For those that did not attend the recent Mello Monday event for UK private investors , Steve raised an important point about Enterprise Value when looking at stocks whose share prices still look depressed vs 2019. Many companies continue to have depressed equity valuations but when you take into account the debt they have taken on to get through COVID they have higher EVs than they did under much better economic conditions.

I was considering looking into £WTB as a potential play on the idea that there is reduced capacity in the hotel industry and Whitbread will have a bigger market share going forwards.

However, when you look at their EV now it is higher than it was in January 2020! I haven’t looked in detail at what is driving the change in EV. I don’t have a view on whether £WTB is a good investment or not, however, it clearly is more expensive on a takeover basis than it was in Jan 2020 on first look and this would require closer inspection.

I have changed my approach to now value the whole business as if I was buying it all. I find it easier to think of it conceptually that way. It also helps from a behavioural point of view as it helps me to think of shares as fractional ownership of businesses not lottery tickets.

I’m also now calculating my own EVs rather than relying on the publicly reported numbers. The bringing of operating leases on to balance sheets has further complicated this.

An example of a share like £RCH which is very popular as a turnaround currently looks a lot more scary when you really dig in to the pension deficit.

I’m not even sure if the deficit is enough to add to EV is some instances. Especially when the assets and liabilities are both extremely large. I’m using the technique outlined by Aoris Investment management and adding 50% of the liability to the deficit to be more conservative.

I wonder what others think regarding the situation in UK stocks right now that look optically cheap?

 Perhaps I am being overly conservative. But in some areas it looks as if a return to 2019 business is already priced in although of course there are shares that are still undervalued.

Either way I will be…

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