TRUE high leverage, intelligent speculation at 3
โพสต์แล้ว: พฤหัสฯ. ส.ค. 26, 2010 2:40 pm
Intelligent Speculation in TRUE Corporation
High leverage in a companys capital structure have long been known to introduce a highly speculative component into a companys common stock, the more so if the common stock represents only a sliver of value compared to the funded debt. In the case of highly stable business such as a utility, this speculative component can be positive. The first well known example is the American Water Works company almost a century ago, whose price raised many folded over a moderate increase in operation.
True Corporation represents an intelligent speculation along the same line of reasoning. With 120 m in assets, 100 m in debt, minor increase in earning power will generate a disproportionate increase in common stock value. True online represents 35% of sales, True Vision, the highly dominant cable operator, represents 15%, and True Move, the subsidiary that have generate so much of the speculative increase, represents 50%. All three operations can be said to have intrinsic stability, as evident in the revenue figures, which have moderately increase from 54 billion to 62 billion, with very small variation. In the year 2008 or 2009, the common stock value gyrate in a typical speculative manner, with valuation not exceeding 21 billion. Thus, here we have all the components of an intelligent speculation, at a reasonably low price of around 1.79-3, market cap of 7 billion to 20 billion. First, we have a highly speculative capitalization that greatly magnify small increase and decrease in business value. Second, we have a highly stable business with interesting growth possibilities that insure the speculator against total capital loss. The only reason this commitment at these prevailing levels was not an investment was that all three business required huge capital investment, and there was a real and large risk that True Corp might experience difficulties in funding it investment and rolling over its debt. The worst case might severely dilute current shareholders equity. Since safety of principal cannot be assured, we must term a commitment in True intelligent speculation instead of an investment.
At current speculative price level of more than 7, the market capitalizes the common stock at 50% of the liability, a figure unjustified by the high financial risk still existing. In addition, the multiplication factornamely the ratio of percentage rise in common stock for a percentage rise in business valueis now drastically reduced compared to the price at 3. At 3, a 25% rise in business value will triple the common stock, whereas at 7, the common stock will only double.
High leverage in a companys capital structure have long been known to introduce a highly speculative component into a companys common stock, the more so if the common stock represents only a sliver of value compared to the funded debt. In the case of highly stable business such as a utility, this speculative component can be positive. The first well known example is the American Water Works company almost a century ago, whose price raised many folded over a moderate increase in operation.
True Corporation represents an intelligent speculation along the same line of reasoning. With 120 m in assets, 100 m in debt, minor increase in earning power will generate a disproportionate increase in common stock value. True online represents 35% of sales, True Vision, the highly dominant cable operator, represents 15%, and True Move, the subsidiary that have generate so much of the speculative increase, represents 50%. All three operations can be said to have intrinsic stability, as evident in the revenue figures, which have moderately increase from 54 billion to 62 billion, with very small variation. In the year 2008 or 2009, the common stock value gyrate in a typical speculative manner, with valuation not exceeding 21 billion. Thus, here we have all the components of an intelligent speculation, at a reasonably low price of around 1.79-3, market cap of 7 billion to 20 billion. First, we have a highly speculative capitalization that greatly magnify small increase and decrease in business value. Second, we have a highly stable business with interesting growth possibilities that insure the speculator against total capital loss. The only reason this commitment at these prevailing levels was not an investment was that all three business required huge capital investment, and there was a real and large risk that True Corp might experience difficulties in funding it investment and rolling over its debt. The worst case might severely dilute current shareholders equity. Since safety of principal cannot be assured, we must term a commitment in True intelligent speculation instead of an investment.
At current speculative price level of more than 7, the market capitalizes the common stock at 50% of the liability, a figure unjustified by the high financial risk still existing. In addition, the multiplication factornamely the ratio of percentage rise in common stock for a percentage rise in business valueis now drastically reduced compared to the price at 3. At 3, a 25% rise in business value will triple the common stock, whereas at 7, the common stock will only double.