Valuations to blow your mind
It weighs a lot, it costs a lot
and it’s worth a whole lot more
but it’s not something you could afford anyway
cuz you weren’t careful with my love
you lost the key to the door of my heart
now there’s a price you have to pay – Lucinda Williams
2014 has already started with quite a bang, as mergers and trading heat up. Feet to fire, I would guess that late January or early February brings out some panic selling over who-knows-what and you’ll get your 5-10% pullback. And think about this right now — it WILL NOT be easy to buy into the next panic sell off.
But in the meantime, drink up, it’s another Merger Monday on Wall Street.
Whiskey Merger Monday: Suntory and Beam Ink $13.6 Billion Deal – The Wall Street Journal (Mon 9:51AM EST)
And that leads me right into today’s “Trader’s Thought of the Day”.
What if I told you that at today’s prices you could buy Facebook more cheaply than the privately-held Suntory out of Japan is buying Beam, a company that mostly makes and distributes poor tasting, cheap whiskey blends?
Let’s do the math and let the numbers speak for themselves.
Including debt, this acquisition is going to cost Suntory about $16 billion.
Japan’s Suntory acquires Beam in $16bn deal – Financial Times (Mon 9:53AM EST)
$BEAM is expected to earn about $3.00 next year, which would represent 10% growth from this year, which was itself up about 10% from last year. That means Suntory is paying nearly 30 times next year’s earnings for a company growing annual earnings just barely double digits.
Meanwhile, $FB is expected to earn about $2 per share next year, up from about $1.20 this year, which means it’s currently trading at 28x near year’s earnings.
I would note, that price-to-sales analysis makes Facebook look more expensive than Beam is being sold for today. That is, Beam’s revenues, at about $2.5 billion per year, growing about 3-5% annually, or just a little faster than the broader economy. And Suntory is paying a rather eye-popping 6.4 times forward sales for a company with little competitive advantage in the grand scheme of things.
Facebook, meanwhile, is going to grow sales up from $10 billion this year to closer to $13 billion or so next year, which would be a 30% annual growth rate. At the current quote, you’re paying nearly 10 times forward sales for Facebook, which clearly has much higher margins than Beam does.
Facebook’s been one of my biggest positions since it dropped into the low $20s and while I’ve sold all my FB call options that I’d had for a long while last year, I’m still holding a good-sized Facebook common stock position steady for now. All that said, kudos to long-term Beam investors. Facebook investors can, at least at this point, only dream that they are rewarded as well as Beam has rewarded their investors over the long-term.
[wsj-chart-inset query=”symb=beam&time=all&freq=&startdate=&enddate=&size=2&=Insert&style=1012&nosettings=1&mocktick=1″ title=”Long-Term Beam Chart”]Nice return for BEAM long-term shareholders[/wsj-chart-inset]
All signs, including this $BEAM acquisition by Suntory and the price it went through at, continue to point to a bubble-blowing bull market all around us. I don’t think tapering or even a raising of interest rates back towards normal levels by the Federal Reserve are going to happen in time to stop valuations from continuing to move higher. Be careful though, I don’t think history will look back kindly at the price paid by Suntory for a low-margin commodity drink business today.
