1 year ago

The “Masters of the Universe” Portfolio


Example: Running

Example: Running International Business Machines (IBM) through the Checklist I used 2015 financial data from Google Finance. Item 1: Gross Profit Margin. IBM had Revenues of $81.7b and a gross profit of 40.6b. $40.6b / $81.7b = Gross Profit Margin of 49.6% I’m looking for Gross Profit Margins over 40%. = Pass Item 2: Net Profit Margin. IBM had Revenues of $81.7b and a net profit of $13.1b. $13.1b / 81.7b = Net Profit Margin of 16% I’m looking for Net Profit Margins over 10% = Pass Item 3: SG&A. IBM had a gross profit of $40.6b and SG&A of $19.5b. $19.5 / $40.6 = SG&A of 48% I’m looking for SG&A of less than 50% of gross profit. = Pass Item 4: Intangible Assets. From 1993-2012 IBM reports their inventors received over 67,000 US patents. Interbrand places the 2015 “brand value” of IBM at $65b. IBM keeps a running list of Trademarks on their website: Item 5: Long Term Debt. IBM has long term debt of $33.4b and Equity of $14.2b. That’s a debt to equity ratio of 2.35 to 1. I usually look for companies with long term debt to equity ratio under 1 to 1. The less debt the better. On the plus side, with Net Income of $13.1b it’ll only take 2.5 years to pay it off. As I mentioned earlier, it’s nearly impossible for a company to pass every item on the checklist. Item 6: Retained Earnings. Retained earnings grew from $117b in 2012 to $146b in 2015. An annual growth rate of 5.69% Item 7: CAPEX. The last four years of net earnings for IBM total $58.3b. The last four years of CAPEX total approximately $17.2b. I’m looking for CAPEX less than 50% of net earnings. $17.2 / 58.3 = 29% = Pass

Item 8: ROIC. (Net Income – Dividends) / (Long Term Debt + Equity). I’m looking for a ROIC greater than 15%. IBM had $13.1b in net income and paid out $4.8b in dividends. I calculated long term debt at $33.4b and equity at $14.2b. ($13.1 - $4.8 = $8.3) / ($33.4 + 14.2 = $47.6) $8.3 / $47.6 = ROIC 17.4% = Pass

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