GARRETT POSTS ON CLF Z VALUE

Rulers, All of us on Phil’s blog have the common goal of financial security long after our ability to work for “the man.” Therefore, it’s extremely important as Rule #1 Investors that we have a basic understanding of our “Big 5” Growth Rate numbers. When Phil gets in your face with his Green Beret and says, “Ruler, give me The Big 5!” You should be able to snap to attention and yell out, “Sir, Yes Sir. The Big 5 Growth Rate Numbers are ROIC, EPS, Sales, Cash Flow and Book Value, Sir!” Either that or suffer the loss of thousands of dollars. Your choice! Since CLF is getting hammered Mr. Market is giving us a real-time educational opportunity to discuss Book Value Per Share and our coined term “Rule #1 Zombie Value!” Today Book Value is playing an important role in helping me determine CLF’s Value. Why? Simply because it’s harder to get an accurate value for CLF’s with such declining Big 5 numbers. The expression we like to use is “Don’t try to catch a falling knife.” If you haven’t noticed yet, CLF is a falling knife! When you see the “falling knife” scenario happen, it means we need to wait for a solid floor and a reversal in the trend. Trying to “guess” where or when the bottom might occur is not managing our risk. We need to use what I call the three “F’s” - Fibs, Floors and plain ol’ Facts to help us determine the floor. Because we manage our own portfolio like a professional hedge fund manager, we can utilize Rule #1 Option Stockpiling strategies to lower our basis well below the lowest point when the trend finally does reverse. Cool, huh? You’ll learn how to do that in Atlanta in April. So in this “falling knife” scenario, looking at BVPS and calculating our Zombie Book Value (ZBV) is a good means to determine CLF’s value. Think of an ugly, vacant house in your town. It probably isn’t worth the lumber that’s holding it up. But darn…that ugly house starts to look pretty sexy if you could buy it for 50% less than what the land is worth that it’s barely standing upon - just tear it down, and start over. Everything has a price. Even CLF. At some price, it’s going to be worth something to somebody as long as it has some assets it could sell. And by looking at CLF’s financial statements I can see what value those assets are. Let’s look at Book Value which is sometimes called “Equity Value.” It’s expressed as a dollar amount. We like to see that number in a “per share” price so we can look at an apples to apples comparison to our share price today. When we do that, we now call it Book Value “Per Share.” Quoting our investing bible, Payback Time, Phil writes that “Book Value grows from earnings that don’t have to be spent to maintain the business. Its rate of growth is ultimately reflected in the rate of growth of the stock price, since the stock price will increase with the growth of the real owner value.” That’s one reason why I like to lean towards BVPS Growth Rates when estimating future GR’s for our sticker price. It’s harder for those financial gurus to cheat on the number. However, today I’m more interested in what CLF’s value would be if “for some strange reason, it suddenly stopped doing business, collected all the money the business was owed, sold off everything it owned, and then paid off all its debts, the amount of money you’d have left would be its Equity.” And CLF gave us a snapshot what that number would be when they filed their 2012 Annual Report. I can find that number on numerous free websites and it’s $32.51 BVPS. At the moment I’m writing this CLF is trading at $21.70. That ugly house may start to look rather “sexy” if it drops even lower. Does this mean that I should buy it? No! Mr. Market is sometimes irrational but most of the times, he’s right! Maybe MANAGEMENT has made some decisions since then and the market has priced this correctly. Let’s take a look at CLF’s Zombie Value. How can we get a value that’s actually lower than its Book Value is? After all, we just said it was “the amount of money you’d have left.” Companies buy stuff. And to keep it simple, some of that stuff is worth more to them than it is to us as investors. What’s the value of the trademark “Rule #1”? I don’t know. But suppose Phil had to sell his company because he invested everything he owns into Enron. His accountant would put a value on that Trademark. I’m not interested in paying for that name as an investor if I buy the Rule #1 Company. I’ll take his software but I don’t want to pay for the name “Rule #1” because I’m going to erase it from history and convert everything into my company called “Investor University.” To me, those are “Garbage Assets” or “GA” - stuff I’m going to subtract from the Book Value. Companies have to list their GA’s on their balance sheet. They call them “Intangibles, Cost in Excess, and/or Goodwill”….just “Garbage Assets” to me when I’m trying to determine what a company is worth if it were walking among the “living dead”…a Zombie Company…think airlines like Pan Am, TWA, Northwest. They flew in bankruptcy as a Zombie Company, sucking the life out of profitable airlines, until someone like Carl Ichan came along and bought them and sold off their parts. He made millions buying zombies. We can make money off the living dead too! Here’s how you calculate the RZBV for CLF: Open CLF’s 10K 2012 Annual Report to the “Balance Sheet” First we need to get rid of our “Garbage Assets” that we don’t want to pay for as an investor. Write down “Total Assets” (TA): $13,575 Write down “Intangibles” (I): $167 Write down “Cost in Excess (CE) or Goodwill” : $129 Add I + CE =’s Garbage Assets (GA): $167 + $129 =’s $296 TA – GA =’s “Rule #1 Tangible Assets” (RTA): $13,576 - $296 =’s $13,279 Now that we have a new number of assets called “RTA” that will determine our Rule #1 Zombie Value (RZV). Let’s figure that out: Write down “Total Liabilities” (TL): $8,942 RTA – TL =’s Rule #1 Zombie Value (RZV): $13,279 - $8,942 =’s $4,337 Next, I want to convert $4,337 into a “per share” number so I can compare it to today’s trading price. Divide the Rule #1 Zombie Value of $4,337 million by the number of shares outstanding. Where do we find that? On the TownToolBox, select "Stock at Glance" and select "CFL". You'll notice that the number of "Shares Outstanding" is 142,479,076. $4,337,000,000 / 142,479,076 ='s $30.43 Zombie Value Per Share based on 4th Quarter Data. This is where you have to know your biz or at least confirm your numbers. CLF issued a bunch more shares in the first quarter and diluted their shareholders value contributing to CLF's falling price. Their actual "Shares Outstanding" is 158,200,000. So let's use the most recent data to derive a more accurate Z Value. Therefore, $4,337,000,000 Zombie Value / 158,200,000 current shares outstanding ='s $27.41 per share. Because I seek a high Margin of Safety, I'm going to give myself a discount. 50% ZMOS is $13.71 and a 30% ZMOS is $19.19. This certainly isn't the entire story. But it's part of the chapter as I do my Rule #1 Homework and create a "Story" where CLF is going to be in 20 years. If I can't create certainty, then I don't invest. To Your Wealth! Garrett Hey...Read this: I am not an adviser. I am not licensed. I am not offering advice because I have no idea what might be right for you and I'm not trained in any way to know what is right for you. Anything I post is for my own general education and is probably not appropriate for you.