Thursday, February 23, 2012

Your Valuation Affected By Government

The political bickering that takes place in Washington can usually be ignored by the bottom-up value investor. But not always. Yesterday, US President Obama announced a plan to reduce corporate tax rates from 35% to 28%, along with the cancellation of several tax deductions. It's worth it for investors to keep an eye on this situation, for if this plan (or some variation of it) makes it into law, it will have a dramatic effect on the intrinsic value of a number of companies!

For example, a US retailer in your portfolio is probably paying a very high rate, since it doesn't get to take many deductions (for R&D, manufacturing, foreign earnings etc). That retailer would likely see an immediate 10%+ jump in earnings if this plan were to become law, giving it greater power to invest, borrow and therefore return cash to shareholders.

On the other hand, a company paying low rates because it has been able to take advantage of deductions that will no longer be accepted will be worth a lot less (e.g. that company in your portfolio with the fleet of corporate jets that is headquartered in the US but generates all of its earnings from its Bermudan subsidiary thanks to LIFO accounting).

The onus is on you to figure out how this will affect the margin of safety of each of the companies you own and each of the companies in your watch list, so get to it!

2 comments:

J Mako said...

HI Barel,

Could you explain the connection between offshore operation and LIFO accounting in the example you used?

Saj Karsan said...

Hi J,

They are not connected, other than that Obama's plan seeks to increase taxes by having a minimum tax on foreign earnings and by eliminating LIFO accounting (at least for tax purposes)

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