A really odd way of figuring a bargain

Investment Analysis Clubs Saul’s Investing Discussions
1

In reading through MF RB’s description of their Best Buys, I came across this really odd description of one of their Best Buy Now, which will have to remain nameless:

For the past year, though, XXX’s stock has taken a breather while the business has continued to grow. Now, at about 35 times estimated 2015 earnings against a five-year growth rate that should easily top 15%, the price seems more like a bargain.

Sorry, but this sounds bizarre to me. That means that they see a PE of 35 with a five year growth rate of 15 as a bargain!? Wow!

I admit that they do say “should top 15%” (but didn’t refer to topping 20%), so lets say 18%. But on the other hand, they are talking about a hypothetical future PE of 35, at the end of 2015. The current PE is listed at 41.6. Either way, you have a PEG of over 2.0. I can see it as a “recommendation” if it’s high conviction and all that, but a “bargain”???

Saul

13 Likes
2

What you mean by growth here, is it revenue growth? If revenue is expected to grow 15% for say next 5 years, that means it will double in 5 years. Also it doesn’t mean the net income has to grow at 15% but could be much higher. The SGA leverage, R&D leverage, etc. At double the revenue, the company may end up earning 3x or 4x net income.

I can think of software, drug companies to many industries where doubling of revenue could easily triple, quadruple net income.

So I think PEG by itself doesn’t tell that the stock is not a bargain.

1 Like
3

What you mean by growth here, is it revenue growth?

True, it’s not clear, but 35 times estimated 2015 earnings against a five-year growth rate that… sounds to me at least like they are talking about earnings, not revenue.

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4

Defining ‘growth’ for the purposes of calculating value is an interesting question. EPS carries obvious dangers but sales may not reflect the full picture. It is of such overriding importance that I find it best to use an amalgam of the two based on a hunch about the co. in question. I have found it vital to establish my own figure rather than use other people’s, analysts etc. and find it just about possible to be cautious, conservative and optimistic all at the same time.

5

I find it best to use an amalgam

I’m really sorry but the word amalgam escapes me, therefore I saved others in the same brain fog the trouble of looking it up.

a·mal·gam
?'malg?m/
noun
noun: amalgam; plural noun: amalgams

a mixture or blend.
“a curious amalgam of the traditional and the modern”
Chemistry
an alloy of mercury with another metal, especially one used for dental fillings.

Origin
late 15th century: from French amalgame or medieval Latin amalgama, from Greek malagma ‘an emollient.’
Translate amalgam to
Use over time for: amalgam

Now I understand the post.

The learning on this board never ends. Isn’t it great!

Mark

6

sounds to me at least like they are talking about earnings, not revenue.

They talked about business continue to grow and the stock took a breather. To me business means revenue but the 15% growth is not clear whether earnings or revenue. I don’t know anything beyond what you posted. It seems to me that you are not clear either. I guess with very limited information it is not clear the bargain finding is wrong or right.

The reason I replied to your post is, we all have various bias and just wanted to highlight the 35 PE should not mean something is a bargain or not.

7

True, it’s not clear, but 35 times estimated 2015 earnings against a five-year growth rate that… sounds to me at least like they are talking about earnings, not revenue.

In defense of SA and the company in question, over the last 13 quarters, earnings have grown an average of 30%. Earnings growth has only been below 20% in three of those quarters.

Will it continue to grow that much in the future? Who knows? But it’s a great brand and they are looking at a lot of different avenues for continued growth.

Jason
Long anonymous company

1 Like
8

I might agree this company is no longer a “bargain” in the sense of finding a true gem that is under appreciated with the growth rates we’ve come to expect, but the numbers do meet the minimum requirements we’ve been targeting here on these boards:


$2.82	$2.66	$2.53	$2.64	TTM Last Year = $10.65
$3.50	$4.15	$3.84	$3.88	TTM This Year = $15.37

YoY EPS Growth = 44.3% (>30% is the target)

TTM PE = 42

1YPEG = 42/44% = .94 (<1 is the target)

YoY Rev Growth = 26% (>20% is the target)

Disclosure, I am long this company. I had reduced my stake about 2-3 weeks ago to get into another stock in the same industry, but later decided this company had gotten beat down far enough and was becoming a “bargain” once again in the sense of meeting the minimum litmus test and the fact this company was one of those market darlings (and probably still is). So, I decided to get back in for a full position using a small tad of intuition on how Mr Market will react when it the stock gets back in favor. Indeed, it has earned about 20 or 30 points already since I got back in. Not bad, but this time I won’t be a fool for love. This time I have the 1YPEG to know when to leave. As soon as the stock travels too far ahead of itself I’ll know how to handle myself.

Cheers!
–Kevin

2 Likes
9

Disclosure, I am long this company.

And you’re still not willing to give us the ticker so we can do our own Rev & Ear diligence? You want to tease us only? Is this a company you chose to hold, or are you rather holding some TMF board’s hand? It seems that this is a pick of your own. We all benefit with so many good eyes looking. This board is about sharing and helping. Cough it up.

Alex

4 Likes
10

Ha! Just looked at the numbers! Chipotle! I’ll cough it up for us! One of my 3 holdouts from pre Saul. I still see good things with this one. Bargain?..no…long term growth appreciation…most likely…I was looking to reduce my position at opportune moments.
Alex

1 Like
11

And you’re still not willing to give us the ticker so we can do our own Rev & Ear diligence?

With all due respect, SA subscribers pay money for that service and as a result, we should not be sharing that information outside the pay service.

So if you want to know what company we’re talking about, buy the subscription.

Jason

4 Likes
12

I might agree this company is no longer a “bargain” in the sense of finding a true gem that is under appreciated with the growth rates we’ve come to expect, but the numbers do meet the minimum requirements we’ve been targeting here on these boards:

Hi Kevin, I wasn’t even looking at the numbers, or commenting about the company itself. I was just reacting to the stated rational of a forward PE of 35, with growth of 15%, constituting a “bargain”.
Saul

3 Likes
13

Fools,

Here is a conservative representation of the company’s financial statements going forward. The historical are also provided.

One can use it to justify the company as a good investment now and to show that it is not a bargain.

The intention of these numbers is to show, using conservative projections, what should happen to the price of the stock over the next few years, based upon certain assumptions.

The key components include the growth in the numbers of stores (increasing at a slower rate), comps (6%), operating expenses (slightly improving) and share dilution (very little).

What it does not include is potential revenue from new concepts, price increases, faster growth of the number of restaurants in 2020 (>3,032) or further improvements in operating costs as a percentage of sales.

How can one project revenues out to 2020? Why does this analysis even matter? One can try to project them, because of the company’s brand, its past performance and its ability to grow revenue, comps and profit throughout its history. Also, analysts think they can open more than 3,000 restaurants. But I believe that they will easily open more than 4,000 (they have almost 1,900 today).

Do we believe that the company can perform as shown in this analysis? I think so. In fact, given all of the things that are not included, I think they can do better.

However, this does not mean that the price of the stock is a bargain. On the contrary, if the assumptions turn out to be correct, the company will return over 14% annually through 2020 assuming the same P/E as today (see the table at the bottom). One can make a really good case that the company’s P/E will come down quite a lot over the next few years. If the P/E goes down to 30, this analysis shows share price growth of a bit more than 8% annually through 2020.

Other questions include the impact of competition, potential acceleration of costs due to supply constraints and other factors. These could also be added to the analysis.

At the end of the day, I view the company as a super brand with the ability to grow more than expected, successfully introduce new concepts, raise prices over time, find new ways to improve throughput and introduce various profitable formats that will enable them to enter non-traditional markets. Given all of these future options, I am happy owning the company, despite the fact that it’s stock is trading at a premium.

Among all of my holdings, this is the company that I feel most comfortable about being successful in the long run, and I feel that I don’t need to watch it like I do some of my other holdings.

DJ

===================================================================================================================================================


Future/Past	2020	2019	2018	2017	2016	2015	2014	2013	2012	2011	2010	2009	2008	2007	2006	2005	2004

Rev	        10,075	8,779	7,616	6,576	5,655	4,839	4,108	3,215	2,731	2,270	1,836	1,518	1,332	1,086	  628	  471	    0

OpCosts																	
Food & Pack	 3,486	 3,037	 2,635	 2,275	1,956	1,674	1,421	1,074	  891	  739	  561	  466	  432	  346	  202	  154	  105
Labor	         2,217  1,931	1,675	1,447	1,244	1,065	  904	  740	  642	  543	  454	  385	  351	  289	  179	  139	   94
Occupancy	   564	  492	  426	  368	  317	  271	  231	  199	  171	  147	  129	  114	   98	   76	   48	   36	   26
Other	         1,048	  913	  792	  684	  588	  503	  434	  347	  287	  251	  203	  175	  164	  132	   83	   64	   44
G&A	           675	  588	  510	  441	  379	  324	  274	  204	  183	  149	  119	   99	   89	   75	   52	   45	   34
Dep&Amm	           262	  228	  198	  171	  147	  126	  110	   96	   84	   75	   69	   61	   53	   44	   28	   22	   15
Pre-Open	    35	   31	   27	   23	   20	   17	   16	   16	   12	    8	    8	    8	   12	   10	    2	    2	    2
DispLoss	    17	   15	   13	   11	   10	    8	    7	    7	    5	    6	    6	    6	    9	    6	    3	    2	5
---------------------------------------------------------------------------------------------------------------------------------------------------
TotOpEx	         8,304	7,236	6,277	5,420	4,661	3,989	3,397	2,682	2,275	1,919	1,548	1,315	1,208	  978	  597	  465	  323
---------------------------------------------------------------------------------------------------------------------------------------------------
OpInc	         1,771	1,543	1,339	1,156	  994	  851	  711	  533	  456	  351	  288	  204	  124	  108	   31	    6	   -8
---------------------------------------------------------------------------------------------------------------------------------------------------
IntInc	             9	    7	    6	    6	    5	    4	    4	    2	    2	    2	    1	    1	    3	    6	    0	    0	    0
IntEx	             0	    0	    0	    0	    0	    0	    0	     0	    0	    -3	   -0	   -0	   -0	   -0	   -1	   -0	  -0
---------------------------------------------------------------------------------------------------------------------------------------------------
EBIT	        1,780	1,551	1,345	1,162	  999	  855	  714	  534	  458	  350	  289	  204	  127	  114	   30	    6	   -8
Taxes	         -685	 -597	 -518	 -447	 -385	 -329	 -269	 -207	 -180	 -135	 -110	  -77	  -49	  -43	    7	    0	    0
---------------------------------------------------------------------------------------------------------------------------------------------------
NI	        1,095	  954	  827	  714	  614	  526	  445	  327	  278	  215	  179	  127	   78	   71	   38	    6	   -8
---------------------------------------------------------------------------------------------------------------------------------------------------
EPS													
Basic	        34.23	29.97	26.13	22.68	19.60	16.86	14.35	10.58	 8.82	 6.89	 5.73	 3.99	 2.39	 2.16	 1.43	 0.24	-0.34
Diluted	        33.71	29.52	25.74	22.34	19.30	16.60	14.13	10.47	 8.75	 6.76	 5.64	 3.95	 2.36	 2.13	 1.43	 0.24	-0.34
WAShrs
Basic	           32	   32	   32	   32	   31	   31	   31	   31	   32	   31	   31	   32	   33	   33	   26	   25	   22
Diluted	           32	   32	   32	   32	   32	   32	   32	   31	   32	   32	   32	   32	   33	   33	   26	   26	   22
---------------------------------------------------------------------------------------------------------------------------------------------------																	
OpCashFlow	                                                 $682 	 $529 	 $420 	 $411 	 $289 	 $261 	 $199 	 $147 	 $104 	  $77 	
MaintCapEx	                                                ($253)	($200)	($197)	($151)	($113)	($117)	($152)	($141)	 ($97)	 ($83)	
FranchAcq.	                                            	   $0 	   $0 	   $0 	   $0 	   $0	   $0	   $0     ($6)	   $0	   $0	
FCF		                                                 $429 	 $329 	 $223 	 $260 	 $176 	 $143 	  $46 	   $1 	   $6 	  ($6)	
FCF/Shr.	                                               $13.63 	$10.51 	$7.01 	$8.18 	$5.55 	$4.47 	$1.40 	$0.02 	$0.24  ($0.22)	

---------------------------------------------------------------------------------------------------------------------------------------------------
RevGrth.	14.8%	15.3%	15.8%	16.3%	16.8%	17.8%	27.8%	17.7%	20.3%	23.6%	20.9%	14.0%	22.7%	73.0%	33.3%	49.2%	
%ofSales																	
Food & Pack	34.6%	34.6%	34.6%	34.6%	34.6%	34.6%	34.6%	33.4%	32.6%	32.5%	30.6%	30.7%	32.4%	31.9%	32.2%	32.7%	33.3%
Labor	        22.0%	22.0%	22.0%	22.0%	22.0%	22.0%	22.0%	23.0%	23.5%	23.9%	24.7%	25.4%	26.4%	26.7%	28.5%	29.6%	29.8%
Occupancy	 5.6%	 5.6%	 5.6%	 5.6%	 5.6%	 5.6%	 5.6%	 6.2%	 6.3%	 6.5%	 7.0%	 7.5%	 7.4%	 7.0%	 7.6%	 7.7%	 8.1%
Other	        10.4%   10.4%	10.4%	10.4%	10.4%	10.4%	10.6%	10.8%	10.5%	11.1%	11.1%	11.5%	12.3%	12.1%	13.2%	13.7%	13.8%
G&A	         6.7%	 6.7%	 6.7%	 6.7%	 6.7%	 6.7%	 6.7%	 6.3%	 6.7%	 6.6%	 6.5%	 6.5%	 6.7%	 6.9%	 8.3%	 9.5%	10.8%
Dep&Amm	         2.6%	 2.6%	 2.6%	 2.6%	 2.6%	 2.6%	 2.7%	 3.0%	 3.1%	 3.3%	 3.8%	 4.0%	 4.0%	 4.0%	 4.5%	 4.6%	 4.8%
Pre-Open	0.35%	0.35%	0.35%	0.35%	0.35%	0.35%	0.38%	0.48%	0.44%	0.37%	0.42%	0.55%	0.87%	0.88%	0.31%	0.47%	0.52%
DispLoss	0.17%	0.17%	0.17%	0.17%	0.17%	0.17%	0.17%	0.21%	0.18%	0.26%	0.34%	0.39%	0.70%	0.57%	0.50%	0.36%	1.43%
---------------------------------------------------------------------------------------------------------------------------------------------------
TotOpEx	        82.4%	82.4%	82.4%	82.4%	82.4%	82.4%	82.7%	83.4%	83.3%	84.6%	84.3%	86.6%	90.7%	90.0%	95.1%	98.7%	102.5%
OpInc	        17.6%	17.6%	17.6%	17.6%	17.6%	17.6%	17.3%	16.6%	16.7%	15.4%	15.7%	13.4%	 9.3%	10.0%	 4.9%	 1.3%	-2.5%
---------------------------------------------------------------------------------------------------------------------------------------------------
IntInc	        0.09%	0.09%	0.09%	0.09%	0.09%	0.09%	0.09%	0.05%	0.07%	0.09%	0.08%	0.06%	0.26%	0.56%	0.01%	0.04%	0.08%
IntEx	        0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%  -0.13%  -0.01%  -0.03%  -0.02%  -0.03%  -0.13%  -0.04%  -0.01%
Taxes	        38.5%	38.5%	38.5%	38.5%	38.5%	38.5%	37.6%	38.7%	39.3%	38.5%	38.1%	37.9%	38.5%	38.1%  -24.7%	 0.0%	 0.0%
WAShr. Change	 0.5%	 0.5%	 0.5%	 0.5%	 0.5%	 0.5%	0.74%	-1.58%	0.03%	0.13%  -1.14%  -3.15%	0.00%  25.68%	3.35%  14.01%	
---------------------------------------------------------------------------------------------------------------------------------------------------																	
StoreGrth%	 8.0%	 8.5%	 9.0%	 9.5%	10.0%	10.5%	11.8%	13.1%	14.6%	13.5%	13.4%	14.2%	18.9%				
NewRest	          225	  220	  214	  206	  197	  187	  188	  185	  180	  146	  128	  119	  133				
Rest@End	3,032	2,807	2,587	2,373	2,167	1,970	1,783	1,595	1,410	1,230	1,084	  956	  837	  704			
Avg. Rest	2,920	2,697	2,480	2,270	2,069	1,877	1,689	1,503	1,320	1,157	1,020	  897	  771	  704			
GrthOnAvg	 8.0%	 8.5%	 9.0%	 9.5%	10.0%	10.5%	11.8%	13.1%	14.6%	13.5%	13.4%	14.2%	18.9%				
Sales/AvgRest	3,450	3,255	3,071	2,897	2,733	2,578	2,432	2,139	2,069	1,962	1,800	1,693	1,728	1,542			
Grth/AvgRest	 6.0%	 6.0%	 6.0%	 6.0%	 6.0%	 6.0%	13.7%	 3.4%	 5.5%	 9.0%	 6.3%	-2.0%	12.0%				
---------------------------------------------------------------------------------------------------------------------------------------------------																	
																	
Todays Price & P/E	$627	 41.6 															

FuturePrice	 2020	 2019	 2018	 2017	 2016	 2015											
10 x Earnings	 $337	 $295	 $257	 $223	 $193	 $166											
15 x Earnings	 $506	 $443	 $386	 $335	 $290	 $249											
20 x Earnings	 **$674**	 $590	 $515	 $447	 $386	 $332											
25 x Earnings	 **$843	 $738	 $643**	 $558	 $483	 $415											
30 x Earnings	**$1,011	 $886	 $772	 $670**	 $579	 $498											
35 x Earnings	**$1,180	$1,033	 $901	 $782	 $676**	 $581											
40 x Earnings	**$1,348	$1,181	$1,029	 $893	 $772	 $664**											
Today's P/E	**$1,402	$1,228	$1,071	 $929	 $803	 $691**											
																	
AnnulizedRet	 2020	  2019	  2018	  2017	  2016	  2015											
10 x Earnings	-9.8%	-14.0%	-20.0%	-29.1%	-44.5%	-73.5%											
15 x Earnings	-3.5%	 -6.7%	-11.4%	-18.9%	-32.1%	-60.3%											
20 x Earnings	 1.2%	 -1.2%	 -4.8%	-10.7%	-21.5%	-47.1%											
25 x Earnings	 5.0%	  3.3%	  0.6%	 -3.8%	-12.3%	-33.8%											
30 x Earnings	 8.3%	  7.1%	  5.3%	  2.2%	 -3.9%	-20.6%											
35 x Earnings	11.1%	 10.5%	  9.5%	  7.6%	  3.8%	 -7.3%											
40 x Earnings	13.6%	 13.5%	 13.2%	 12.5%	 11.0%	  5.9%											
At Today's P/E	14.4%	 14.4%	 14.3%	 14.0%	 13.1%	 10.1%
13 Likes
14

I feel like I am playing “Name That Tune”, and this would be good fodder for Stock Gumshoe…

not to worry, if it does become a “bargain”, Saul and the collective community here will bring it to surface in a way that will make it a more clear.

No offense meant, I am actually amused at how much more data I would need to figure out who this company is…

Cosmid

1 Like
15

Well Cosmid it is a hot little tamale and if you look at the earnings that were given out it shouldn’t be to hard to figure out.

Andy

16

Nicely played, Andy. Just a few pieces of data and I figured it out without need for the whole enchilada…

But the somewhat cryptic (by need) nature of the discussion struck a chord with how I used to respond to what I would refer to as teasers (not implying that is what was happening here, just about my response to the mystery). I felt I had to know what they were and run out and buy them…you know, the whole 3D printing and “what to buy when cable collapses” narrative. Sort of felt that they must have value because I was the only one not in on the secret!

Through Sauls’ generous sharing and the contributions of those who frequent this board, I have come around to thinking that I am better off gaining a better understanding of what I own than chasing the next big thing.

There is a certain level of contentment that comes with knowing that I don’t need to own every winning stock out there, although a few wouldn’t hurt.

Cosmid

3 Likes