There is a restaurant in my neighborhood that is doing very well. I also have a restaurant near my company, business is also very good, but their "good" is very different. The restaurant, which is near the company, is a centuries old restaurant in the center of the city. Although you don't need to book a week in advance, but the customer flow is very stable. And they are all regular customers, do not need any promotion. There are a lot of businessmen. Massive Dianping never send coupons, must be very profitable. But it has been a similar business area for so many years, with limited growth in customer unit price, and the estimated annual revenue growth rate is not high. The steady operation of this restaurant is also well understood, because it is difficult to increase the customer flow of the old brand, if the money earned each year for reinvestment, the earnings will decline, it is better to give shareholders dividends.
The old name of this downtown area is a typical listed company "two high and one low" value stocks - high ROE (high profitability), low growth rate, high dividends (only so that the net assets will not be too large, which will affect profitability). This type of company can be low growth rate (PEG is often greater than 1.5) to bring high valuation, because the performance growth rate is low, but the certainty is strong. For a more detailed analysis, please refer to my article "Soy Sauce and Vinegar Stocks Highly Valued Just Because Institutions Own a Group?". The company has a lot of such companies abroad. There are many such companies abroad. Coca-Cola only grows 6% per year, the stock market crash before the whole year PE is more than 30 times. Precisely because of high gross margins and high dividends, ROE has been stable between 25%-30%. Even at 35x over PE, the returns are not bad.
Look at the online celebrity restaurants in my neighborhood because it is a population introduction area, the population is growing fast and the turnover is also growing fast. With the rapid growth in traffic, every year they have to invest in expanding their business areas and opening branches, so the hotel never pays dividends and the shareholders don't need to pay dividends because they can't find any faster-growing investments. No dividends, net assets (denominator) growth rate is also fast, but because of the faster growth in profits, ROE is also higher, is still rising. This "online celebrity hotel" is a typical listed company "two high and one low" growth stocks - high ROE (profitability), high growth rate, low dividends (for the main business) (more cost-effective for the main business). Such companies can also get a higher valuation, because they can use high growth to reduce the valuation. While some high-growth companies with 30% a-share growth rate in the same three years can be given 70 times, others can only be given more than 20 times. What's the difference?
This article will discuss why some high-growth companies can get ridiculously high valuations. There is also a "Volkswagen Hotel" in my neighborhood. As the name implies, it's one of those restaurants that goes out of business and opens a new one every year. If I can't get a reservation at one of those "online celebrity stores," I go to this "Hotel Populaire" because there are always seats available. A restaurant that always has seats is definitely not doing well. It's an old restaurant, but it's been operating at such a low level for so many years. The so-called dividend is an extra sum of money, enough for the owner's wife and boss to support their precious son and daughter to go to school. In fact, this store was also a boom, the owner often recalled to me the first year of business reservation phone soft scene - no wonder after a few years of growth, those hot "online store" population introduction will slow down, the growth rate will certainly decline.
Looking back at my big a-shares, in fact 80% are such "popular restaurants", low ROE, low growth rate, low dividends, but many of these stocks are "too rich in the past", and eventually from "two highs and one low" to "two highs and one low". High and one low" into "three low". No matter how strong the business model and management capabilities, a high growth rate of 20% or more is not sustainable, otherwise all the business in the world will be yours. One day will drop to the maximum growth rate of 5%. That's when the difference between high ROE and low ROE comes out. If the growth rate slows down, you can still maintain a high ROE, and become a "century-old store" near the company, with slow growth but stable profits.
Valuation, assuming that the "century-old store" to 35 times PE, now the online celebrity store can give the company 70 times; but in most cases, the management of the management ability is not enough to support a good reputation of the old store. Instead, it has become a "three low" store, and will be 20 times later, so now the online celebrity store can only give 30 times. Many of you may be wondering how this valuation has evolved. I'll elaborate with a few examples of specific public companies.
Future Discounting Method
A few years ago, an alcoholic beverage with pre-prepared cocktails in bottles or cans was popular in a variety of social settings and dining scenes. Due to the rapid growth in demand, major wine companies entered the scene, including giant brands such as Cinco de Mayo. As a result, this pre-mixed wine quickly hit a bottleneck after a while, as the novelty of mass consumption passed, the consumer scene became saturated, and the major brands over-competed and lost money. However, when the category cooled down, it also optimized the competitive landscape. Paragon Brands pulled away from second place and started to restart high growth in 2018.
Another reason for Barilla's high growth is that it has expanded the consumption scenarios for the product - one person drinking it at home as a beverage or at the table - and is representative of the "family economy" in the consumption upgrade, as well as the rekindled pre-mixed wine category. With the change of consumption scenario, the purchase channels of premixed wine have become relatively stable supermarkets, convenience stores and shopping websites, and the target customers are single youths in first- and second-tier cities, which are not affected by the epidemic. The company that can come out of the industry's predicament on its own is still a good company, at least in terms of management. From the product card position, the future growth rate and certainty are very good, which would have been a good investment opportunity. But a closer look at the stock price will be able to suck in a breath of cold air, 45 ~ 60 times PE.
Is it because the current performance has not fully recovered, resulting in a price-earnings ratio failure? No, the company has been four consecutive quarters of high-speed growth, PE calculation performance base basically back to normal. Look at analysts' performance forecasts, the next three years will be 25-35% of the normal high-speed growth, PE does not exist in the possibility of a significant decline. According to the general valuation level, stable growth period of the leader can give 10% valuation premium, if the competition pattern is good then give 20% premium. pe should be between 33 to 40 times. Why is there nearly 45 times PE after the recent plunge, the reason is the previous logic. Bairun now belongs to the "close to home network of celebrity stores", its valuation depends on whether it will become "two high and one low centuries-old store" or "popular restaurant" three low. Some people say I can't predict the future. How can I know how a listed company will grow in a few years?
The stock price is an expectation of what is predictable in the future. The market is not predictable, the management is partly predictable, but the business model is better predictable. Wine is a better business model when it comes to restaurants. It becomes easy to get addicted and have a fixed buying habit. Once the brand is established, channels are well built, repurchase rates are high, and the certainty of future growth is very high. On the negative side, pre-mixed wine is a very small wine, and the future market space depends entirely on the company's ability to educate the market, which is uncertain. In addition, the company's current competitive landscape is good, but the barriers to the premixed wine industry are not high. Once the company popularizes the consumption habits and opens up the industry space, there will be more big companies to participate in it, and the brand of any liquor company will not be weaker than RIO.
Well, the good thing is that all these uncertainties are a few years away, and the growth of the next three years is still certain, and the most important judgement is the financial indicator of ROE.The low point of the operation in 2018 was 6.6%, and this year, the first year of the recovery of the business has reached 14%. With a growth rate of 25-35%, even with a relatively low dividend yield, the company will achieve a 20% ROE in 2021-a reasonable level of profitability for a consumer segment leader. Even if the next three years are certain, we can use a special valuation method - the discounted future method. We know that all valuation methods are based on discounted future free cash flows, but many businesses can't use them because they can't tell if they have sustainable value - most of them die, and a significant number of public companies go to zero within a decade.
There is, therefore, a flexible method, such as "future discounting". Take Paragon for example. As mentioned earlier, it is basically certain that the performance will improve to 2022 after three years. So, let's assume that if Barilla is the dominant segment in the premixed wine category in 2022, then the financial indicators are ROE 20%, and the growth rate over the past three years is 25-30%. Assuming the market risk appetite and style preference at that time is similar to now, how many times will the market give PE? Because there is no direct reference company, we can only look at some comparable companies in the same category according to business logic.
Similar competitive landscape and growth rate: mass consumer goods: so, even if cautious, I think at the assumed ROE, even if the competitive landscape changes from oligopoly to duopoly, and the growth rate declines to 10-20% from 2022, the PE can still be 40x by 2022. 40x by 2022, with 25-30% growth rate predicted by the agency, equals 2019 EPS of 83x PE (40 * 1.275). If the expected return is 20% per year, the intervention price for 2019 is 49x PE (83/1.2); for many institutional investors, if they can find a good company with stable advantages and an expected return of only 15%, the intervention price is 55x (83/1.15). Two recent lows for Paragon. Do not fall near this price. After the Chinese New Year, the stock fell to the $24 position as the market did not know the impact of the epidemic on sales. Then when the news became clear, the opportunity was never given again.
So take the restaurant industry as an example, from the valuation given by the market, investors believe that Haitian will become a "hundred years old", and most of the companies will become "popular restaurants" and eventually disappear. For Bairun such as "ten years uncertain, three years highly certain" company, the market chose to temporarily regard it as a "ten-year old store", give a reasonable valuation and wait and see. Restaurant industry, many categories of competition pattern is good, relatively high certainty, most of the high valuation is obtained through this method.
For 50 times high-growth companies, high-growth consumer stocks are safer than high-growth technology stocks. Some high-growth tech stocks are completely dependent on industry trends, some need to expand their balance sheets at the same time, some have poor competitive models, and some are changing their technology paths so quickly that they rarely see valuations three years out.
Similar to the restaurant industry, the pharmaceutical industry has some companies with consumer upgrade attributes, most typically represented by Pientzehuang, Changchun Gaoxin, and Wolvu Bio. These three companies belong to different pharmaceutical sub-industries, but all of them have some **** the same characteristics: my biologics are sublingual desensitizers, Changchun Gaoxin is children's short stature, and Pientzehuang is a liver-protecting traditional Chinese medicine. None of these diseases will not kill people, but it will reduce the quality of life of people, and the price is particularly expensive, so there is a strong attribute of consumer upgrading.
The products of all three companies need to be used for a long time, so the growth is stable. All three companies have some industry barriers. Pientzehuang is a top-secret state-level formula, while R&D-cycled Wuwu Bio and Changchun Gaoxin are years ahead of their competitors. But there is no specialized data to prove their efficacy, and the industry barriers between Wuwu Bio and Changchun Gaoxin are not absolute. So these three companies are not companies that can see sustainable business ability, but rather companies that have a high degree of certainty in three to five years and ten years. Compared with food and beverage, if the competitive landscape of consumer upgrade drugs is good (excluding Dong'ahjiao, which has a bad competitive landscape), its valuation can be reasonable in five years, that is, discounted by its performance in 2024.
Changchun Gaoxin and Pientzehuang are 40 to 60 times (these two companies have some other businesses, which lowers the overall valuation), and our company is 60 to 90 times, which is the product of this valuation method. You can do your own calculations based on performance forecasts. These three five years later comparable target company is now Yunnan Baiyao, after ten years of rapid growth, has become "two high and one low" value stocks.
The mature stock market can get the highest valuation (PEG greater than 2), which only belongs to the best companies (period stocks, junk stocks, hot money speculation is not within the scope of this article): the first company is a stable high ROE, low growth rate, high dividend yield of the stock; the second company is a growth company, ROE medium, high growth rate, low dividends, but is expected to become the first company in the future. Overvalued and overvalued are two completely different concepts. For a non-cyclical, high-growth stock with a three-year average growth rate of 30%, 30x may be overvalued and 70x may be a normal valuation. Whether to give 70 times PE or 30 times PE depends on whether the company becomes a "century-old store" or a "popular restaurant". But even for the best companies, the valuation will slowly decline. We buy high valuation companies just to determine the rate of decline in valuation will be lower than the performance growth rate, high valuation levels will inevitably decline over time. We can neither be anchored by price nor by high earnings growth, let alone high valuations. After all, high valuations are only an expedient way to buy good companies, and low valuations are the sustainable way to invest.