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QuestionsCategory: Valuation QuadrantView and Analysis on LUX
Chui Ong asked 6 years ago

I found out about LUX from the webinars. Never heard of them before but seems like they have quite a monopoly in the eyewear industry. 
So here’s my attempt to use the investment quadrant to analyze it and I have some questions that I hope to get some help on. 
First I calculated the CAGR
Revenue 9.17%
EPS (diluted) 14.84%
Operating Cash Flow 9.88%
Free Cash Flow 10.88%
 Free Cash Flow Per share 3.95%
Question1: Why does FCF and FCF/share vary so much? I thought FCF/per = FCF/total no of shares. The number of shares was varied between 460M and 480M, not sufficient to cause such a big difference in the percentage. 
I thought of using DCF (thinking it’s a company with predictable cash flow) using 5%.. I got intrinsic value of $16.
Question 2: Doesn’t seem right so appreciate any sharing on why DCF won’t work for LUX?
Finally I went back to look at LUX’s historical PE. It ranged from 14 (in 2009) to a peak of 55 (when price peaked at $74 in 2015). Right now the price is about $47 with EPS (2015) at $1.67. So the current PE is about 28. 
Question 3: To me, it is a bit more expensive and I would prefer to wait till PE is about 20. But is PE of 20 still considered expensive? How can I find who are its competitors?
Incidentally, I realize the EPS and PE were quite similar to KO that I analyzed earlier. In fact KO is actually slightly cheaper at 42/1.67 = 25 (PE). 
Question 4: There is probably no right answer, but if you were to choose within these 2 stocks, which one will you choose? 
For me, if a crisis hit and both KO and LUX falls to PE of about 17, I am thinking I will go for KO over LUX. This is because KO is much much bigger than LUX and in time of crisis, I don’t think people will stop drinking coke (it’s not that much expensive). But in time of crisis, less people can afford to buy branded eyewear (I came to the conclusion that LUX holds 85% of the luxury eyewear market and not the overall eyewear market, please correct me if I am wrong).
And also LUX seems to have management issue at hand. The key management is the founder who is now chairman and ceo. But he is already 85 years old and they recently have one of their CEO resign (they are trying to create this weird co-ceo structure). 
I hope to hear your views, maybe I have overlooked certain considerations and would love to learn from all of you. 

1 Answers
Victor Chng answered 6 years ago

Hi Chui Ong,
Q1: The FCF/Share varies is not due to the number of shares but rather the FCF have increase. Based on the information in morningstar the FCF in 2011 is 485m and the FCF in 2015 is 733m
Q2: LUX is a well known stocks and every investor know about it. The DCF we have taught in the investment quadrant is based on a 10 years projection. For such stocks that are stable and have competitive advantage will tend to last longer which means you can either increase the projection years to 20 years or find the average PE trading range of the company.
Q3: I usually don;t tag a range that PE 20 is expensive. I think it is rather relative. If the company is growing at 40% than PE 20 is view as cheap. I usually try looking for competitor buy googling or looking at analyst report on who they compare the company with.
Q4: If both are equally good in their business and showing good growth. Choose the one that is more undervalued. If both are not undervalued, I will avoid it. Remember investing required discipline and patience to wait for the right price. What I learn about investing is that most of the time people tend to rush into investing in something which later cause them to lose money. Patience and discipline is the key to successful investing. Based on what you have mentioned, I think is valid as that KO is the better company. It is a good analysis and observation. keep it up. Remember if you are uncomfortable with management, then never put your money there 

Chui Ong replied 6 years ago

Victor, thank you for your replies and encouragement!

On average, how many companies do you have to analyze before you find one that you truly believe in?

Having looked at 4-5 companies so far, I am getting a bit discouraged that I have not found any that’s undervalued enough.

Victor Chng replied 6 years ago

Hi Chui Ong,

You are definitely on the right track so keep moving forward. Value Investing is a game of patience, most of the time you will be looking for good companies and once in a while those go companies will drop in share price to give you an opportunity to invest. Hence, you have to be patience. Moreover, the current market condition are harder to find value stocks because most market value are either fair or over. The important thing is to build your watch list of companies. So when market crisis happen, you will be deploying your cash because you have done your homework instead of doing homework when the market crisis which let you miss an opportunity.