The Analysis & Selection of Equity Bonds - Stocks 2011 Forum Presentation

8/3/2019 The Analysis & Selection of Equity Bonds - Stocks 2011 Forum Presentation

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The Analysis & Selection of Equity Bonds

Theodor Tonca


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Great Business: Equity Bond

Simple, predictable business

Great underlying economics

Durable competitive advantage

Stable, increasing earnings

Free cash flow


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Average Business: Common Stock

Difficult to understand business, complicated structure

Poor underlying economics

No competitive advantage

Constantly fluctuating earnings

Little or no free cash flow


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Equity Bonds V. Common Stocks

Equity Bonds

Simple, predictable business

Great underlying economics

Durable competitive advantage

Stable, increasing earnings

Free cash flow

Common Stocks

Difficult to understand business

Poor underlying economics

No competitive advantage

Constantly fluctuating earnings

Little or no free cash flow


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Example: The Simple & Predictable

Which is easier to understand and whose business is more predictable?

Sysco

Distributor and marketer of food service products. (The company gets the things you like to eat to yourfavorite restaurants and supermarkets.)

Cisco Systems

Designs and sells electronics, voice and communications systems. (Product lineup consists of Borderless

Networks, Routers & Switches and Access Points to name a few.)


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Example: Not Subject To Obsolescence

Which is more likely to become obsolete?

Wrigley

I don't think the internet or any technological development is going tochange the way people chew gum.

Yahoo

How many people today still use the web directory which Yahoo

started in 1994 as David & Jerry's Guide To The World Wide

Web?


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Example: Straightforward Capital Structure

Company A

Preferred Shares Common Shares

- Non-cumulative Series W - 1,424,922,000,000 Issued & Outstanding

- Non-cumulative Series AA Options

- Non-cumulative Series AB - 15,659,000 Issued & Outstanding

- Non-cumulative Series AC Senior Debt

- Non-cumulative Series AD - $61,224,000,000 Outstanding

- Non-cumulative Series AE (Covered Bonds, Senior Deposit Notes,

- Non-cumulative Series AF Unsecured Funding, Credit Lines

- Non-cumulative Series AG Various Receivables)

- Non-cumulative Series AH

- Non-cumulative, 5-Year Rate Reset Series AJ

- Non-cumulative, 5-Year Rate Reset Series AL

- Non-cumulative, 5-Year Rate Reset Series AN

- Non-cumulative, 5-Year Rate Reset Series AP

- Non-cumulative, 5-Year Rate Reset Series AR

- Non-cumulative, 5-Year Rate Reset Series AT

- Non-cumulative, 5-Year Rate Reset Series AV

- Non-cumulative, 5-Year Rate Reset Series AX

Company B

Common Shares

- 2,269,070 Issued & Outstanding

Options

- 163,250 Issued & Outstanding

Senior Debt

- $10,364,000 Outstanding (Three Lines of Credit)


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Example: Conservative

Un-promotional by nature

Is not dual-listed on multiple stock exchanges

Does not employ a small army of PR & IR personnel

Minimal Excess & Over Indulgence


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Case Study: Great Underlying Economics

Stable & Steady

High Operating & Gross Margins

High Return on Shareholder's Equity

Low Debt/Equity Ratio

Negative Share Growth


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Case Study: Durable Competitive Advantage

Consistency & Predictability (From a Business, Operations and Financial standpoint)

High Return on Capital (Same as High Return on Shareholder's Equity)

Goodwill & Intangibles

Management

Reasonable Price


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Case Study: Stable, Increasing Earnings

Great Business Average Business

$5,080 $5,981 $5,980 $6,824 $11,809

0

2

4

6

8

10

12

Net Income

-$18 -$71 -$123 $82 $55

-15

-10

-5

0

5

10

Net Income


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Case Study: Free Cash Flow


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Conclusion

Which would you rather own?

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The Analysis & Selection of Equity Bonds - Stocks 2011 Forum Presentation