Hey there. Unfortunately my analysis already assumes you're familiar with looking at banks and how they generate income so I skipped out certain sections.
But to answer your questions, HLF is very traditional in terms of how it generates revenue i.e. through traditional services such as servicing loans to SMEs, car loans etc. This makes up the bulk of their services. If you look at it over the years, the type of loans that they service have not changed much and they have not deviated from their core competency.
To generalize it simply, there is an old saying regarding banks involving the 3 - 6 - 3 rule. Take money at 3%, lend it out at 6%, and be at the golf course at 3pm. Obviously this has changed in the recent years but the core idea is the same. Banks traditionally take money from you at low interest rates (just look at how much you get per FD) and loan it out at much higher interest rates. So that gives you an idea of how a bank generates its income.
Bear in mind this is simplification of the process and you should read up further if you find it interesting.
I like the traditional banking business simply because its so resilient and profitable. Banking is going to be around in the next 1, 3, 5 years as its a necessary service that people need to tap into. We look into values like growth in deposits and the growth in the loan book to see whether the banks are able to sustain this growth.
While book value does not necessarily equate to intrinsic value, in this case we use it as a rough approximation to see how a financial institution has performed over time. Of course it goes without saying that looking at book value alone is a sure way to disaster.
With regards to banks, earnings have been roughly stable in light of the past 5 years. Banks have a slightly cyclical nature to them, and they don't function like normal companies. You will see banks taking on loans of lesser quality (2006 - 2007) during boom times and than writing off these non-performing loans (2008 - 2010) when things turn sour. So in that sense, investing in a bank requires an understanding of how they work.
With regards to the dividend yield, I covered in it one of my slides. The gist is that HLF earns far more than it pays out in dividends giving it a good buffer region. I also look at its financial performance over 2008 - 2009 to give me a good gauge.
Finally, while I use book value as an approximation for the benefits of illustration, the ability of the bank to generate cash is the most important aspect. In that sense, the ability of a bank to generate cash is tied closely to its assets.
Historically, banks shouldn't have a problem at least generating a 1% Return on Assets so that gives you a rough idea of the earnings power.
I guess what I like about HLF most is that its very conservatively financed. Looking at their history, they have't deviated much from their core competency in terms of loans. They took the write-downs to their bad loans in 2008 - 2010 and you can see charge offs for bad loans decreasing quarter by quarter. So in my view, there's no rationale reason for HLF to be trading at least liquidation value i.e. book value.
(20-12-2011, 07:30 AM)Musicwhiz Wrote: (20-12-2011, 12:36 AM)juno.tay Wrote: I go into greater detail in my post. Do let me know what you think.
What is the Company's main business? How does it derive its revenue, and what constitutes the largest portion of it? You did not mention this in your analysis. In the event of a downturn, what is the likelihood of maintaining its revenue/profit since it is in the lending business?
Earnings do not seem very stable from the 5-year history, with fluctuations during 2008. Though dividend has been rising, you did not provide cash flow analysis numbers to support the conclusion of a "hefty" 5% dividend. Can this be maintained and where is the cash coming from?
Book value can be very deceptive and should not be taken as "intrinsic value". I note that these two terms are used somewhat interchangeably in the analysis. Discount to book may not necessarily indicate a bargain, and market price may or may not rise to bridge the "gap". It would depend on how assets are valued on the Balance Sheet in the first place, and one should also check for potential impairments to asset values which may have been recorded on a historical cost basis.
I also think P/B ratio can be misleading, since book value itself is not an accurate measure. For myself, I prefer the use of either PER (for companies with more stable/predictable earnings) or dividend yield (if cash flows are stable and consistent).
Just my 2-cents.
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