AMC is trading at a 25% discount to its historical valuation
Monthly Archives: February 2016
Enter Watchlist: United Therapeutics Corporation
Valuation
UTHR is currently trading at a significant discount to its historical 15.3x forward P/E.
Outlook
Margin expansion is meaningful despite EPS decline in 2016.
The Evolution of Power
Forms of power have evolved in correlation with technological advancement. The means by which “authorities” establish legitimacy have democratized the means by which tastes / trends / ideas evolve. The present age rewards net production, rather than net consumption, in the conquest of societal mind share.
Profit Margins of the Future
Profit margin have expanded, thanks to four key trends:
- Strong commodities prices
- Emerging market cost arbitrage (companies making things more cheaply in emerging markets)
- Demand growth from emerging markets
- Improved corporate efficiency driven by the use of new technology
- (+) the market has rewarded companies that have undertaken mergers and share buybacks, as opposed to companies that have invested internally, further bolstering margins
In other words, profit margins should naturally mean-revert and oscillate. The existence of fat margins should encourage new competitors and pricing cycles that cause those margins to erode; conversely, at the bottom of the cycle, low margins should lead to weaker players exiting the business and giving stronger companies more breathing space. If that cycle doesn’t continue, something strange is taking place.
Noise and Signal (Nassim Taleb)
Taleb argues that as you consume more data, and the ratio of noise to signal increases, the less you know about what’s going on and the more inadvertent trouble you are likely to cause.
One can see from the tonsillectomy story that access to data increases intervention —as with neuroticism. Rory Sutherland signaled to me that those with a personal doctor on staff should be particularly vulnerable to naive interventionism, hence iatrogenics; doctors need to justify their salaries and prove to themselves that they have some work ethics, something “doing nothing” doesn’t satisfy (Editor’s note: the same forces apply to leaders, managers, etc.).
Consider that every day, 6,200 persons die in the United States, many of preventable causes. But the media only reports the most anecdotal and sensational cases (hurricanes, freak incidents, small plane crashes) giving us a more and more distorted map of real risks. In an ancestral environment, the anecdote, the “interesting” is information; no longer today. Likewise, by presenting us with explanations and theories the media induces an illusion of understanding the world.
Occam’s Razor and Communication Theory
Occam’s Razor: Among competing hypotheses, the one with the fewest assumptions should be selected
Communication: The fundamental problem of communication is that of reproducing at one point, either exactly or approximately, a message selected at another point
– Claud Shannon “A Theory of Communication,” 1948
Online Sales as a % of Total Revenue for GPS
From FQ4 2012 to FQ4 2014, online as a % of net revenue has grown at a 3.5% CAGR.
Gap Stores Model Buildup
Model Components
- Diluted Earnings per Share
- Comparable Sales
- Net Sales (segment, geography + online)
- Guidance (full year EPS, operating margin)
Operating Components
- Marketing expense
- Inventory dollars per store
- Cash inflow
- Cash distribution (buyback, dividend)
- CapEx
GPS Model Drivers
General notes:
- Comparable store sales tied primarily to valuation
- Net sales indicative of brand / geographic strength, watch online