Garrett, who recently did a YUMMMMY analysis of St. Joe's, was having a little trouble with the Excel formulas outlined here on the site. Here's our exchange below. Hopefully my answer will help others figure out the numbers they need to be using in their own valuations.
From: Garrett Smyth
Date: Jun 24, 2005
Subject: Valuation problems
To: Phil Town
Phil,
I know it's not your job to necessarily teach me how to value a company. I have gone back into your blog and I believe that I have set up my spreadsheet using the formulas that you recommend. But I keep getting different values than other folks that write into your blog.
Will you either look real briefly at my spreadsheet or direct me to a reference that you like to use to find the value of a company?
Ex: Tol brothers value. On the blog, Jonathan gets $100 sticker value with a margin of safety while I get $156. I mess with the numbers just to see what I am doing incorrectly but can't quite figure it out.
I know I'm wearing you out but I am just so psyched right now about everything that I have learned in the past few months.
Thanks.
Garrett W. Smyth
From: Phil Town
Date: Jun 25, 2005
Subject: Re: Excel Spread sheet
To: Garrett Smyth
Got the sheet:
No math errors. Here's the problem:
1. The Growth Rate is the lower of historical or Zacks. You use 21%. Zacks is 17%.
2. The Future PE ratio is the lower of double the growth rate or historical. You use 42 but the historical is 10.
3. If you use a 17% growth rate and a 10 PE you'll get a 15% Sticker of $82 with an MOS of $41 on a stock selling for $99.
Cool, huh? How a few changes in numbers make this go from a really good deal to an overpriced company. By the way, after a while you'll be looking for the expected overpricing as a stock heats up - especially best of breed like TOL.
For a Rule #1 investor the time to snap up TOL was in 2000-2001 when sales and equity growth was over 30% a year, EPS growth at 20%. Use 17% for growth rate, a PE of 10 and a current EPS of $1.95 for Jan 2001 when it was selling at $10 a share and you'll get a Sticker of $23 and an MOS of $11. Obviously that would have done well - 66% per year compounded since then. Crazy money.
Could you buy TOL at $99 and make money? Sure. If it grows at 20% and hangs on to a 15 PE you could do well. But do you have a margin of safety? No. So if you decide to go on this one, you better watch those arrows!
Phil
