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Author: lostpros Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 129  
Subject: Valuation Date: 4/30/2004 10:48 AM
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This idea of how to Value comes from TMFCop and is found in "Fire Your Stock Analyst!" by Harry Domash, an investment columnist for the San Francisco Chronicle.

I have done an abbreviated version to get a quick valuation, so I know when to buy as it goes down. (I use Moneycentral as my source). Thoughts and feedback would be greatly appreciated. I recognize I may be way too conservative with some of my projections, but this accounts for my conservative nature. I encourage others to tweak the numbers as they see fit and come up with their target buy in price.

RBK – quick value

1. Sales

2003 – 3485.3
1994 – 3280.4
CAGR = .68

1999 – 2899.9
CAGR between 1999 and 2003 = 4.7%
Most recent quarter = 4% but see Gunsightpass's post referenced below as well as the following thread that includes mac750's commentary

This gives us an idea. Last year sales grew 11%. I will use 13% (this could be aggressive or conservative depending upon how you look at it – 4% most recent quarter would be 16% for the year, but see impact of currency sales etc.).

Project sales 2 years out – $ 4450.4 million (FY05)

2. Net profit margin
10 year average 3.62
Current profit margin 4.5

Again to be conservative, I will use 4.1.

3. Compute net income.
4450.4 x .041 = $182.5 million

4. Estimate outstanding shares.

Shares outstanding 1994 – 80.9 million
Shares outstanding 2003 – 59.6 million

You have to love that!! Shares have stayed pretty constant around 60 million the past three years, so I will use that number.

5. FY05 EPS = 182.5/60 = $3.04 (interestingly, this is .01 more than the low analyst estimate).
6. For the last ten years, the PE has been between 11 and 20, other than an aberration in the great bubble of 1998 and 1999. I am going to use this range.

FY05 Low Target Price = 11 x 3.04 = $33.44
FY05 High Target Price = 20 x 3.04 = $60.80

Average these together and you get a FY05 Target price of $ 47.12.

The current P/E is 15.7, assuming it stays constant you get a target price of $ 47.73
Thus, I see a two year target of $48 as realistic.

Note this does not account for the current dividend yield of 1.20 or .45 a share. So, here is where I get a little confused. I am going to take a target price and then add .90 to it b/c of the two year dividend. Thoughts welcome.

7. Margin of safety. I don't think you need to build a huge margin of safety with a stock like RBK, but will use 40 percent to be conservative. Others, of course, can adjust this.

Taking my target price of $48 and multiplying it by my margin of safety, I get $28.80. Then adding back the dividend, I get a target price of $29.70. As you can see, this is a very conservative estimate for RBK. A little more aggressive investor would see the current price levels as a great buy-in point. For example, if I am right and the earnings only grow by $3.04 and the PE stays at its current levels, you will have a $48 stock in two years. That is a 15.5% rate of return, which is fantastic. The average estimate is $3.14, which puts the stock at $49.45 with its current PE; and if they actually grow at 15% and their profit margins stay at 4.5% then their EPS would be $3.46 and their price would be $54.3 for a return rate of 23%.

Now the challenge for this board, justify the growth and profit margins or what you think they might be and why. These are definitely things to watch in the upcoming quarters (as well as this one – I have not yet reviewed the numbers) to see if the higher numbers will materialize. Gunsightpass and Mac750 have an insightful review/discussion of the first quarter numbers, which can be found here: http://boards.fool.com/Message.asp?mid=20673643
and in the following posts.

I hope this will spark some discussion of a great buy-in price. Let the debate begin.

lostpros
– who owns RBK and would like to add to the position at the right price.


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