In their latest conversation at the 2021 Virtual Value Investing Conference, the team at Tweedy Browne discussed a number of topics including how they calculate the intrinsic value for businesses, and which metrics they apply. Here’s an excerpt from the conversation:
I would say is that the vast majority of the investments that we make today are attempting to buy businesses at 70% or less of a conservative estimate of intrinsic value. With intrinsic value being defined as private market value i.e. what would accrue to the shareholders if a hundred percent of the company were put up for sale tomorrow to a knowledgeable third party.
We make these private market value appraisals, as Bob mentioned in his speech, by observing M&A multiples, real world M&A transactions, and trying to find companies that trade at big discounts to those multiples.
We’re looking at Enterprise Value to EBITA or EBIT plus merger amortization, or Enterprise Value to EBITDA, P/E, and in some cases maybe even an Enterprise Value to Sales.
My guess today, if you look at our portfolio, something like 80% of the stocks that we own today, the appraisal… our assessment of valuation was really an earnings-based derived valuation.
But I would also say that probably the remaining 20% of the stocks that we own are valued looking at asset value, right. What I would call balance sheet derived valuations where we’re looking at buying companies that trade at either low price to book value or as john mentioned, below in some cases even net current asset value.
Now in terms of price to book I think we tend to use these more with financials like banks or insurance companies or in certain cases deeply cyclical businesses that have very volatile earnings records.
But we ultimately think they’re pretty good businesses and they’re trading at large discounts to let’s say tangible book value, as long as they have strong balance sheets, and in our belief they have staying power, we’re willing to invest in those statistical based more Ben Graham style value investing as well.
You can watch the entire discussion here:
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