VALUING WHOLE FOODS

I love owning Whole Foods.  It is a great example of a Rule #1 company.

First, Rule #1 investors don’t buy stock.  We buy businesses.  That means we evaluate the opportunity as if we owned the whole thing and as if there was no stock market for the next ten years. 

Second, Rule #1 investors try to buy $1 of value but only pay $0.50 for it.  When we do this correctly we know we are going to make money at some point.  We also know that our risk is less than if we bought a comparable business but paid the full $1 for it.  We call this a Margin of Safety.  I insist on a MOS because I’m not all that smart and need a cushion that can absorb my mistakes in valuing a business or unexpected problems that the business might have.

For those two reasons, we have to put a value on a business before we can buy it.  Valuing a business the way we do it with Rule #1 is all about predictability.  Predictability comes from consistency and consistency comes from some form of monopoly.  Without getting into this in detail, and getting back to Whole Foods, WFMI has a monopoly in the natural foods business and a growing monopoly in the high end grocery business and has a management team that produces consistent growth in cash, earnings and equity.  In my view WFMI and Wal-Mart are going to crush the old school grocery stores between them; WFMI from the top, WMT from the bottom.  As a business owner, that’s the kind of market clout that I’m looking for to predict the future with some degree of certainty.  In other words, because of its growing monopoly it looks like WFMI should be able to continue doing for the next ten years what its been doing for the last ten years.

So what has it been doing for the last ten years?  It been doubling EPS every two years.  Over 40% per year.  Its been doubling equity every three years.  Over 26% per year.  Same with cash.  It can pay off its debt in 6 months.  ROE is at 14%, ROIC is at 11%.  Those numbers scream ‘PREDICTABILITY’!!!

So how to value it?  The minimum return on our money that we’ll accept is 15% per year.  To get to the correct current value for WFMI we just estimate future growth based on past growth and apply the 15% minimum to get a current retail price – which I call Sticker Price.  Here’s the calculation on an excel spreadsheet:

1.      current ttm eps: 2.32

2.      past growth rate:  26%-40%.  Zacks avg. is 20%.  Use 22%

3.      est. future PE: 44 (double eps growth but not more than 50)

4.      EPS in 2015 =fv(22%, 10 yrs, $2.32).    $17 per share

5.      Value per share in 2015 = $17*44        $746 per share

6.      Sticker Price =pv(15%, 10, $746)          $184 per share

7.      MOS Price = Sticker / 2                       $92 per share

8.      Actual Price per share Feb 4, 05     $90 per share

The Sticker Price is the price that will get me a 15% return for the next ten years if everything goes as the analysts think it will.  Since on Feb 4, Sticker is about 100% above MOS, I’m in a great situation.  I like the fact that the company’s actual results significantly exceed the my projection.  If a lot goes right, and it could, this company could rule the grocery world in a few years.  A growth rate at their low end average of 26% would put the Sticker Price today at $290 a share.   That makes me feel like my MOS probably has more cushion than it looks like. 

That’s good because I bought Whole Foods at $90 today.

That said, WFMI is trading at a huge multiple.  It wouldn’t take much bad news for it to pull back to 70.  So, at least those of you who are using tools, watch the arrows, watch the big guys and don’t hesitate to go to cash when the money runs the other way.  You can always get back in when they return.

Now go play!

Comments

[Debra Cross]

I just heard you speak at a "Get Motivated" seminar in Cleveland. What was the program that you used in your presentation that showed the green arrows and red arrows?

[Phil]

That was Success Magazine's Investor Toolbox.

[Gary Overgard]

When you use Invest Tools to search for 'Rule #1' companys which of the search strategies are you using? Is there an equivalent on any of the free sites?

[Phil]

Hi Gary,

Here are some links to previous posts that will put you on the right path:

http://philtown.typepad.com/phil_towns_blog/2005/10/from_jon_carr_c.html

http://philtown.typepad.com/phil_towns_blog/2005/10/investools_sear.html

Now go play.

[Ricky C]

Hey Phil!
Rule #1 has jumped all the way up to #6 on Amazon's book list! Not bad for less than one week.

It's great reading. Can't wait to finish the book and begin applying the principles. Posting the calculators on the Web site is very cool, too.

I believe the indicators are pointing to a #1 on Amazon! ;)

Great job and good luck.

RC

[Phil]

Thanks, Ricky! Let me know how you like the book.

[Sarah]

I just did my eval on Whole Foods, but it bothered me that the 1 year EPS growth rate was -6% (based on the 9/04 data of 1.05 and 9/05 data of .99). Does the 1 year data not matter as much as the 5 and 10 year? I'm getting my data from MSN Money, btw.

[Sarah]

Ahhh...this was your post from LAST year. Sorry about that!

[John McIntire]

Phil, I am reviewing your 2005 estimate of WFMI and comparing it to my current calcs - where did you get a TTM EPS of 2.32? I looked at all the historical data knowing you did this valuation in the summer of 2005. So, to update these numbers, and test my mad skilz, here is what I get now:

EPSGR - 21.60
Analyst 5yr proj GR - 19.60%
Rule #1 PE - 39.20
Future EPS - 5.93
Future Stock Price - $232.40
Sticker - $57.45
MOS - $28.72
Current Price - $66.06

Therefore - way out of our ballpark! Right?

[John D]

John,

I ran the current figures and came very close to your MOS, just a little higher at $33.00. The current stock price of $66.00 appears to be full sticker price as of today.

I also was a little perplexed at first when I saw Phil's numbers. When I checked the charts I realized there was a stock split on 12/28/05, which would reduce every other number by 50%, from that point forward.

So when Phil used the TTM EPS of $2.32 it was equal to a TTM ESP of $1.16 after the split. This is still higher than any ESP figure I can find, but at least more reasonable.

Phil said he purchased the stock on 2/4/05 for $90.00 which would be correct since current charts show the price on 2/4/05 to be $45.00, which also reflects the split in Dec 2005.

John D

[John McIntire]

Ahhhhhhhhhhhh... I see said the blind man...

[John Zuker]

Hi Phil,

I've thoroughly enjoyed your book and I'm anxious to get started. I've been a buy and hold/diversify guy for years, and I have paid a big price for that. But I'm now ready to take more control.

Anyway, I currently own Starbucks which, in spite of the market ups and downs, has ultimately been very good to me. As a way of getting some practice with the numbers and to determine the current sticker price (when I see a Starbucks right across the street from another one, I wonder how much more can they grow?) I came up with the following. (All from MSN/Money as you direct in your book)

BIG 5 (rounded) 10yr 5yr 1yr

ROIC 16% 23%
*Eq Grwth 16% 12% 16%
EPS grwth 26% 25% 25%
Sales Gr 26% 22% 24%
FCF 36% 34% 34%

*Equity Growth based on current BV/S- 3.15 from initial BV/S (9/96) of .73. (It dropped from '04 to '05 as did Free Cash Flow.)

Sticker Price Calcs;

Current EPS- .70

Estimated EPS Grwth- 16%
This is where I got a tad confused. I did go conservative, as you suggest.
Historically, the 10 year Equity growth rate has been about 16% with a drop from '04 to '05 (the 5 year was 12%).
EPS growth and Sales growth have remained strong, about 25%. Analysts predict 21.6% (5 yr) EPS growth going forward. But going with the lower, "Rule #" number, I think, would put me at 16%. Slower growth ahead doesn't seem out of the question.

Est. Future PE- 32 (16x2)
Again, the historical PE averages out to 41. But going with Rule #1, I went to the lower PE. (Current PE is about 50.)

Future Market Price- 84$
16% is close to %15, so two doubles in 10 years. Therefore, EPS 10 years from now will be about $2.80.
(.70 doubled is 1.40. 1.40 doubled is 2.80) So $2.80 x 32(PE) = $84.

STICKER PRICE-$21 (84 divided by 4 -to ensure min. ROR of 15%) In the low 20s, in any event.

Current Price is around $35. Am I being accurate and, therefore, SBUX is way overpriced, or are my numbers skewed too conservatively?

That estimated future EPS growth number seems to be the tricky one.

How did I do?

Best,

John Z

[John Zuker]

Apologies. I put that last post in the wrong place.

Best John Z

[bttweb]

Whole Foods dropped to $48... mmmm.. looks like some1's calculation were OFF

[Frank]

You know, I've started watching Jim Cramer's Mad Money on CNBC, here and there, about a month ago. As much as I want to dislike the show, I don't. But there are a lot of things I don't agree with him on. I heard a rumor that stocks he talks in favor on his show have been known to jump 10% the following day. I have to believe the majority of people that watch this show are only trying to make a quick buck and have know idea how to research stocks on their own. If I find a company that meet the 4M's and have the Big 5 numbers, I don't need to call Jim Cramer ask him what he thinks. I already have enough info to make an informed decision on my own. When listening to Jim Cramer talk about stocks or tell people what he thinks about their picks, I keep this in mind, Jim Cramer can confirm a companies Moat, and whether it has good management or not, but what he can't confirm is:

Meaning: When Jim Cramer talks about stocks he likes, these are companies that have meaning TO HIM. Don't go out and buy these companies the next day, just because Jim Cramer owns it, if it doesn't have meaning to you. I can't believe people call him to ask what he thinks of their picks, and if he likes them, people will buy them, regardless if they have meaning to that person or not. If he doesn't like them, people might stay away from them, even if they have meaning to that person and all the numbers are great ( Uhumm..Uhumm..E-bay.... )

Margin of Safety: Jim Cramer isn't going to tell you whether a stock is half off ( you know... buy a dollar of value for 50 cents).
I was really irked the other night when Starbucks reached around $39 and he's telling people it's still a buy. For rule number 1 investors it's not a buy. We only buy companies at 50% off. Maybe Cramer likes to pay a 10-20% off retail, but not me. Listen, if Jim Cramer only talked about stocks at 50% off, I don't think he would have a show, because number 1: Not a lot of companies are at 50% off during the same period. Number 2: Jim Cramer gets excited talking about the stocks he likes and is passionate about. Sure, he might find companies at 50% off, but he might not be passionate about them. When people call him for his thoughts on a company, I'm sure he assumes the person calling did some homework on their own - regardless whether they did or not.

With all this said, I do like Mad Money. I find it entertaining, and some bits and pieces informative. My only advice when watching this show ( or any other shows that give stock advice ) is think for yourself, don't let these people think for you. Do your homework, follow the 4Ms and confirm the Big5 regardless what advice Jim Cramer or anyone else gives you.

I'm done with my rant for the day.

[Patrick T. Kelly]

Phil; I am reading your book and, since I have never invested in the market before, am wanting to invest 1,000.00 in the market and if it works, more to follow. . Where would I go about researching companies?

Thanx

[Rich]

Phil,
Thank you so much for generously sharing the strategies in your book. They have turned my life around!
A clarification I need: When you puchase a company at a set price... and then unfortunately it goes down in price. What I have been doing is paying attention to the 3 tools in terms of when to sell, BUT I never sell until (1) the price goes back up to profit level and of course (2) all 3 tools are telling me to get out. Am I following your strategy exactly????? It wasn't clear to me in your book.

[Kim]

After seeing you on MSNBC last night I came to find out more. I read your first entry in the blog where you said Whole Foods was "on sale" in February and bougt at $90.00. Today, June 10th, the price is $39.00 What happened?

[Molly]

Kim and Bttweb,

This blog is over 2 years old, therefore, the stock prices of Whole Foods are over two years old! If you read some of the other comments, some of the people said that Whole Foods stock split a long time ago.

The archives are really not meant for information about what stocks are currently doing. You all might get more responses if you post on a more recent blog.

[Matt]

Phil,
I saw you on the millionaire inside and thought what you had to say made a lot of sense. I purchased the book and have started to invest on my own. I am familiar with Coach and remembered from the first show that Coach was on sale. I thought I would look at Coach just to see for myself if it was still on sale. According to my calculations, it is. However, I was wondering if you have it being on sale or not. Coincidently, I had calculated the numbers for both United Health and Healthways (you mentioned them on the second show) and had them valued below what you had mentioned. I was wondering if you had looked at Coach recently to see if my calculations are correct. Maybe I'm doubting myself because since I have purchased a few shares, it has gone down. I guess that will happen from time to time though. Thanks for your time.

[Dan]

It looks like phil stopped answering to these post a long time ago so if you are still curious about whole foods here is what happened. Whole foods is a great company with good management who is invested in the company for the long run. The bump in the road the company hit was when it made it's bid to aquire one of their rivals Wild Oats. The FTC feels by allowing Whole Foods to go through with this it would create a monopoly in the organic foods business. I almost bought Whole Foods myself a few months ago but decided to wait until I heard the news on the FTC decision. I'm happy i didnn't but then because I was able to take that money and invest else where for the time being. However I feel that Whole Foods is a good long term investment after the case with the FTC blows over. If your are further interested in Whole Foods there is a story out there about the CEO making posts in a Yahoo! finance group.

[sue]

could somebody pleas do a calc on aapl. Seems to me its on sale.

[Benjamin]

Sue,
Here is what I got for AAPL:
Current EPS: $3.54
Rule #1 Growth Rate: 24%
Rule #1 PE: 36
Sticker Price: $270.73
MOS: $135.37

PS: You should note that AAPL's big 5 numbers are not so consistent and therefore make it rather unpredictable.

[David]

Sue, I show AAPL is on sale based on the following using Investools:

Sticker Price = 344.55
MOS Price = 172.28 (50% of Sticker)
Today's Last Price = 131.77 (if my math is correct that is a rounded 62% discount)

So, I would put it in my watch list and do the further research as Phil suggests.

[James]

Does anyone else find that Disney is a good long term investment? Well established company, wide moat, good historical numbers. I am trying to make my first purchase after reading Rule #1 recently and want to get started on a good company to start my retirement investment fund. Anyone have any successful suggestions?

[Stephanie]

I took the plunge and started purchasing my companies in July. I definiately hit a lot of bumps and bought some losers from miscalculations. But I seem to be on track and now my question is, do you sell once you hit your 15% return and then wait for it to come back down to repurchase, or do you hang in until the company hits it's sticker price? Or do you Warren Buffet and never sell?

I would love to get some other opintions.

Thanks,

Stephanie

[Tom]

Looking at CVS - my numbers must be off. I'm getting an MOS of 91.56? Anyone like to take a stab at this one? Here is what I'm seeing:
Current EPS - 1.72
Future EPS - 19.9
EPS growth Rate - 36.08
Sticker price - 183.13
MOS - 91.56

Just using CVS as an exercise to get used to running the numbers for now.

[Leon]

What is the best was to compute cash flow? I am confused and the book is not helping.

Thanks.

[j.b.]

leon,

check out phil's FAQ, particularly this one:

http://philtown.typepad.com/frequently_asked_question/2007/05/where_do_i_go_t.html

[Bill]

Guys, I do not how to say this...other than I am real pleased with this education process and the discipline that Phil has introduced us to...

Starting from when I took most of my team to the Atlanta "Get Motivated" session at the first of the year…during which I decided to follow Phil's advice (after which I read his book, wore out his audio book, etc) on top of some of the basic Investools training (2/07).

All I can say is thanks Phil...!!!!

I have taken charge of our finances...and in spite of my wife's total resistance, have won her over!! Based upon the results from following the Rule #1 training...just last week, she has moved all of her beloved mutual fund assets over and into the Rule #1 process with TOS...

Bottom line, since mid year Phil's process and the tools have saved and made me $40k + during the ups and downs of the market in my 401k and DC plans. While that is good news...the really good news is that I have learned a ton and can continue to "take charge" going forward - til we die!

As a result of my learning’s, I had moved all of our prior/old IRA's and Roth to TOS and set up some small/new accounts. All of this has (as of today) resulted in the following results:

Roth IRA +30% on CTSH and SLB...+ 2:1 Split on CTSH due on 10/16...post split moved CTSH into cash, locking in gains and as an experiment to see how the performance compared to the cash account (including taxation) - post split.

Cash Account + 22% on CTSH...+ 2:1 Split due on 10/16

IRA (non deduct-contributions)...I use this as my learning account on Covered Calls...+2% on stock and +2.5% on covered calls on SBUX in the last two months.

Phil...Once again, THANKS!!! I am giving your CD' as gifts to all my close family and friends this year!

[ALAIN]

I am new at the RULE #1. Can someone verify that JNPR fits the criteria. These are the numbers I come up with:
Current EPS 0.48
Est. EPS Growth Rate 46%
Est. Future PE 55
FUTURE EPS $21.03
FUTURE STOCK PRICE $1,150
STICKER PRICE $284.21
MOS PRICE 142.10

CURRENT PRICE = $37.04

EQUITY 45.9%
EPS 27.3%
SALES 60.3%
CASH 69.3%
I ARBITRARILY USED $33 AS 1997 SALES NUMBER TO MAKE FORMULA WORK, 1997 sales not available on MSN Money, regardles there is considerable sales increase annually.

Thank you

[Bill]

Alain,

Suggest you check your big 5 again on JNPR and for the last 10 years. Phil tells us that he "never buys a stock with a bad big 5"... and "consistancy is key"...

Here are the numbers:

Last 4 Qtrs, 5-Year Avg 10-Year Avg

ROIC: -17.35% -2.70% -24.65%

Book Value / Share Growth Rate:
-13.88% +41.29% +132.34% *

EPS Growth Rate:
-402.02% -137.93% +1.60%

Sales Growth Rate:
+11.61% +29.30% +416.23% *

Free Cash Flow Growth Rate:
+19.97% +121.58% +227.45%

I get am MOS price of $16.50 to 19.98 depending on if you violate the 50% max on the P/E and use the historic P/E which I would not do...Hope this helps.

[Ed]

I also checked JNPR and CSCO as two competitors week ago and found that CSCO has sicker price about $42 (trading $32) when JNPR has about $19 (trading over $30). Big 5 of JNPR are not good, so despite not 1/2 price went for CSCO. It looks more attractive for many reasons.

Also trying to use rule 1 came to feeling that 2000 bubble creates more optimistic picture even for not looking good companies today. Therefore started to use variables in calculations from 2002.

Would like comments of other users of rule#1.

[Mark]

I have been unable to find an answer about how to calculate cash flow. Specifically that when i subtract "Purchase of Fixed Assets" from "Cash from Operating Activities", PoFA is a negative number. so for example, MDT 2007 is: 2979-(-573)= 3552 ???? As an engineer i have a hard time dropping signs. Please help. Thanks, Mark

[Phil]

Mark,
First make sure the business has a great moat. If it does, then its fine to use Operating Cash Flow numbers. Its the first major line in the cash flow statement, usually about a third of the way down from the top. You'll see that for good moat businesses, its a lot more consistent number for cash flow than free cash and therefore a lot more useful to use to compare cash with earnings, equity and sales.

Free cash is important to watch because some businesses use up all their cash all the time just replacing equipment, so even though they are profitable, the owners have to shove the profits back in to keep the doors open. Its a kind of false profitability.... But if a business has a great moat, yet free cash is all over the place, probably they are using cash to open new stores and grow. Nothing wrong with that.

Bottom line, if you are looking at one of those bouncy free cash flow businesses use the operating cash flow numbers to get a better idea of what's happening with the growth of cash.

Now go play.

Phil

[stewert]

I've enjoyed reading your book, it's given me the convidence to start investing. I'm interested in bank stocks, how do you evaluate them? They don't have sales or ROIC numbers. The one I'm interested in is TD.

Thanks

[Nick]

I have been analyzing many financial instiutions and none fit the critiria for rule 1 due to ROIC. This is due to the typical capital structures of financial instituations (heavy deposits to fund operiations). However, ROE and EPS growth is huge. Can we use a different measure for financial institutions other than ROIC, because they will NEVER fit a rule 1 criteria, but can be a great business.

[j.b.]

With banks, Phil has advised using ROE instead of ROIC:

http://philtown.typepad.com/phil_towns_blog/2006/10/rule_1_question.html

[Brock]

When using the Tools (the three different charts) to gauge when the 'big boys' are doing their buying or selling, how much of a time horizon should one use when pulling up the charts? One month? Three months? Six months? Five days?

These charts can look radically different from a short time horizon vs. a longer one, despite the fact that each tool is using the factor numbers.

In the Rule 1 book I see two of the charts pictured using a six month horizon; yet another (moving average) is shown using only a four month chart.

Any clarification would be appreciated.

[Ralph]

Phil,

I saw you at a Get Motivated seminar in Orlando and never forgot about you. Now I have your book and am paper trading. I worked the numbers on RYL and came up with a sticker of $88 and a MOS of $44. The business is selling for $25. Could Mr. Market be that far off, or am I? You rock!

[Carrie]

I just finished reading Rule #1 last night and I absolutely love it!

I’m a bit confused by figuring out the Sticker Price for Exxon Mobil (XOM) (not that I’m a huge fan of XOM, but I inherited some stock from my grandma and am trying to figure out what to do with it…) Anyway, here are my #’s

ROIC 19% 23%
Equity 9% 13% 13% 9%
EPS 17% 25% 28% 16%
Sales 7% 12% 15% 2%
Cash 19% 16% 4%

(Something crazy must of happeded in '06 -all of the growth rates dropped)

Current EPS= $6.99
Estimated Growth = 12% (my #)
= 5% (analyst #)
Historical PE = 18
= 24 (my #)
=10 (analyst #)

Sticker Price = $28 (using analyst #’s)
= $53 (using 12% growth rate and PE10)
= $96 (using 12% growth rate and historical PE 18)

Sticker price is huge difference!!!!!! Either sticker price is way high and I need to get out or it’s priced just right (today’s price is $90 and falling). Any help would be greatly appreciated!
Thanks,
~Carrie

[al]

Carrie,

Phil says in the book to always go with the analysts' growth rate, since they often know something we don't. Unless you're really sure you understand the company and have a solid justification for going with the higher growth rate.

[Ray]

This is a comment addressing Mark's question about calculating cash flow with negative numbers. I think I understand his question, if he is using MSN. On MSN the cash flow summary gives "Purchased of Fixed Assets" as a negative number (and also colors it red). I don't believe the numbers are negative just a DEBIT from the finance sheet and therefore represented as a red, negative number. I am also an engineer so I think we need to take the ABSOLUTE of "Purchase of Fixed Assets". To prove this do a simple example from Phil's hardcover book, page 102. Use Garmin's Cash numbers listed in the table and the numbers listed on MSN for Cash Flow. If you subtract the absolute of "Purchase of Fixed Assets" from "Cash from Operating Activities" your numbers come close to Phil's. The numbers don't match the other way. Ex. Cash for 2002 (taken from MSN) 161.88 - 12.42 = 149.46. Phil has 149 listed in his table. The long of the short of it - just drop the negative. Please let me know if my logic is wrong Phil. Thanks for a great book.

[Paula Verschuren]

Hi Phil, just read your book, great stuff but I'm new to this and i all ready signed up with morning star. I was wondering if you could walk me through the numbers on the morning star site? Where do i find the ROIC and the big 5#? Thanks.

[Josh]

Phil,

I have a question pertaining to the historical charts and how often per day you check them. I have noticed that sometimes the shapes of the curves or the points of crossing when we should buy or sell change depending on what day and what time of day you look at the charts.

Do you really need to watch the curves several times a day to make sure you buy and sell at the right time? How often do you look at the curves to determine your strategy?

[anonymous]

Phil says he checks the tools after the markets close, at night.

[Vinita Malani]

In Chapter 13 you state that there are two times to sell a wonderful company! Shouldn't this be three, to include the time when the tools signal a sell situation even though the market price has not crossed the Sticker price

[H. R.]

Hello all,

I am new to rule 1 investing and stumbled upon a website that sells ruleone company lists, where all the calculations are done for you. Does anyone know anything about this? Is it worth exploring? Thanks.

[David]

Banks don't have an ROIC value, nor do they have sales. So, what to use instead?

[syed]

Phil

I have become fan of your after reading your book "Rule #1" and has since recommeded it to many guys who wanted to invest in Stock Market. What is your take on Whole Foods symbol WFMI now. Would you buy it with all the bad news at the $39/- $40/0 price in this market? or would you wait till it comes back down to 35 in near future? Please advice?

Thanks,
Moghis

[James Byers]

Can you help me understand the "wash sale" rule and how this has an effect on returns? (a) for taxable accounts and (b) for 401k accounts. As I watch the 3 arrows I am learning about the "wash sale" rule and want to make sure I don't get hurt due to this IRS rule.
Thanks, Jim

[jb]

David,

With banks, Phil has advised using ROE instead of ROIC:

http://philtown.typepad.com/phil_towns_blog/2006/10/rule_1_question.html

[Ziv]

Hello Phil,
I just want to know if this equation is right:

ROIC =
(net cash provided by operating activities)/(Total laibility and shareholders' equity)

so I could calculate the last 10 years average ROIC when I'm reading the company's financial reports

Thanks

[Laura]

Ziv,

Here is a post where Phil outlines how to manually calculate ROIC:

http://www.philtown.com/phil_towns_blog/2006/05/all_about_roic.html

[Shay]

Hi all

Just finished with the reading of the book and some of the examples in this blog and got started screening some buisnesses.

As it's my first trial please se if I'm doing it right.

One of the buisnesses I've found so far was
Aaron Rent. (RNT)

The big 5 are from MSN

ROIC 11.6% ,11.7% (1,5)
Equity 29.15%, 19.86%, 18%, 14% (1,3,5,9)
EPS 28.95, 26.28,40.34.14.93 (1,3,5,9)
Sales 17.36, 20.91, 19.89,17.64 (1,3,5,9)
Cash 69.8%, -38.7%, 12% (1,3,4)
=======
Current EPS is 1.52
Estimated growth (by analysts) 14.3%
PE 24 (historical was lower than default)
Future EPS 5.79$
Future Price 138.84$
Sticker price 34.32$
MOS 17.16$

Current price 18.58$
=====================
cash flow seems to be not very predictable.
No long term debts.
The people in the head of the company are the ones who got it started.

One thing I'm not sure about, when looking into insider trading, I can see MR LOUDERMILK R CHARLES SR. CEO. selling more than 4M $ worth of shares in Sep. 12-13, 6 days later the stock losses ~6$ in value.

Can this be considered a great buisness or is it something to keep away from????

Thanks

Shay

[Tina]

A dear friend gave me your book recently, I have started reading...I am into chapter 2 and I wanted to know if I finish the book, is that the same as taking the course you offer, or is it necessary to take your seminar in order to really "get" the concepts for a complete novice? I look at the website and FAQ's and feel really overwhelmed.

I have also ordered the audiobook so that I can get through the material faster, utilizing commute time. I completely trust the friends that gave me your book and I definitely need simple since up to this point I have never had a good relationship with numbers to say the least. Best to you, and thanks for serving in the military, there are not many people who honor that commitment these days, particularly if they have not served themselves.
Best to you, T

[chris]

how do i calculate historical PE if high and lows are N/A

[MULI]

Hello,

I just finished reading your book. It is very professional and insightful, thank you.

Regarding the three technical tools- should I use them with a daily graph or with a weekly graph to buy and sell a desire stock?

For the "STARBUCKS" On chapter-12 you used a weekly graph, as for the "CHEESE CAKE" On chapter-13 you used a daily graph.

Should the MACD (8, 17, 9), SLOW St. (14, 5) & SMA (10) be used with the daily graph?

What are the recommended parameters for the weekly graph?

Regards

MULI

[Ben Mena]

Have you found a free site for 10 years datat on ROIC (besides Avvfn)?

This is really holding me back. Thanks / Please help.
Where does Phil get his data?

[Ziv]

Where can I find the letter addressed to the shareholders. Is there a form in which it is published?

Thanks
Ziv

[Chris S]

Hello all,

I am new to the website and new to blogs, so please be patient with me. I am moving through my second read of the book and have been practicing the concepts. I wanted to run the Big 5 by some one for a company I have been looking at to see if I am figuring the numbers properly. I have been using MSN Money for all the numbers except for Cash and ROIC. For those I have been using MorningStar. The company is Nokia. Here are the calculations (10, 5, 1)

Sales: 16.60, 5.68, 20.27
EPS: 16.40, 21.29, 28.05
Equity: 14.29, 3.21, 2.30
Cash: 18.18, .45, 9.33.

ROIC from '98 to '06:
30%, 35%, 35%, 17%, 20%, 21%, 20%, 30%, 33%

I could not locate numbers for 1997 for Cash and ROIC. I used the calculators on the website for the calculations. Any help is appreciated.

Thanks,

Chris S.

[Tom E.]

One of my favorite companies is Zara. Looking at their parent company big 5 as calculated with your quick tool, it looks like a great company. However it is a Spanish company listed in Euros. I notice you advised not investing in overseas mutual funds. What about overseas companies? Should I be hesitant? Their data is available through MSN, but is it a bad idea to purchase a foreign stock?

Tom

[Phil's Team]

Tina,

Phil doesn't personally teach seminars in Rule #1 investing at this time -- but he does make presentations about Success Magazine's Investor Toolbox software, which is probably what you mean. The seminars for the Investor Toolbox specifically teach you how to use that software to do your investing. These are not Rule #1 investing seminars.

If you have further questions, please email us and let us know!

Thanks.

[David]

Hi, I have a few questions. Hope someone will be able to help me.

Total Revenues
Costs and Expenses
EBITDA
Net Income
Current Assets
Non-Current Assets
Total Assets
Current Liabilities
Non-Current Liabilities
Total Liabilities
Stockholders' Equity
EPS

These are the data I have, are these enough to get the Sticker and MOS prices? How can I get NOPAT and CASH FROM OPERATING ACTIVITIES from this?

I could really use your help. Thanks and more power

[David]

Hi, I have a few questions. Hope someone will be able to help me.

Total Revenues
Costs and Expenses
EBITDA
Net Income
Current Assets
Non-Current Assets
Total Assets
Current Liabilities
Non-Current Liabilities
Total Liabilities
Stockholders' Equity
EPS

These are the data I have, are these enough to get the Sticker and MOS prices? How can I get NOPAT and CASH FROM OPERATING ACTIVITIES from this?

I could really use your help. Thanks and more power

[david]

hi, i get confused by the terminologies used by different companies/websites.

I currently have the ff:
Total Revenues
Costs and Expenses (1)
EBITDA (2)
Net Income
Current Assets
Non-Current Assets
Total Assets
Current Liabilities
Non-Current Liabilities
Total Liabilities
Stockholders' Equity
EPS

Can anyone help me as to how to compute ROIC, Sales and Cashflow Growth?

[Ray Dossat]

Why do I get an answer on ROIC of 0.33 on the ROIC calculator? When it says it's 42.4% for 2006 thru MSN Money.

I'M Using
514 = Net Income
0.25 = Debt
1557 = Total Equity
Ticker is GRMN.

Any help would be appreciated.

[Ulli Haack]

Hello Phil,
I am from german. Excuse me, my english is very bad. I have read your book "Regel Nummer Eins" 5 mounths ago. I have learned your rules very intensive. But now, I don´t know, what is the MOS for Starbucks. Can you help me?

[CHRIS B]

can somebody tell me where can i go to open a free practice trading account.
thankyou.

[Bill Andry]

I purchased your book inthe last 2 weeks and have been attemting to absorp the material and calculate the big5 and sticker price. I just calculated Whole Foods(1/23/08) to see if I can in fact calculate them correctly. If I calculated correctly Whole Foods is still a Rule No.# 1 investment by the numbers. Sticker price of $42.19 vs actual quote today of $38.72. I used $1.29=current eps, growth rate=16, PE=30, and constant 15% return. Is this correct?

[Tom]

Hello Phil

I have enjoyed reading your book and your way if investing. I have been trying to learn how to use the three tool's my question is what time frame should I be setting the chart at. There is a different look from 10 day's to 3 months.

Thanks for any help you can give me.

[Dave Sowder]

I see Whole Foods right now at 37.55. according to the chart it was 51.33 February 2005. Phil, you bought it for $90. Am I looking at this wrong?

[Eddie Herring]

Dave - There was a 2 for 1 split on 12/28/05 so what now shows at about $75 in Dec 05/Jan 06 would have been $150 before the split. Hope this helps.

Eddie

[Ann]

Phil,

I have figured out how to find 4/5 of the Big Five but I cannot find the "Free Cash Flow" line that you refer to as being the bottom line on the Cash Flow Statement. Is it also termed Net Cash? Net Cash is the bottom line on MSN's Free Cash Flow Statement.

Love your book! Wish I had read it years ago as I am now 71 and new to all of this. but I am enjoying the challenge.

Ann.

[Will]

Go to Morningstar.com, pop in a company symbol at the top, then, click Financial Statements click 10-Yr Cash Flows, scroll to the bottom of the page. BTW MSN no longer has FCF.

[Thomas]

Hi Phil,

First off thank you so much for writing a wondering and interesting book. I have just finished reading it and have starting trying to work out the big five. I have been trying to work out the numbers and was wondering if you would be willing to take a look at Oracle Corp (ORCL) and if I am following your book right our MOS should be close. I have an MOS of $9.91. I believe I have done everything correct and if so I truly understand your writing and would be happy from here on in. However if it isn’t the same and has a big difference then I know I am doing something wrong.

So please can you help a newcomer to the rule make sure he is doing it correct.

Regards,
Thomas

[Ygor A]

Note: I sent a COMMENT some minutes ago by mistake, that was wrong so please delete that.

The following one is the comment that I would like to POST, thks,
-----

It is my first time using Rule#1 and I am looking at CVS:

Current EPS - 1.9
Estimated EPS growth Rate - 16%
Estimated PE in Ten Years - 25
Future EPS - 8.38
Sticker price - 51.79
MOS - 25.89

Somebody else is following CVS? I will like to compare numbers.

[Brian]

I just attended the Get Motivated Seminar in Baton Rouge on Feb 12. I purchased Rule #1 on the 14th and now trying to locate the big five using Morningstar. The only one of the big 5 that i am having trouble locating is ROIC. Morningstar does, however, calculate Return on Equity for the last ten years. Are these figures the same?

Thanks,
Brian

[harald]

HAllo Phil, I´m from Germany an read your Book - gread Job!!
But my problem is that i can´t change the settings from the tools on msn money.

Do you know the trick?

Best regards and Thank you for helping
Harald

[jodi]

Hi Phil,

Bought Apple at $180...then read your book...didn;t put in stops...now it's down to $119. I've learned alot now...will always put in stops...still have the stock...should I sell or hold (know it will be years) I'm an Apple believer...but the industry is so down...

[j.b.]

brian,

read these:

http://www.philtown.com/phil_towns_blog/2006/05/index.html
http://philtown.typepad.com/phil_towns_blog/2006/05/rule_1_question.html

[Kenny Soh]

hey phil, I'm from Singapore. therefore, i'm unable to use the internet tools you gave in the book like msn money or yahoo finance to search for a stock from the Singapore Exchange. What do you suggest i do then?

[Kari]

I do love this book! I'm really excited to get going.

This is actually in response to ChrisB and the conversation around Jan 23, 2008. He said that Whole Foods is still a Rule#1 company. I love Whole Foods and shop there often, but when I calculated the numbers (based off MSN), it is not a Rule #1 company.

Am I doing somthing wrong?? I am concerned mostly about the 1 yr numbers. The 5 and 10 yr numbers are good.

2006-2007
1yr ROIC= 9.2
1yr Equity= 4.2
1yr EPS= -8.5

Was there another stock split or something that made these numbers low?

Thanks!

[mike]

Hi, Phil!
I have read your book and after researching the companies have found couple of those that meet all the requirements. At that moment it was Google and Garmin. All three investment tools showed to wait (it was the period between 02/25 to 03/11) then after that all three tools showed to buy. And I did that (I used simulator's account money to try the system). But after one day of price growing up, since that day price goes down - dropped a lot - but tools still say buy (or at least, if you bought already then hold, none of the tools signal to sell). MOS is way below the Sticker but price is going down though according to the Rule should be the opposite? What is the problem? What else should I consider?
Thanks.

[Bennett]

In response to Mike’s comment about Google and Garmin the tools are just that, “tools”. They don’t guarantee anything especially if a stock makes a double bottom, which in this bear market has been quite common. My suggestion is that if you calculated a good MOS price and are comfortable with management and the company has a meaning to you then don’t worry about a stocks price in the short term (1 year at the least) that the stock price will begin to reflect its intrinsic value. There are quite a few quality companies that are well below 50% off its sticker price right now, so the best course of action is to keep buying these great companies as long as your time horizon is years and not months. This is a wonderful time to buy stocks and a terrible time to sell them. Do your homework then load up the truck. As a side note, I calculated a MOS price of $458.00 for Google so hopefully you bought it for around that price. If you did you will make well over 15% per year in the years to come.

Bennett

[Carol Antoine]

Hi Phil, I read your book twice...it's great. I am having trouble configuring the MACD on msn money. Could you help? In the book it is not clear, at least not to me, what the step by step procedure is. On page 203 you say "Find the place on the website where you can change defaults" I can't find that place. Please help. Thanks, Carol

[Queen Anne Drizzle]

Book states that of the "Big Five" numbers, Equity growth is the most important. To be pure, wouldn't you need to add sum of distributed dividends to equity? For example, a company may have zero equity growth but if they have been paying generous growing dividends then shouldn't a Rule #1 investor take that into account? When Microsoft paid their huge one time dividend in 2004 their equity dropped and that would unfairly penalize their numbers if we followed Rule #1 methodology.

[kara m.]

Queen Anne,

I'm not sure about this, but I think the logic is that if a company can't think of a way to invest the dividend money itself and make it grow, then that might indicate they've stopped growing -- at least temporarily. So why would you want to invest in a company that can't grow your cash at a faster rate than you can in your IRA?

[Jim Harris]

I'm stumped. I'm trying to make sure I use the correct numbers for a company's CASH FLOW and I'm not sure which one it is. I'm using MSN Money web sight. Please help...

[Brett]

Phil,

I was curious of your take on HANS.

Big 5 scores:

ROC: 5-year 46%, 1-year 42%

BOOK VALUE: 7-year: 49%, 5-year: 67%, 3-year: 89%, 1-year: 81%

SALES: 7-year: 44%, 5 year: 58%, 3-year: 71%, 1-year: 49%

EPS: 7-year: 63%, 5-year: 107%, 3-year: 90%, 1-year: 53%

CASH: 4-year: 158%, ZERO DEBT

Current PE: 20

Last year EPS: 1.51

Analysts Estimates 5-year: 20%

Even with the recent earnings 'miss', they grew 38% over last year's Q1. Using your calculator, i get a Sticker Price of $53.16 and a margin of safety of $26.58, which is rapidly approaching.

With a company with these types of numbers, and a known takeover candidate, what am i missing?

[Phil's Team]

Jim,

Read this FAQ item for Cash Flow instructions:
http://www.philtown.com/frequently_asked_question/2007/05/where_do_i_go_t.html

[Phil's Team]

Brett,

Here's a prior post by Phil on HANS. It runs through a valuation from 2006.

http://www.philtown.com/phil_towns_blog/2006/03/following_the_f.html

[Sandesh Sapre]

Gurus,

I am a beginner to Rule # 1 investing. I like MGM. I have made some good money with it in the past.
When I use Rule # 1 investing, I am getting positive signals with MOS price. Just wasn't sure if I am getting right numbers or not.
Anyone else following this stock ? Appreciate you sharing the information.

[Jack Shea]

Curious to know your thoughts on this now. It looks like the business changed significantly. If you use Joe Ponzio's method at http://www.fwallstreet.com/blog/25.htm I came up with a value around $39 or $40 a share. But because the business seems to have changed/slowed down, I can't figure out how to use Rule #1 to value this.

Anyone?

[Troy Stanley]

Could someone help me with a book reference...I really want to make sure I'm calculating these numbers correctly from the get go and I can't figure out this discrepancy in the book.
If you look at Garmin's numbers on page 108 (specifically the EPS growth rates for the 5yr-26% and 1yr-27%) you'll notice they differ from what Phil lists as MSN's EPS growth rate for the same periods on page 100. The rates, as noted by MSN for the same periods are 5yr-19.92% and 1yr-33.7%. Now, if you use Phil's online calculators you get even different numbers: 5yr-24.18% and 1yr-15.24%. (I used Phil's Garmin numbers on pg. 96.)

Can anyone explain this discrepancy? This is driving me absolutely nuts. I figured I must be overlooking something.
Thanks,
Troy

[Phil's Team]

Troy,

The numbers Phil uses in the book for most of his calculations come from Investools, so they may differ from the numbers cited by MSN, due to the fact that MSN uses BVPS instead of equity, and MSN also calculates Cash Flow and ROIC differently. There should be a note about that in the book (in the paperback; if you have the hardcover edition the note may not have been inserted yet).

[Troy]

Thanks for the reply, but how are we really suppose to know which numbers to rely on when we invest our money? It isn't like the numbers differ by 1-3 percentage points - they differ drastically. Any helpful hints on what numbers to rely on when we are looking for results above 10% growth rates?

Thanks,

Troy

[Jim A.]

On p. 157 of the paperback book, when filling in the table at the bottom in the "Historical (equity) growth rate" column, which of the Equity Growth Rates (from the previously-calculated Big 5) are we supposed to use? 10yr? 5yr? 1yr? Some average of the above? This is not explained anywhere (e.g., p. 150, p. 163).

I know we're supposed to compare this with the "analysts" estimate (which we can get from MSN). That number appears in the second column of the table. But the explanation of which growth number to bring forward into the third column was not clear in the book.

Thanks!

[Carol]

Troy,

If you don't have Investools, calculate the growth rates manually either using Excel or Phil's calculators. Don't necessarily trust any growth rates cited on MSN.

[Carlos]

I don't know how i havent figured this out through HS or anything but HOW the heck do you calculate the percentage increase from a number 0 or lesser?

I'm trying to calculate FCF for SanDisk so for example:

FCF06-FCF05/FCF05 - This is correct right?

So 421-346/346 = 21.67% increase

Here's where i'm lost

58.3-(-45)<- neg. CF/(-45) = A negative absurd #.

How do i calculate FCF rate of change from a negative # or 0 to a positive number?