How many people have you heard that said: “I wish I could have bought AP way back 2007 at P6”?
Instead of wishing something that will never happen (i.e. turning back time), let’s examine why AP increase from P6 to P35 and moved sideways from thereon so that through this analysis we will learn something that we can apply for future stock purchases.
The breakdown of our problem is:
- Why AP increased from P6 to P35 in 2007 to 2010?
- Why AP price moved sideways from thereon?
Why AP Increased From P6 to P35 in 2007 to 2010 and Traded Sideways Thereon?
In order to answer the problems, much insight can be derived from the following relationships:
Based on the charts presented above, the following can be observed:
- Capacity of AP’s power generation increased before price jumped from below P10 to P30’s level.
- The substantial increase in generation capacity was only reflected in the revenues of AP in 2010 thus the spike in the price in 2010.
- AP’s stock price is driven by the increase in revenues and EPS.
- The stock price moved sideways as generation capacity growth slowed down.
Power capacity drives the revenues of AP. Revenue growth in effect drives the EPS of AP. The increase of EPS places AP at an attractive valuation.
Therefore, power capacity is the foundation of AP’s value (and to other power generation companies).
Warren Buffett loves a company with good economic moat and a good management. Economic moat is the barrier for entry of competitors. The power generation industry has a natural barrier for entry of being capital intensive and the 3-year lead time before the completion of a power plant construction. The power shortage in the Philippines assured AP that the electricity capacity that it produces have ready buyers. Combined that with a management that can deliver what it promised, AP delivered a lot of shareholder value to its investors.
Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.
Disclosure: No position