Three wise men were blindfolded and led one at a time into a room where an elephant stood. Each was asked to discern what was in the room without removing his blindfold. The first, upon touching the elephant’s trunk, concluded a “snake” was in the room. The second, upon contacting a leg, concluded a “tree” was in the room. The third, upon grasping the tail, concluded a “rope” was in the room. All were surprised to discover the elephant once their blindfolds were removed. — old Indian fable You may have heard this old fable before. The three blindfolded wise…
Three wise men were blindfolded and led one at a time into a room where an elephant stood. Each was asked to discern what was in the room without removing his blindfold.
The first, upon touching the elephant’s trunk, concluded a “snake” was in the room. The second, upon contacting a leg, concluded a “tree” was in the room. The third, upon grasping the tail, concluded a “rope” was in the room. All were surprised to discover the elephant once their blindfolds were removed.
— old Indian fable
You may have heard this old fable before. The three blindfolded wise men were not able to make a good guess of the complete picture (in this case, an elephant). It can be the same with investing.
For any potential investment, our own view may be limited, and we may miss some major points. We could always do with more intelligent and Foolish perspectives.
To demonstrate, let’s use info-communications company Starhub Ltd (SGX: CC3) as an example. As one of the big trio in the telecommunications industry – the others being Singapore Telecommunications Limited (SGX: ZY4) and M1 Ltd (SGX: B2F) – Starhub makes its money from the provision of mobile, pay TV, broadband, and fixed services.
The value investor’s view
One thing the bargain-loving value investor will be watching like a hawk is a company’s valuation. At its closing price of $3.89 yesterday, Starhub sported a trailing price-to-earnings (PE) ratio of around 18.5.
In the meantime, the SPDR STI ETF (SGX: ES3) has a trailing PE ratio of 13. As the SPDR STI ETF closely mimics the fundamentals of the Straits Times Index, we can also say that stocks in Singapore are on average, being priced at 13 times their trailing earnings.
Given Starhub’s higher PE ratio when compared to the market average, the value investor may not have much enthusiasm for the company.
Furthermore, Starhub maintains a net debt position with S$224.1 million in cash and equivalents and S$687.5 million in borrowings as of 31 March 2015. Debt may come with the territory for telcos, but Starhub’s balance sheet may be a source of financial risk and that represents another discouragement for the cautious value investor.
On the plus side, Starhub is able to generate a fair amount of free cash flow (more on this soon) from its business.
But all things considered, the value investor may still have a hard time getting over the company’s higher valuation and debt-heavy balance sheet.
The income investor’s view
Starhub may have a few traits that can catch the eye of the income investor. First, the company has a handsome dividend yield of 5.1%, which is well ahead of the SPDR STI ETF’s yield of just 2.8%.
Second, Starhub has had a steady track record with paying a dividend. Over the past five years from 2010 to 2014 (Starhub’s fiscal year coincides with the calendar year), Starhub has kept its annual dividend unchanged at S$0.20 per share.
|Year||Starhub’s dividends per share|
Source: S&P Capital IQ
Third, in that same period, the info-communications firm has also generated stable free cash flow (operating cash flow minus capital expenditures). As this trait can help add to the sustainability of the company’s dividend, it’s something which the income investor may like to see.
Source: Starhub’s Earnings Report
Lastly, as a provider of info-communications services, Starhub’s revenue may be deemed to be recurring in nature. This makes Starhub’s business, and by extension its dividends, stable and that’s something which the income investor may appreciate too.
With all that said, Starhub could thus be one stock that the income investor might be interested in at the right price.
The growth investor’s view
When it comes to Starhub, the growth investor might having mixed feelings about its growth prospects.
Source: Starhub’s earnings report
On the bright side, the revenue for Starhub’s all-important mobile services segment and its smaller fixed network services segment has been inching upwards. But the downside is that competition in the broadband space has resulted in revenue from Starhub’s broadband services segment shrinking from where it was five years ago in 2010.
When we mash the segments with stagnant revenue, shrinking revenue, and growing revenue together, there just isn’t much in terms of growth in Starhub’s overall revenue that the growth investor is able to see at the moment.
With this in mind, the growth investor might want to give Starhub a pass by virtue of its lack of strong historical growth and the above-average valuation (as mentioned earlier) carried by its shares.
So, there you have it. Three quick perspectives from three different investor personalities looking at the same company. Thinking as different investor personalities and coming up with different views can be a useful exercise for us.
Collectively, the differing views may be worth much more than the sum of their parts.
So, do you – Foolish reader – have another company of interest in mind? Why not give the differing views approach a try yourself and then share it with us? We all may become better investors from sharing our motley views.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.