TIP489: Intrinsic Value Analysis of Dollar General & Apple

Warren Buffett's investment framework plays a crucial role in his decision-making process when selecting stocks. In this episode, the framework was applied to analyze Dollar General and Apple. Dollar General, a discount retailer founded in 1939, targets rural towns and lower income communities, offering various merchandise products at lower costs than larger retailers. With over 18,000 stores in 47 states and Mexico, Dollar General has a significant footprint in the US market, generating $34.2 billion in revenue, $2.4 billion in net income, and $1.8 billion in free cash flow in fiscal year 2021. The company's PE ratio is around 24, and its stock is trading at approximately $240 per share. Notable investors in Dollar General include Chris Blumstrand, Tom Gayner, and Charlie Munger, who has a long-term relationship with Costco, a competitor with 834 stores compared to Dollar General's over 18,000. Buffett's framework helps investors narrow down the vast number of stocks to sound investment opportunities.

Costco and Dollar General, despite being large retailers, cater to different markets and business models. Costco focuses on high sales volume with minimal profit per item, while Dollar General targets rural communities with small, conveniently located stores, selling everyday items at affordable prices and making higher profits per item. Buffett's investment principles, such as analyzing a business's marketplace, consistent operating history, and favorable long-term prospects, apply to Dollar General. The company's marketplace consists of a variety of simple, everyday items at low prices, and they target rural communities to keep costs low. Dollar General's consistent growth over the past decades, with increasing revenues and earnings per share, demonstrates a successful business strategy. Additionally, the trend of wealth inequality and inflation could benefit Dollar General, as they offer affordable prices on consumable goods, which make up over 75% of their revenue. The company's continued expansion, with plans to add over 1,000 new stores in 2022, further highlights their growth potential.

Dollar General's competitive advantage lies in its low cost, convenience, and the trust it has built with its customers. The company's management, led by CEO Todd Vezos and soon-to-be CEO Jeff Owen, have shown a rational approach to capital allocation, with a focus on returning value to shareholders through dividends and share buybacks. The company's return on invested capital has been impressive, averaging around 30% from 2013 to 2019, and while it has dipped slightly in recent years, earnings per share have continued to grow at an impressive rate of 18.1% per year over the past 5 years. Dollar General's expansion into larger stores, new business segments, and urban areas, as well as its commitment to keeping prices competitive, further strengthens its position as a value investor's choice. Warren Buffett's principles of investing in companies with durable competitive advantages and effective management certainly apply to Dollar General.

Dollar General prioritizes high returns for shareholders before opening new stores, as evidenced by their target internal rate of return of 20% to 22%. This focus on high returns, along with their strong financial performance and countercyclical business model, makes Dollar General an attractive investment option for value investors. Despite the challenges of investing in a volatile market, joining a community like the TIP Mastermind can provide valuable resources and support to help investors stay informed and successful. Additionally, companies like Dollar General, which have a proven track record of outperforming the market, are worth considering for their potential to continue generating strong returns.

Yahoo Finance is a valuable tool for staying informed about the stock market, providing insights into major trends, company news, and financial data. Buffett's investment analysis includes evaluating a company's return on invested capital and profit margins, as well as determining the intrinsic value and purchasing at a discount. Dollar General, for example, has a strong business model and consistent profit margins, making it an attractive investment candidate. By using tools like Yahoo Finance and conducting thorough analysis, investors can make informed decisions and potentially achieve long-term growth. Buffett's investment tenets include evaluating a company's return on invested capital and profit margins, as well as determining the intrinsic value before making a purchase. Dollar General, with its strong business model and consistent profit margins, is an attractive investment candidate. Yahoo Finance is a valuable tool for staying informed about market trends and company news, making it an essential resource for investors. By combining thorough analysis with the use of tools like Yahoo Finance, investors can make informed decisions and potentially achieve long-term growth.

Dollar General is seen as a value play with decent potential for double-digit returns over the next decade, but it's not a get-rich-quick investment. The company's success hinges on effective international expansion, particularly in Mexico, and its current focus on the US market. The valuation is considered fair, and there's an embedded call option based on international growth. However, risks include competition from companies like Dollar Tree and Walmart, management's ability to execute on their business strategy, and pricing pressure from competitors. For tech-focused investments, the speaker is bullish on companies like Amazon and Alphabet due to their rapid growth and profitability. These companies have built strong moats and continue to grow at exceptional rates, making them attractive value plays for the long term.

Legendary investor Warren Buffett continues to see value in Apple, as evidenced by Berkshire Hathaway's significant increase in shares. Buffett, who views Apple like a consumer product with an emotional attachment, sees the company's ecosystem and brand as a permanent and valuable moat. Apple's business model, which includes designing, manufacturing, and selling tech products and services, has resulted in impressive sales, with the iPhone accounting for over half of their revenue in 2021. Buffett is drawn to Apple's durable competitive advantage, low capital requirements, and the incredible moat they've built, making it difficult for competitors to meaningfully compete. Apple's brand, valued at $355 billion, is the most valuable in the world, and their expansion into different consumer products and business segments has been successful. Buffett recognizes Apple's ability to capitalize on their brand and believes it sets them apart as a superior business to Berkshire Hathaway.

Apple has been a remarkable performer over the past decade, with substantial growth in sales for its iPhone, Mac, iPad, wearables, home accessories, and services business. This growth has led to significant increases in revenue, up an average of 18% per year over the past two years, with a market cap of $2.4 trillion. Apple's strong presence in the US, Japan, Europe, China, and the Asian Pacific regions contributes to its impressive growth, with China being the largest percentage growth area. The company's product business, which includes simple and understandable offerings, and its services business, which has high margins due to its digital nature, align with Buffett's investment principles. With favorable long-term prospects, a consistent operating history, and a strong brand loyalty that allows for pricing power and continued growth in new markets, Apple is expected to be much larger in 10 to 20 years than it is today. Additionally, Apple's management team, led by Tim Cook since 2011, has a strong track record of high returns on capital and an aggressive share repurchase program.

Apple's management has been effectively reinvesting in the business, generating high returns on capital, and buying back substantial amounts of shares, leading to significant increases in shareholder value. From 2017 to 2021, Apple's outstanding shares decreased by roughly 5.3% per year. The company's exceptional return on invested capital, which has been over 18% for the past 15 years, indicates that the business is earning strong profits, and as Munger's quote suggests, the stock is likely to follow suit and compound at a high rate of return over the long term. Apple's management's rational decision-making, transparency, and shareholder focus further justify the investment in the company.

Apple's free cash flows have been growing substantially over the past few years, with an average growth rate of 11.7% per year over the past 5 years and 8.4% over the past 10 years. Using these growth rates as a basis, the intrinsic value of Apple based on these projections is estimated to be around $3 trillion, which is a 19% discount to its current market cap. However, it's important to note that no investment is worth an infinite price, and even great businesses like Apple are not immune to market fluctuations and potential risks. It's essential for investors to consider different scenarios and projections when evaluating a company's intrinsic value. Additionally, investors should consider their investment style and risk tolerance when deciding whether to purchase a stock based on its intrinsic value or other factors. Ultimately, it's crucial to remember that investing involves risk, and it's essential to conduct thorough research and analysis before making any investment decisions.

Apple, as a leading tech company, faces various risks that could impact its stock performance. These risks include supply chain disruptions and raw material availability, dependence on iPhone sales, potential government intervention, inflation, and competition from other tech giants. While Apple's history of innovation and effective management make it an attractive long-term investment, these risks should be carefully considered. Additionally, the stock's price may not always reflect its intrinsic value due to market volatility. Investors should evaluate their assumptions about Apple's future growth and consider the company's competitive advantage and management quality before making investment decisions. As Buffett famously said, markets can be irrational in the short term but weigh the true value of a business over the long term.

Having a long-term investment perspective can provide an advantage in the market. When purchasing a farm or investing in a company like Apple, there will be ups and downs, but a long-term approach allows investors to ride out market fluctuations and benefit from the compounding of returns. John Huber, an investor, emphasized this point, stating that individual investors can outperform larger institutions by thinking long term. This is because most market participants have shorter time horizons, and a long-term mindset enables investors to avoid emotional reactions to short-term market volatility. Investors like Nick Sleep, who recognized the potential in companies like Amazon, Costco, and Berkshire Hathaway early on and held onto them for the long term, serve as excellent examples of this strategy's success. By focusing on the quality of businesses and maintaining a long-term perspective, investors can achieve superior returns and weather market downturns.

Successful long-term investing, as exemplified by Warren Buffett, Charlie Munger, Sleep, and Zechariah, involves investing in companies that operate ethically and create value for their shareholders over the long term, rather than just focusing on maximizing short-term profits at the expense of employees and customers. Additionally, these investors emphasize the importance of having a long-term perspective and making sacrifices today for greater rewards in the future. They encourage resisting the urge to chase short-term gains and instead focusing on building strong, long-lasting relationships with quality companies. This approach not only applies to investing but also to various aspects of life, including relationships, health, and careers. By adopting a long-term mindset, individuals can reap significant benefits and achieve greater success in the long run.