I've known about GH for a number of years but for some reason I never really looked closely at the numbers. I finally did in November 2020 and became a shareholder.
Stock buybacks are not always a good thing for a company to do. If a company is buying back its stock above its intrinsic value it destroys shareholder value. If it buys back stock below intrinsic value it creates shareholder value. To see if GH is creating value for its shareholders we first need to estimate the company's intrinsic value.
1) Lets's first look at discounted cash flow (DCF)
Note that for this I use Buffett's owner earnings instead of earnings. Buffet defines owner earnings as:
net earnings + depreciation + amortization - growth capital expenditures (I am using capital expenditures instead of growth capital expenditures as it is a stricter more conservative number)
From 2010 to 2019 GH has averaged $20,940,000 in owner earnings per year. If we want to be conservative and discont this by 10% and then divide by the current number of shares outstanding ($20,940,000 / 0.1 / 22,700,000) we get $9.22 per share as an estimated intrinsic value for GH. This rough calculation does not take into account future growth in owner earnings so it is a very conservative number.
2) A second way to estimate GH's intrinsic value would be to take its 10-year average owner earnings per share of $0.922 and give it a certain mutiple. For the multiple I've selected its 10-year average price/owner earnigs multiple of 12.6:
$0.92 X 12.6 = $11.59 as estimated intrinsic value.
So far we have an estimated intrinsce value that ranges form $9.22 - $11.59. There are other methods that can be used to estimated intrinsic value. I just wanted to get a very rough estimate and the above will do.
So GH can currently purchase its stock for under $8.00 (current asking price is $7.68) when it has an estimated intrinsic value of $9.22 - $11.59 which is 17% - 34% below estimated intrinsic value. In other words GH can purchase its stock for $0.6 - $0.83 on the dollar.
That's why I believe the NCIB makes a lot of sense.
Now the really fun thing to do would be to calculate the intrinsic value of GH to a private buyer. I think Malx1 has done an amazing job on this and so I have nothing to add on that.
Now you can make a very strong case that the future of GH is better than its past:
- Oil prices might be higher in the coming years (demand stronger than supply and oil companies wanting to return capital to shareholders instead of more drilling
- Future tech jobs in Alberta
- Moratorium on casino building in Alberta (each current profitable casino is more valuable because of this)
- Over time inflation will lead to increased spending
I hope I haven't bored all of you with this stuff.
I've really enjoyed all of your posts and will continue to do so. As my name implies I will be around for a while :)