Might be this...
At Davis Advisors, we seek to purchase durable, well-managed businesses at value prices and hold them for the long term to allow the power of compounding to work.
The Davis Investment Discipline begins with the premise that stocks represent long-term economic interests in real businesses. With that in mind, our research process begins with two essential questions:
What kind of businesses do we want to own?
How much should we pay for them?
Identifying the Types of Businesses We Want to Own
To answer this question, we try to determine if the businesses possess characteristics that foster creation of value over long periods of time. These characteristics include:
Durable, financially strong business models.
Sustainable competitive advantages.
To learn more, see What We Look For In A Company.
Determining the Price We Should Pay
Once we have identified businesses we want to own, we wait patiently for opportunities to purchase shares at a discount to our estimate of their intrinsic worth. We believe this provides a margin of safety that can enhance our potential return while mitigating risk. Components of our proprietary valuation methodology include:
Calculate Owner Earnings rather than taking GAAP earnings at face value.
Determine a company’s true Enterprise Value.
Calculate the Owner Earnings Yield.
Compare the Owner Earnings Yield to the risk-free rate.
How Much Should We Pay?
Our goal is to purchase durable, well-managed businesses when they are trading at a discount to our estimate of intrinsic value in order to establish a margin of safety, which can enhance prospective returns while reducing investment risk.
To determine how much we should pay for a business, our investment process considers four factors: Owner Earnings, Enterprise Value, Owner Earnings Yield, and Reinvestment Rates.
Owner Earnings are the excess cash a business generates after reinvesting enough to maintain current capacity and competitive advantages but before investing for growth.
To calculate Owner Earnings, we pore over income statements and make extensive adjustments.
We pay close attention to extraordinary items, differences between maintenance capital spending and depreciation, the cost of stock options, and pension assumptions, among other items.
We also consider where a business may be over-earning or under-earning versus its potential over full market cycles and try to normalize line items where appropriate.
After determining Owner Earnings, we compare that figure to the price we would realistically have to pay to own the business, which we refer to as Enterprise Value.
Enterprise Value takes into account equity, debt and off-balance-sheet liabilities as well as certain technical balance sheet adjustments and represents the price we would have to pay to purchase the entire business and own it free and clear.
Owner Earnings Yield
By comparing Owner Earnings to enterprise value we can value a business on a multiple-of-earnings basis or, inversely, on an earnings-yield basis where we divide Owner Earnings by Enterprise Value and calculate the going-in yield – i.e., the initial return we would earn if we purchased that business in its entirety at today’s prices.
The Owner Earnings Yield is a standardized method by which we may judge the attractiveness of a business relative not only to the prevailing risk-free rate (e.g., the interest rate on short-term U.S. Treasury bills) but also relative to the earnings yield offered by other potential investments in the market.
Finally, we consider a range of growth rate assumptions that are partly based on organic growth and partly based on assumptions about future returns on capital.