and 15 if it's low risk the cost of equity is 8 to n that's a very stable business with low leverage if it's intermediate
risk it's going to be 10 to 11 if it's high risk it's going to Be 12 to 15 you do better picking in those ranges and qualitatively judging things than anything you're going to do with a capital asset pricing model in fact when we used to do the examples for the capital asset pricing model calculations we pick companies where the number produced by this actually made sense and it wasn't so easy to find those companies so just make a judgment about the cost of Equity and put it into that weighted average cost Capal so you
adjust it for depreciation You' got the weighted average cost of capital you've got an earnings power you take one over the weighted average cost of capital that gives you remember we started with operating earnings after tax that gives you the value of the earnings of the operating business that is just the starting point here for the earnings power because in Addition to the operating business businesses have nonoperating assets they have cash that's in excess of what they need they often have real estate that's in excess of what they need you want to add back the
nonoperating assets and that's the total earnings power value now those nonoperating assets are automatically included in the asset value so the asset value is Actually simpler to calculate for the earnings power value it's the value of the operating earnings of the business after tax plus the value of the excess assets again that's an Enterprise Value to get the value of the equity you have to subtract the value of the debt from that the EPV of the equity is comparable to the asset value of the equity the earnings power value of the company is comparable to
the asset value of the Company when you've done all that this approach will tell a story the story is one of these three things the first case you've got huge asset Val and relatively small earnings power what's going on there if you calculated these things well you could have made a mistake it could be a dying industry and you've done a reproduction value the assets more often than not the first means that management is not making the Best of those asss they're not producing earnings commen with the value of the assets that they have if
that's the case what is going to be the critical focus of your research so when you did your projects in 6301 and you saw that this was the case what was the critical determinant to theate value of that company whether you could the manag whether there were activists who had significant shares in it was under threat whether the guy who ran it was 101 years old and his favorite daughter had breast cancer so the family was going to die out and you were going to get a decent man Professional Management in place but in that
case what's the crucial document that you have to it's the proxy state who are the management what's their power who are the big shareholders what are the what's the second story is one where the earnings power value and the asset Value are about the same where should where when and where should that be the case that should be the case when there are no barriers to if there are no barriers entry you would expect the properly calculated power value to be equal to the reproduction value of the that's what competition should do and it means
you have two separate observations on the value of that company the last case is the one where The earning it's the Coca-Cola case where the earnings power value is hugely in excess of the cost of reproduc there you're going to earning power which you're almost certainly going to have to do the crucial issue is what Tano is going to talk about next week which is are those earnings sustainable are there competitive advantages here not just growth and there too the process of valuation is very different so in this Case if you also make the supporting
judgement that are competitive advantages here you have to approach valuation from a slightly different perspective sometimes you will decide that there are no barriers to entry and the earnings power value and the asset value are not that close you have to ask yourself which are you going to trust if the earnings this is a commodity business and the earnings are Very unstable but the asset base is stable companies like natural resources or industrial Commodities like steel which is going to be the better estimate of the longterm Val it's going to be the asset so you
don't have to try and forecast what the price of oil is going to be or what the price of coer is going to be just have to Value their Reserves at the current available prices value the cost of reproducing the plant in the most effici way possible if the earnings Power value is reasonably stable in clothing tools food products things like restaurants but most of the assets are in tangible so it's hard to get your arms around then you're going to put a bigger weight on the rather than the estim but having two separate estimates
is going to to do a lot better in the valuation of these companies than one smoos together stupid estimate that you got from your Net Present Value now actually next time We're going to do the very first valuation which is Hudson General it's in the book but let me just say something about the way you want to start valuing all these companies is to break them their PE if it's a single line of business go ahead and just do the Consolidated balance sheet but if it's not want to try and get your arms around the
individual businesses and the individual assets so you're actually Doing drug companies you break it up into the existing portfolio what are the drugs they have worth and that's a liquidation value because as they go off patent they liquid it you want to Value the pipeline the expenditures plus the adjustment factor for how well they seem to have done and then they may have local economies of scale and distribution and you want to value that infrastructure we'll talk about how to do that later American Express you've got credit cards loans in a network Services business nestly
you've got a whole bunch of different product lines and then you've got lots of Securities that they own and things like that so you and value these non-franchise businesses like we're going to talk about you want to look at asset values and earnings power values and the Strategic assumption that there are no barriers to entry here and you Should do a lot better than the idiots who just do 6301 sorry I ran over we'll try and give you the time back on THS out yes yeah he's like summarizing his you serious where oh like there
was there was somebody right in front of me who was like taking Pictures that are going to be really really rough stuff that I not very familiar with other people are I go to the [Music] bathroom you want to talk to you want to talk to G how you doing what's going onday I'm uh I'm going down Australia today you were in you in Australia today No no it's Australia day today oh it's Australia day today that's so uh so what are you going to be happy yeah I'm extremely what know still yes I would
do the first a lot of Have reest that's right comp it just seems it does especially my yeah now it turns out when I mean I they want to hear how I'm think But my question was going to be how do you differentiate between grow through Acquisitions and grow through CBS that from finals yes if you often yeah more often not if you're not a your how much of the structure so Microsoft ask is It can can throw your Capal can make look AC I anything can't get rid of the dog sh yeah I all
oh yeah yeah that's hard that's harder to do Just this one this one it's probably I me 266 266 students they don't set it up for me so for for minut how's it going I'm just just about to leave um it's it's certainly I'm Certainly feeling like it is that time uh Hey listen um I'm so sorry this can can we take can I take a rate check um yeah um and did you get my email about Thursday be sorry just running little bit behind uh yeah a little stressful yeah well We I look forward
to see you THS e for for
