where is the upside?

In my previous posts, I argued that AMA is going to be a good investment down the road. I still believe in it today, even more strongly.

What I want to write today is that I believe there will be surprises on the upside for AMA in the next few years. AMA had been in a shock mode in a few years and only recently did it secure a solid footing. If we look into the financial statements closely, we will find that all the six businesses, handpicked by Mr.Malone in the restructuring process, actually have an amazing ROIC, which is around 60%. What does that mean? For a beginner, it means for every dollar tangible assets supporting the business, it is earning 60 cents in a year for the company. And this is simply amazing. AMA is trying hard to pay down debt with every penny it collects as cash and it is natural that the company underinvested over the last few years. Once the debt is largely paid down, cash flow will be plowed back into operations. If AMA only keeps 30% of its earnings, with a ROIC of 60%, it will grow its earnings by 18%.

The beautiful thing here is, after years of underinvestment, it will be very easy for AMA to find projects where it can put money in profitably in the near future. My guess is that the ROIC will be less than 60%. But who cares? Even with 30% of ROIC, a reinvestment of 30% of earnings will grow EPS by 9%. And if AMA can grow EPS by 9% over the next few years, we shareholders are going to make a killing in the next few years at today's price.

I predicted on the Aussie Stock Forum that CMI is possible to hit 3 in the next few years. I made this claim when the price was 0.66 per share and laid out precisely what I was thinking at that time. Ironically, I sold my position entirely @1.03, 50% gain in 6 months. Sounds brilliant right? If I'd held this position, I would have made another 22% on top of that 50% in another half a year. CMI is similar to AMA in a lot of aspects. Most importantly, they both are incredibly good business trading at absurd price, although CMI has significant management issues which is the sole reason I sold it. But who'd know Raymond would die this year??

In the end, good business and low valuation wins out. Overtime, people realized how cheap the stock is and CMI went ahead. This is a lesson I will never forget in my lifetime. Buying exceptional business at ridiculously low price, this is the formula to be mega-rich.