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Thoughts on my EPV valuation of Next Plc. NXT

Analysing companies' finances and value from their financial statements using ratios and formulae
TheMotorcycleBoy
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Thoughts on my EPV valuation of Next Plc. NXT

#178074

Postby TheMotorcycleBoy » November 4th, 2018, 3:54 pm

Now that I am a little bit more au fait with Earnings power valuation I decided to apply this technique to NXT. Firstly, I looked at some Annual reports covering 2014-2018, and tried to figure out whether they are in a phase of growth or whether or not their books are showing any one-off type discrepancies which would require consideration. Looking just sales and EBIT, and calculating operating margin:

Year	2014	2015	2016	2017	2018
Sales 3740 3999.8 4176.9 4097.3 4055.5
EBIT 722.8 812.1 867.2 827.7 759.9
Margin 0.19 0.20 0.21 0.20 0.19

From looking at the above, and doing one or two sums, I decided to assume that Next is not going through a growth phase and that sales/margins etc. look fairly steady, so much so that I decided to only look at the latest figures without determining an averaged out value of "growth capex" to add back to increase the distributable cash flow amount.


So what I did with the above, was that since EPV ignores money paid or lost due to interest payments and works by merely accessing how much money can be extracted from the business and distributed as cash at that point, I merely took the EBIT, and taxed it at Next's tax rate added back all of the A&D and subtracted all the capex, and used this figure along with the net cash/debt position to calculate distributable cash profit for Next Plc.

Note however I've, in this first instance, completely ignored the figure described as Online customer receivables, which is present in the company's balance sheet as "Customer and other receivables".

After using a discount rate of 8% and dividing the EPV by the total number of shares we arrive at a EPV per share of £42.13.

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Re: Thoughts on my EPV valuation of Next Plc. NXT

#178084

Postby TheMotorcycleBoy » November 4th, 2018, 4:45 pm

Then I decided to learn more about this comparatively large value recorded as "Receivables" in the current assets section. Indeed the value in the current assets is actually given as £1,248.2m, compared to a total of £4,055.5m of sales, i.e. just over 30% of sales.

Reading the note 11 associated with this entry, it seems that these "Receivables" have two components, firstly trade receivables (presumably items sold on credit to resellers) but most importantly online customer purchases, which I believe are online purchases made from https://www.next.co.uk/ and paid for on Next's own credit facility. Because presumably had the purchases been made on a regular credit card (e.g. VISA) then I assume Next would already have the cash - and so it would not be the "Receivables" bucket.

So I'm curious as to whether a portion of this "Receivables" figure will soon result in a boost to Next's cash position.

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Re: Thoughts on my EPV valuation of Next Plc. NXT

#178096

Postby TheMotorcycleBoy » November 4th, 2018, 5:30 pm

Ok, I had another think about this.....i.e. contributions or otherwise of Next's "Receivables" (i.e. the portion representing regular cash inflows due to online customer purchases made on NextPay), and I'm now of the view that this figure is part of the existing Revenue, and hence EBIT calculations, as published by Next themselves in their reports. From Note 1. of Next's January 2018 report:



and hence they should not be understood in the same way as a valuation of another firm, which in addition to having, for example, strong "earnings power", also has a considerable sum of ready cash in the bank.

So I'm now of the opinion that in the light of my initial simple EPV attempt, ignorant of the "quick" receivables on tap, of £42/share implies that NXT currently at £54 is somewhat overvalued......in particular by reference to only this valuation technique.

All opinions on the above, or for that matter on a NXT valuation welcome.

Matt

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Re: Thoughts on my EPV valuation of Next Plc. NXT

#181555

Postby Walrus » November 20th, 2018, 8:50 am

TheMotorcycleBoy wrote:Ok, I had another think about this.....i.e. contributions or otherwise of Next's "Receivables" (i.e. the portion representing regular cash inflows due to online customer purchases made on NextPay), and I'm now of the view that this figure is part of the existing Revenue, and hence EBIT calculations, as published by Next themselves in their reports. From Note 1. of Next's January 2018 report:



and hence they should not be understood in the same way as a valuation of another firm, which in addition to having, for example, strong "earnings power", also has a considerable sum of ready cash in the bank.

So I'm now of the opinion that in the light of my initial simple EPV attempt, ignorant of the "quick" receivables on tap, of £42/share implies that NXT currently at £54 is somewhat overvalued......in particular by reference to only this valuation technique.

All opinions on the above, or for that matter on a NXT valuation welcome.

Matt


I happened up this post by accident, but I will give you my layman view FWIW.

Is your calculation not highly sensitive to both your discount rate and your assumption of zero growth? It may be worth plotting how those variables change your valuation, and then you can assess what conviction you have on those assumptions and what your upside looks like?

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Re: Thoughts on my EPV valuation of Next Plc. NXT

#181672

Postby TheMotorcycleBoy » November 20th, 2018, 1:47 pm

Walrus wrote:
TheMotorcycleBoy wrote:Ok, I had another think about this.....i.e. contributions or otherwise of Next's "Receivables" (i.e. the portion representing regular cash inflows due to online customer purchases made on NextPay), and I'm now of the view that this figure is part of the existing Revenue, and hence EBIT calculations, as published by Next themselves in their reports. From Note 1. of Next's January 2018 report:



and hence they should not be understood in the same way as a valuation of another firm, which in addition to having, for example, strong "earnings power", also has a considerable sum of ready cash in the bank.

So I'm now of the opinion that in the light of my initial simple EPV attempt, ignorant of the "quick" receivables on tap, of £42/share implies that NXT currently at £54 is somewhat overvalued......in particular by reference to only this valuation technique.

All opinions on the above, or for that matter on a NXT valuation welcome.

Matt


I happened up this post by accident, but I will give you my layman view FWIW.

Is your calculation not highly sensitive to both your discount rate and your assumption of zero growth? It may be worth plotting how those variables change your valuation, and then you can assess what conviction you have on those assumptions and what your upside looks like?

Correct.

All of this type of thing is indeed very sensitive, in particular to the discount rate, so any such "figures" derived from mathematical models must be taken with a big pinch of salt.

However, that aside, I'm a newbie in equity buying and of the view that the some of the shares I purchased earlier on this year were perhaps bought a little too pricey. Now whilst I have heard of, and understand, "dollar cost-averaging", I would also be very interested in for my own benefit in finding any ball park pointers as to appropriate measures of value before I press the buy button.

The topic of selection of discount rate, is very interesting, and I have many times contemplated it's fundamental meaning - and indeed invited others on LF to do likewise - if they so wish. Regardless, however of it's relevance/applicability it's hard to escape the fact that it (the DR) is a key ingredient used by many well esteemed investors, the likes of Buffett and Graham, in more recently for many successful fund managers, e.g.

https://uk.reuters.com/article/us-brita ... HZ20151223

(I just plugged Kevin A-L since I recently read one of his valuation books)

Finally, zero growth. Two things: the EPV model deliberately either ignores/eliminates growth from it's model. So as I briefly exemplified in my original post I showed the sales figures for NXT over the past 5 years or so, and since looks like there's little sales growth, I deliberately did not attempt to adjust away any previous growth expenditure in the model.

By comparison, if you have the time, take a look my EPV for Marshalls Plc. So here we can and do see evidence of strong sales growth, so later on in the model, we attempt to remove it.

By the way, in case you are wondering the EPV model deliberately ignores growth, based on the view that growth forecasts being very hard/impossible to make. That's why, I, in my naive view, favour EPV based model than DCF or DDM since those latter methods expect the individual to take a pot shot at estimate future earnings/flows......where as EPV (which is fundamentally present day "distributable cash profits"), only relies on a "guess" of the discount rate... :lol:

anyway, many thanks for your interest
Matt

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Re: Thoughts on my EPV valuation of Next Plc. NXT

#181676

Postby dspp » November 20th, 2018, 2:06 pm

TheMotorcycleBoy wrote:All of this type of thing is indeed very sensitive, in particular to the discount rate, so any such "figures" derived from mathematical models must be taken with a big pinch of salt.

However, that aside, I'm a newbie in equity buying and of the view that the some of the shares I purchased earlier on this year were perhaps bought a little too pricey. Now whilst I have heard of, and understand, "dollar cost-averaging", I would also be very interested in for my own benefit in finding any ball park pointers as to appropriate measures of value before I press the buy button.


For PE, see CAPE.

For PEG, see unity.

More realistically any ball parks that have been identified, backtested, written up, used, and shown to work, - will have then been adopted in the market. Once adopted the result gets priced in, and the outcome is of course they no longer work anywhere near as well.

But what you are doing can be interesting and is relevant.

regards, dspp

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Re: Thoughts on my EPV valuation of Next Plc. NXT

#181724

Postby TheMotorcycleBoy » November 20th, 2018, 4:28 pm

dspp wrote:Once adopted the result gets priced in, and the outcome is of course they no longer work anywhere near as well.


I'm not wishing to appear rude/arrogant, but what exactly do you mean by "priced in", and why is this relevant regards somebody like that Kevin Ashworth-Lord guy or me for example, doing a valuation, and concluding;

"the estimated valuations range between 320p - 400p for this stock, and the share has lately traded between 410-460p, so I'm not currently intending to make a purchase"

Matt

(PS I'm clearly not using NXT as my example here! MSLH would be more likely...)

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Re: Thoughts on my EPV valuation of Next Plc. NXT

#181751

Postby dspp » November 20th, 2018, 5:54 pm

TheMotorcycleBoy wrote:
dspp wrote:Once adopted the result gets priced in, and the outcome is of course they no longer work anywhere near as well.


I'm not wishing to appear rude/arrogant, but what exactly do you mean by "priced in", and why is this relevant regards somebody like that Kevin Ashworth-Lord guy or me for example, doing a valuation, and concluding;

"the estimated valuations range between 320p - 400p for this stock, and the share has lately traded between 410-460p, so I'm not currently intending to make a purchase"

Matt

(PS I'm clearly not using NXT as my example here! MSLH would be more likely...)


There's nothing necessarily wrong with your example, unless something is going on that you have yet to fully appreciate but that someone else may have appreciated. So I cannot comment on your particular example.

However, normally the expression "priced-in" relates to the market price of a share reacting to the effect of a particular new piece of information. It could be a downwards move or an upwards move, but within a certain period of time the information will have been absorbed by the market, everyone will have done their sums, and a new price will have emerged as being the status quo. Classic examples are (say) an oil company making a big exploration discovery; or a major fraud in a business; or an interest rate change, etc.

But this can also happen at a higher level of abstraction, that of ways of assessing the 'correct' value of shares or of a portfolio. But if somebody invented a better way of either assessing the value of an individual share - or of a portfolio; or figured out a way of improving the value of a portfolio, then over time the market would adopt it and that would result in a new (and different) price for the affected shares. Classic examples would be the adoption of DCF models, or the adoption of options theory for optimising portfolios (which, for example, led to people hunting for asset pairs with minimal correlation).

In the case of the new news, if you happen to know that new news ahead of the market (say a tip-off from the well site, or whatever), then you can make a killing in the period before the market responds. But you can also look at this at the higher level, the search for new and better pricing theories. In fact that is the search you are on right now. There is an intermediate level, that of tools.

As an engineer I was taught to think about the product, the tools to make that product, and the theories underlying those tools. A point being made to me was that I could choose to apply my efforts at any one of those three levels. Equally this applies in investing (finance / economics), and there are people out there working at all those levels. You are competing against all of them :).

regards, dspp

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Re: Thoughts on my EPV valuation of Next Plc. NXT

#181762

Postby TheMotorcycleBoy » November 20th, 2018, 6:35 pm

dspp wrote:However, normally the expression "priced-in" relates to the market price of a share reacting to the effect of a particular new piece of information. It could be a downwards move or an upwards move, but within a certain period of time the information will have been absorbed by the market, everyone will have done their sums, and a new price will have emerged as being the status quo. Classic examples are (say) an oil company making a big exploration discovery; or a major fraud in a business; or an interest rate change, etc.

At the risk of sounding very pompous and naive all rolled into one, I did anticipate that could be your response, and I just wanted to confirm it. However, my current point of view has me more inclined to think of Benjamin Graham's "Mr. Market", i.e. the manic depressive who if you ask him will give a buy/sell price daily for any stock. What he tells that day is very dependent on his mood and may have no relationship to EMT etc. etc.

I like to liken this example, falling back on my 8 months :lol: of being a private equity investor on the MSLH (Marshalls Plc.) shares we bought. They are, in my opinion, quite successful, though not a particularly glamourous company. However they do have reasonable margins and values of ROCE. Anyway within the few months we have seen the stock price of this firm go between 380 - 502p. That's a big swing isn't it? When the underlying UK market has been somewhat boring (when that 380-502p occured the FTSE100 wafted between 7200-7800). So regards lots of firms and then viewing the movements of their prices, I struggle to see much intelligent "pricing in" happening.

dspp wrote:As an engineer I was taught to think about the product, the tools to make that product, and the theories underlying those tools. A point being made to me was that I could choose to apply my efforts at any one of those three levels. Equally this applies in investing (finance / economics), and there are people out there working at all those levels. You are competing against all of them :).

I'm trying to view it as "shopping", Dave, not competing. Hopefully in the evening, and if someone else gets the "best buy before" bargain first....then I guess I have to take on the chin!

Matt

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Re: Thoughts on my EPV valuation of Next Plc. NXT

#181768

Postby dspp » November 20th, 2018, 7:00 pm

TheMotorcycleBoy wrote:
dspp wrote:However, normally the expression "priced-in" relates to the market price of a share reacting to the effect of a particular new piece of information. It could be a downwards move or an upwards move, but within a certain period of time the information will have been absorbed by the market, everyone will have done their sums, and a new price will have emerged as being the status quo. Classic examples are (say) an oil company making a big exploration discovery; or a major fraud in a business; or an interest rate change, etc.

At the risk of sounding very pompous and naive all rolled into one, I did anticipate that could be your response, and I just wanted to confirm it. However, my current point of view has me more inclined to think of Benjamin Graham's "Mr. Market", i.e. the manic depressive who if you ask him will give a buy/sell price daily for any stock. What he tells that day is very dependent on his mood and may have no relationship to EMT etc. etc.

I like to liken this example, falling back on my 8 months :lol: of being a private equity investor on the MSLH (Marshalls Plc.) shares we bought. They are, in my opinion, quite successful, though not a particularly glamourous company. However they do have reasonable margins and values of ROCE. Anyway within the few months we have seen the stock price of this firm go between 380 - 502p. That's a big swing isn't it? When the underlying UK market has been somewhat boring (when that 380-502p occured the FTSE100 wafted between 7200-7800). So regards lots of firms and then viewing the movements of their prices, I struggle to see much intelligent "pricing in" happening.

dspp wrote:As an engineer I was taught to think about the product, the tools to make that product, and the theories underlying those tools. A point being made to me was that I could choose to apply my efforts at any one of those three levels. Equally this applies in investing (finance / economics), and there are people out there working at all those levels. You are competing against all of them :).

I'm trying to view it as "shopping", Dave, not competing. Hopefully in the evening, and if someone else gets the "best buy before" bargain first....then I guess I have to take on the chin!

Matt


I culled a longer post/response to give you the short form one you are commenting on. The long form one took the time to explain that current pricing tools/theories include quite a lot of Human Mod #1, and that results in a heck of a lot of noise in the signal. Add in that pricing horizons will vary hugely and you get another lot of noise. Add in that trading/investment strategies of others may be entirely unrelated to yours and bingo, you have the perfect utterly noisy market.

So, do you feel lucky in applying your system du jour to the noisy signal ?

And, if someone else is doing it, and you aren't, who is likely to be in the inferior position ? Could you even detect this ?

At some level this IS a zero-sum competition. It is not 'just' shopping.

Its tricky isn't it.

regards, dspp

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Re: Thoughts on my EPV valuation of Next Plc. NXT

#181889

Postby TheMotorcycleBoy » November 21st, 2018, 11:30 am

dspp wrote:It is not 'just' shopping.

Once upon a time I used to do most of my food shopping at the market.

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Re: Thoughts on my EPV valuation of Next Plc. NXT

#188978

Postby TheMotorcycleBoy » December 23rd, 2018, 4:53 pm

dspp wrote:For PEG, see unity.

Hi Dave,

Was messing about with some numbers for high growth AIM company (Bioventix BVXP) and was *almost* surprised to find their PEG was close to unity:



However, I believe this is non-representative for companies in general. I'm sure you've known this for a while..... :lol: ......but surely it (PEG) fails completely to assist in the pricing of the companies out of their growth phase - but still, let's say, due to good cash flows and dividend payouts, making good investments. Clearly in such instances, P/E would need to tend toward 0, for PEG to give the thumbs up to such instances?

In additionally, in the EPS part of the formula would appear to ignore the background effect of prevailing inflation. Possibly inconsequential for some regions, but not so in an emerging market place?

Such ponderings of mine, make me curious as to whether incorporation of both of these factors was what the Benjamin Graham Formula was driving at, back in the day?

Matt

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Re: Thoughts on my EPV valuation of Next Plc. NXT

#189070

Postby dspp » December 24th, 2018, 11:14 am

Sales growth and EBITDA growth are both decelerating for BVXP.

27% > 10% and 35% > 20%.

Growth rates of 10% are territory of normal shares, not growth stocks. So seeing near unity for PEG is not unsurprising. Lower ratios are better, higher than unity is bad. So a ratio that moves from 0.6 to 1 indicates that this is no longer a high growth company, and that the window of buying opportunity for it as a high growth company is now believed to have closed, at least according to Mr Market.

Whether that is true or not, in the case of BVXP, is unkown to me as I do not know what is in their pipeline. But that is what Mr Market thinks.

regards, dspp

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Re: Thoughts on my EPV valuation of Next Plc. NXT

#189080

Postby TheMotorcycleBoy » December 24th, 2018, 11:46 am

dspp wrote:Sales growth and EBITDA growth are both decelerating for BVXP.

27% > 10% and 35% > 20%.

Growth rates of 10% are territory of normal shares, not growth stocks. So seeing near unity for PEG is not unsurprising. Lower ratios are better, higher than unity is bad. So a ratio that moves from 0.6 to 1 indicates that this is no longer a high growth company, and that the window of buying opportunity for it as a high growth company is now believed to have closed, at least according to Mr Market.

Whether that is true or not, in the case of BVXP, is unkown to me as I do not know what is in their pipeline. But that is what Mr Market thinks.

regards, dspp

Yeah, fair enough.

But would you agree that as a pricing tool PEG is useless for a mature company? That is one whose earnings are unlikely to growth much in excess of prevailing inflation.

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Re: Thoughts on my EPV valuation of Next Plc. NXT

#189095

Postby dspp » December 24th, 2018, 12:49 pm

TheMotorcycleBoy wrote:
dspp wrote:Sales growth and EBITDA growth are both decelerating for BVXP.

27% > 10% and 35% > 20%.

Growth rates of 10% are territory of normal shares, not growth stocks. So seeing near unity for PEG is not unsurprising. Lower ratios are better, higher than unity is bad. So a ratio that moves from 0.6 to 1 indicates that this is no longer a high growth company, and that the window of buying opportunity for it as a high growth company is now believed to have closed, at least according to Mr Market.

Whether that is true or not, in the case of BVXP, is unkown to me as I do not know what is in their pipeline. But that is what Mr Market thinks.

regards, dspp

Yeah, fair enough.

But would you agree that as a pricing tool PEG is useless for a mature company? That is one whose earnings are unlikely to growth much in excess of prevailing inflation.


Yes. PEG is only meant for assessing high-growth situations.

regards, dspp


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