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Continued from here. A week ago, I set readers a mystery/blind stock challenge – to estimate an intrinsic/fair value for four mystery companies: Conquest, War, Famine & Death. Here’s the data table I provided:

Four Mystery Horsemen

First, let me thank all the readers who participated (by blog comment & email): Congrats, you took the time to stick your neck out & provided me with what I consider a meaningful set of fair value estimates. Second, without further ado, here’s a table of the 4 companies & their actual underlying data:

Four Mystery Horsemen Revealed

[NB: For the challenge, remember I normalised to 1 billion of revenue – i.e. applied factors of 20.8%, 39.4%, 78.5% & 17.4%, respectively, to each company’s revenue & additional data points (except CAGRs).]

Yes, the mystery companies are the original Four Horsemen of the Irish food industry (though each has focused more & more on its ex-Ireland business):

Aryzta  (YZA:ID, ARYN:VX)     Mkt Cap:  EUR 6.5 Billion


Glanbia  (GLB:ID, GLB:LN)     Mkt Cap:  EUR 4.9 Billion


Greencore Group  (GNC:LN)     Mkt Cap:  GBP 1.4 Billion


Kerry Group  (KYG:ID, KYGA:LN)     Mkt Cap:  EUR 11.1 Billion


Wow, these charts show quite an astonishing sector rally:

Aryzta & Kerry have basically tripled in just under 5 years, while Glanbia blows ’em away with a share price that’s multiplied almost seven times over. And even that pales in comparison with Greencore…which managed the same feat in just 3.5 years!

Now here’s my readers’ Fair Value Estimates & Long/Short Picks:

4 Horsemen Valuation Table

[Modified Mean: Mean of readers’ FV estimates, excluding highest & lowest outliers. Long/Short: Readers’ Long/Short picks are aggregated to arrive at a net Long/Short for each company – most popular Long & Short are bolded.]

[Note: Readers’ responses were based on my normalised data, so I’ve grossed up their FV estimates accordingly here. For example, submitted mean was 917 million for Aryzta – applying the same 20.8% factor, that’s equiv. to an actual mean FV estimate of 4,411 million.]

Which is also astonishing…

Right across the board, readers’ FV estimates are consistently & substantially lower than current market caps. To put it another way, what I consider a representative sample of pretty well-informed investors tags these companies as over-valued by a significant 47-63% (Aryzta & Kerry) to a colossal 112-136% (Glanbia & Greencore). But they’re invariably touted as reliable/defensive/steady growth food stocks – how hard can it be for investors in the market to broadly agree on fair value here?! We’re not exactly talking about buggy-whip companies heading over a cliff, or new-tech/media enterprises accelerating into the stratosphere…

Somewhere, a devoted company shareholder is choking on his protein drink right now…I mean, this was only a mystery stock challenge, aren’t huge valuation discrepancies the intended result?! And I suppose I’m the evil puppet-master controlling the entire exercise? Yeah sorry, I’m just not buying it… I didn’t cherry-pick the data I provided, and I fail to understand what missing data here would have somehow magically doubled readers’ FV estimates. And lest anyone think this is some value investing conspiracy, I’ll repeat a version of my last table, now with current market multiples:

4 Horsemen Valuation Table II

Ouch, those multiples are really extraordinary..!?

On average, does the sector really deserve a 22.2 P/E now, considering its long-term growth history? The numbers don’t lie… And that P/E’s based on gussied-up earnings from management – which often bear little resemblance to the net earnings figure you’ll actually find at the bottom of the P&L Statement. Or the free cash flow figure found in the Cash Flow Statement…on average, the sector’s now trading on a dizzying 52.1 P/FCF multiple!

And why bother highlighting potentially stretched balance sheets, in terms of debt & pension liabilities? [I mean, how many investors in the market really care about debt (or cash flow)?] Yes, food companies can arguably support higher levels of debt, but current debt/interest expense vs. cash flow multiples could potentially cause difficulties, given unforeseen developments. [Shareholders might argue the current capex binge could always be drastically reduced. Um, sure, but wouldn’t that undermine the (investment &) growth story?!]

Now, I wasn’t actually planning to pick apart each company individually – in fact, I tagged all of them as over-valued last year in The Great Irish Share Valuation Project. But I can’t resist picking on Greencore for a sec…after all, despite having no market caps to reference, readers overwhelmingly (& quite rightly!) designated it as their favourite Short candidate. Who in their right mind* would seriously justify Greencore’s 21.6 P/E & a 40.8 P/FCF multiples, when its adj diluted EPS growth was actually zero & negative (respectively) for the past 5 & 10 years?!

[*Er, maybe Patrick Coveney? He’s been at the helm of Greencore for almost 10 years now – first as CFO in 2005, and then as CEO since early-2008. [Bizarrely, he’s also a director of Glanbia!?] Despite the company’s abysmal medium/long-term financial performance & over-stretched balance sheet, Coveney’s annual compensation has quintupled since he arrived – I calculate he’s collected over GBP 10 million in total comp. as CEO! The board should be ashamed of themselves… What really takes the biscuit cake sandwich here though, is that shareholders have lavished even greater undeserved riches on Coveney, via Greencore’s perplexing share price rally: His vested/unvested shares are now worth over GBP 15 million, while his options are worth another million!]

Personally, I find cash flow shortfalls in well-established companies particularly troubling. Are the growth opportunities really so attractive & compelling that actual capex (& intangibles) spend continues to far outpace depreciation & amortisation? Well, that’s what management will invariably claim…but if that’s true, shouldn’t this compelling growth already be blindingly obvious from a company’s last 5 & 10 years of financials? In reality, as I noted in my last post, a company’s future reflects its past more often than not, and companies ‘generally don’t experience hockey stick growth out of the blue (nor do they suddenly fall off a cliff…)’

But go ask their shareholders, that’s exactly their argument! I can now repeat it in my sleep: Each of these companies has been continually restructuring and/or shedding non-core/low-growth businesses, and is now spending hand over fist to capture & exploit the multitude of high growth opportunities just ahead of them. Fair enough, who am I to doubt this wonderful future…except that’s the very same investment thesis management & shareholders were pitching 5 & even 10 years ago! [And management, in most instances, has changed very little]. Don’t believe me – just go back & read the annual reports, go back & read the bulletin boards. So…shouldn’t this wonderful future be here by now?!

But look, crazy investors & share prices are no real surprise to any of us. And despite the share price rallies these companies have enjoyed to date, a further ‘cross the board rally wouldn’t necessarily come as a huge surprise either. [In fact, since October, all four shares have actually taken off afresh]. Of course, this is a classic example of reflexivity at work:

Initially, management’s cautious in its strategy & investors buy mostly for the defensive qualities & dividends that food stocks usually offer. As share prices rise, management grows more confident & investors grow more wedded to their stock(s). Eventually, as share prices surpass what might reasonably be considered fair value, the story really starts to evolve… Management pitches an ever more ambitious acquisition & investment strategy (debt & pension liabilities are no longer perceived to be a potential risk), and most shareholders are inevitably forced to buy into it…simply to justify the fact they continue holding their shares, despite the escalation in valuations. Which is how they end up arguing food companies are, quite obviously, both safe/defensive & high-growth/high-multiple stocks! And every fresh share price rally is therefore hailed as divine proof of this new paradigm & their own investment genius, rather than a welcome & obvious chance to sell…

Unfortunately, when you hear investors talking out of both sides of their mouth like this, you know you’re getting into bubble stock territory – not the easiest thing to bet against though…

I think the real lesson of this challenge/post is to realise how many investors in the market pretty much ignore the reality of the numbers…they prefer to simply buy the story instead, at any price. More insidiously (and this happens to all of us), investors regularly confuse & conflate stock selection (story) with stock valuation (price), when picking stocks. Consciously or unconsciously, we seem to inevitably massage & cherry-pick the good data & trends, to arrive at a substantially higher intrinsic/fair value that correlates more closely to the story of the company/stock, as we perceive it…and yes, first impressions really do count! [The inverse is true too – we don’t like a story, we mark down the stock accordingly. And as Buffett reminds us, our errors of omission are often just as painful & expensive as our sins of commission].

No matter how experienced an investor you are, a blind/mystery stock challenge is a useful demonstration that a simple unbiased analysis of the numbers can present a very different story (vs. the one you hear presented by management & shareholders). It’s also a great warning of how easily management, the market, the media, message boarders and/or shareholders can seduce you into believing a higher (or lower) valuation is warranted & justified for a stock, regardless of the numbers & despite the current market valuation. And for some, maybe it reminds you that your valuation process might actually be more conservative the less you know about a company…if so, is that such a bad thing?!

I’ve written about this before (see Cheap & Interesting!) – I think there’s huge value & advantage in treating every stock you encounter, first & foremost, as a mystery stock challenge. Before you even consider thinking about reading/learning about a company, before you read any of the message boards, before you absorb management’s investor pitch, before you react to some talking head’s sound-bite or some hack’s regurgitation, why not dive immediately into the historic financials & take a first crack at a valuation? I think you’ll find it can be a far more honest & revealing way to start what might ultimately prove a long & valuable relationship with a company/stock.

Like I said, the numbers don’t lie…