Message Font: Serif | Sans-Serif
No. of Recommendations: 5
Disclosure: I just purchased this stock yesterday at 25.31

If anyone reads this board, I would like your comments. My basis for this purchase is generally along the lines of some guidelines you will find towards the end of Chapter 15 of II. I don't have my copy of II in front of me, but I believe it starts withs A winnowing of the Stock Guide.

He starts with a screen for stocks with P/E of 9. I have used a requirement of P/(3 Year average Earnings) of 10. This is based on a rough rule of thumb that I have set myself as follows:

Buy at P/(3 Year average Earnings) < 100/(30 Year Treasury Bond Yield + 5)

This is loosely based on a Graham example (Chapter 20 I think) where he indiates that by requiring a 5% better earnings power, you have a 50% margin of safety over 10 years.

Sell at double the current indicated buy. (i.e. this will change after you buy if either the Treasury bond yield or the earnings power of the company changes.

The other requirements of his winnowing of the stock guide are:

1. Current Assets / Current Liabilities (Current Ratio) > 1.5
2. Debt not more than 110% of net current assets (for industrial companies)
3. No earnings deficit in the last 5 years.
4. Some current dividend
5. Some EPS growth in the last 5 years.
6. Price less than 120% net tangible assets.

I have added 1 more.

7. Never pay more than 25 times average earning for the last seven years (page 159 of my copy of II - the Jason Zweig revised edition)

I like to use two methods of checking earnings.

Method 1: Indicated earnings as found at say

Method 2: By looking at the change of Book Value per share plus dividends per share over the period. This overcomes some funny accounting and I think partially addresses the issue of expensing employee stock options.

Estimated earnings as indicated by the company are $2.05 - $2.15 per share. For the three year avarage, I will just use 2001 - 2003 as the data is easier to get and it is more conservative since the 2001 earnings were lower that the 2004 estimate.

Now to go through each step:


Method 1 3 year earning average: $3.09
Method 2 3 year earning average: $2.86
Using lower value and $25.31 buy price, P/E = 8.85

Rule 1:
Current Ratio = 1.65 from

Rule 2:
From same source
Net Current Assets = 590.3 - 357.7 = 232.6
Even if we take a conservative view of debt (= all non current liabilities), we get debt = 533.4 - 357.7 = 175.7
Debt is < 110% Net current assets.

Rule 3:

Rule 4:

Rule 5:

Rule 6:
Book Value per share from last Balance sheet stands at about $18.26. My buy price is about 139% of this. I am not too worried about exceeding Graham's limit on this one. Warren Buffet felt Graham focused too much on only buying at minimal excess to book value.

Rule 7:
I will use 6 year average for this as the data is more readily available for Method 2 for 6 years.
Method 1 6 year earning average: $2.06
Method 2 6 year earning average: $1.92
Using lower value and $25.31 buy price, P/E = 13.2

One thing I did not account for at all was the recent acquisition of the European venture. I took a chance on that. Perhaps not an intelligent move.

I would live to hear some commentry on my evaluation.


P.S. The current dividend yield on my buy price is 3.16%

Print the post  


When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.