TransAlta (TA) – “Lines of Death”

“A picture is worth a thousand words” refers to the notion that a complex idea (s) can be conveyed with just a single still image.  Our goal at Model Price and modelpriceguy is to give our users a still image where users can interrupt seemingly complex financial ideas such as fair market value, valuation and compounded growth of investors’ equity through time, including the future.

Here is the model price chart of TransAlta.

TranAlta with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of TA subsequent to this post will be maintained on Facebook, here.

Observables a user can glean with a blink of an eye from our model price chart.

1.  Our calculated model price is below the stated close on August 15, 2012.  Model price is our calculation of fair value, taking earnings estimates, balance sheet and interest rates as our main inputs.  Simple.  Would you over pay for a car? A house? Of course not!  Investors’ will be poorer overpaying for equities over a period of time.  So check your portfolio against model price and see how it stacks up.

2.  What are the EBV lines doing?  Are they going up or down?  If the EBV lines are going up, this means there is compounding of the equity (retained earnings) of the company.  This is good.  You as an investor you get to participate in this growth.  Over time accounting equity compounding yields investors significant gains and is the main determinate in equity values.  If EBV lines are going down, look out.  This is negative compounding – if there is such a thing.  This will be a killer longer term and should be avoided.  In our investment house – Acker Finley – we call downward sloping EBV lines “Lines of Death”.  Investors’ common equity is disappearing do they know this?

Hmm, so TransAlta is trading at a 54% premium to fair market value, and has negative compounding for the foreseeable future under the present fact set.  Now let’s give investors a dividend of 7.35%.  Does this change anything?  Apparently it does, because investor’s hunger for yield far outweighs the math it takes to produce this yield.  Does this make economic sense?

Hopefully readers and users of model price charts can see through this dividend rouse to see what actually is going on with their investment, again with a blink of an eye.

P.S.  Just as an aside, because I can’t help myself, let’s review where the analyst’s recommendations are on TransAlta as an investment and my comments.  Of the 12 analysts surveyed by Bloomberg, six rate TransAlta a “sell” – good for them, obvious, with three “holds” – really? Holding for what?  They probably recommended TA at higher prices and don’t have the guts to say “sell”.  And three “buys”! – Wow, are you kidding me! Target prices range from a high of $18 to a low of $14, with an average of say $16.  Again with a blink of an eye, you the user will be more knowledgeable than half of the analyst’s analyzing TransAlta.

P.P.S.  This is my secret of my television appearances – for those who watch me.  Next time I’m on Market Call, as the caller asks a question about a company, call up the chart on Facebook and give your interruption to your dog, cat, or living room chair.  Would you buy, sell, or hold?  All I’m doing on Market Call is describing a picture/chart.  Sometimes it’s easy, other times I wish I could show you the chart …hey what a business idea!

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