Rich and Scott, Here is from another forum a poster's perspective with his "quick n dirty" take. The poster was looking for feedback and is buffeteer/greenwald type investor.Would love your opionion========================================================================Their business fundamentals look impressive. Their ROE has actually been increasing over the last few years amid some fairly rapid expansion. They certainly seem to be operating very well and I can understand why their CEO was voted CEO of the year. The problem however is in their current valuation, which I believe to be much too high.I ran a two part DCF calculation based on some of the info from the 10-K. First, they have predicted that they can open up to 3500 stores in NA and at a 15% growth rate they will reach that level in 2010. After that I assumed a PE of 17 based on WMT today because they will likely find the same ROE erosion as WMT did as they attempt to expand globally. I looked at several ways to get shareholder FCF from 2007 to 2010 and the way I liked best was to simply take their payout percentage over the last two years in dividend and share buybacks of roughly 40% and project that onto to net earnings. That seemed to make the most sense since I do not expect any changes to their capital structure at this time.Year / Net Earnings / Payout (All numbers in millions)2007 / 230 / 922008 / 265 / 1062009 / 304 / 1222010 / 350 / 1402010 Terminal Value - $5,950Using this method I then discounted the cash flows by various discount rates and divided by the 151MM OS shares.6% - $348% - $3110% - $2912% - $27 As you can see, there is no factor of safety here. It seems to be a case of a well known darling of the street that was priced for absolute perfection and still hasn't gotten down to where it really should be. One thing that could change these calculations though is leverage, which they currently don't use. There may be some fundamental reason for this that I'm not aware of so I would not like to make any assumptions that it will change in the future. It does however make them a potential takeover target if the shares ever do get beaten down.
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