Companies in the U.S. are valued 10% above the cost of replacing their assets
bloomberg.com
bloomberg.com
So by this theory the value of a tech startup is the developer's laptops and the value of a yoga studio is the loaner mats.
Indeed, I'm wondering why the quoted ratio is so low (1.10). Much of a company's value is in its customer and supplier relationships and these aren't tangible assets that can be sold.
Does anyone know?
Not just that -- from the article:
>> To Smithers, the ratio’s doubling since 2009 to 1.10
Having "the economy" be "worth" only 55% of its scrap value seems crazy...
That said, there is a pretty reasonable point that if bonds were returning 5 - 6% over 10 years rather than 1%, quite a bit of capital would move back into bonds and away from equities. That would put a lot of downward pressure on the price of equities.
If you sold every share of every company in the U.S.
and used the money to buy up all the factories, machines
and inventory, you’d have some cash left over.
Where do you see a "theory" in that statement? I only see a calculation.
It would be worth $0 most of the time, and ~100 million a minute during that outage.
(Rather than IP, let's say the laptop's TPM chip is what is necessary to get access to stop the outage, so it's tied to something real)
If Tobin were still alive, I think he would insist that intellectual property (read: code, patents, trademarks and software licenses) also be included. He didn't care about 'factories, machines and inventory'; he cared about 'replacement costs'. The author seems to have glossed over that bit for the sake of brevity and clarity, and in the process accidentally introduced a logic error, at least IMHO.
It is fair to say that stock prices are not representative of current value, but rather the long term value and growth the company has yet to realize. So in that sense, Tobin is right, but the growth the company has yet to realize is really just goodwill accrued as an asset. Meh. I'm rambling now.
In the case of low value businesses like Yoga Studios & Startups, yes the value is nil. For good reason -- a Yoga studio's only asset is it's book of business. You don't fire the employees and get any meaningful liquidation value. Ditto for startups -- startups are evaluated at future value... present value is laptops + IKEA Tables.
But we're not talking about Yoga studios, we're talking about Fortune 500 companies. When you are selling for more than you are worth, you'd better hope you keep delivering, because the market will punish you brutally when you slip up.
http://en.wikipedia.org/wiki/Tobin%27s_q
This is an economic theory that was first published 1968/1969. It was a good model when Tech/IT wasn't a huge sector of the economy in its own right.
In principle, the valuation seems overly simplistic. Corporate stocks — the combination of people and entitlements that can be wielded to generate revenue – should be more than the sum of the value of the piecemeal assets, IMHO.
Even if not overly simplistic, I feel like the methodology would leave a lot of room for broad speculation. How did they value: future redeemable assets, trade assets, intellectual property, intangible leverage, market and demographic prospects, cultural distinctions of the corporation, and goodwill? These things all tend to be waffly in the accounting, but they have a real impact on future income and therefore the prospective value of the company.
Everything I have read about Tobin suggests that the man was spectacularly clueless, and every time I read something about him I cringe and emit some guttorial sigh. In all likelihood I deeply misunderstand his thinking, but I have yet to see anything remotely resembling clear, persuasive arguments in defence of his ideas, which seem tragically disconnected from economic reality.
It is true, that when I toss a ball into the air, the error of my measurement from the instantaneous position of the ball to the gravitational center of the earth is very fuzzy. In fact the error bars are probably wider than the measurement of height given enough hand wavy argument and bad measurement tools. I agree with your interpretation of that observation. I really don't have any idea how far away that baseball is from the center of the earth. None the less, toss the ball up in the air higher than you've ever seen it tossed before, its coming back down faster than ever before, eventually.
Or rephrased it doesn't seem to be a random walk error where the odds of being higher or lower are always 50:50 no matter if its right on 1.000 or higher than its ever been. It does seem to revert to the norm. So if its higher than its ever been, then the odds of reversion to the norm in the near future are higher than they've ever been...
Things are never going to change because you'll never get enough people to willingly give up making so much money. Take bubbles, i.e.: When the numbers are so far askew that everyone knows there's a bubble, you are still not going to see anyone not play the game. There's just too much money to be made.
Handwaving about intangible values or customer goodwill doesn't change the fact that market expectations are primarily built on faith in the future, which is an entirely irrational basis for economic decision-making.
It's certainly difficult to quantify the value of IP, as opposed to the value plant and machinery.
But are most valuations driven by guesses about the future value of IP that have at least some connection with economic reality? Or are they driven by hope, hype, and momentum?
The reliable and empirically predictable manic-depressive boom-bust cycle of corporate capitalism strongly suggests the latter.
Or to put it another way - at some point the QE taps are going to be turned off, and the economy is going to have to go back to buying and selling stuff that people want instead of relying on stock price inflations created by cheap money hand-outs to banks so generously donated by the Fed and the other national banks.
Anyone who thinks there won't be a "significant adjustment" when that happens is - IMO - fooling themselves.
I feel like a fool :(
Faith in some version of future events is the only rational basis for economic decision making. You pay present money in the hope of future value, because otherwise you'd simply retain the present discounted value of the purchase price.
As long as that faith isn't blind, but instead well researched and based on a defensible thesis, there's nothing wrong with it.
On a company-by-company basis, it's practical to evaluate how much of the company's market value derives from intangible components like goodwill and market position, but it's much harder to do it on the scale of an entire economy, which is what the analysis in the article claims to do.
It's more reasonable to look at capital intensive industries like manufacturing and agriculture and see if their Q values are historically high. Lumping compannies like Adobe and Apache into that same group and using the same metrics for the whole group is disingenuous.
Cue the "new normal" excuses. The "prices have reached a plateau". The same pre-buble-burst talk that has happened every other time.
This will not end well.
[1] http://www.indexologyblog.com/2013/09/03/too-high-or-too-low...
http://www.amazon.com/When-Genius-Failed-Long-Term-Managemen...
It makes sense for a single company, if it is so unprofitable, even including future potential profitability, that it really should be shut down and stripped for assets. But ordinarily I would expect a company to be worth significantly more than its book value. Otherwise, you could easily recreate the company by just "replacing" the assets. But this is only true if the company is based entirely on easily replaceable, low skill labor. Are there any large companies like this anymore?
In reality, there are intangible assets - and I'm not talking about software etc. - that are very difficult to measure, and guarantee that any worthwhile business should be valued at more than its tangible assets. Some things are hard to price, but might be possible to sell off: brand identity, customer base, marketing data, etc. Still, replacing these things is hard.
Some things are very hard to sell off. Businesses have employees, and employees are in an organizational structure where they know how to work with other employees to get their jobs done. As well, there are relationships with contractors and vendors. Replacing these is extremely hard.