You all remember Mark, right? The Garmin guy? Well he left this comment on the blog a few days ago:
Hi Phil...Just a short note to tell you that my GRMN position is up 45% as of today! How long should I ride this?
Mark
Here's what I said:
Hi Mark,
Congratulations on bringing Garmin to our attention. A lot of people have benefited because of your work on this. And now, especially if you've done a good job of finding a Rule #1 business with a big MOS, the time will come to ask, when do I get out?
First, understand that the price of a business goes up because the Big Guys, the institutions, put more money into it than they are taking out. That's the only reason the price goes up. Everything else is secondary. That means that anything can go up. Even a bad business can go up if they buy enough of it.
Second, understand that they can do these numbers, too, which is why a big Margin of Safety Price usually doesn't last long. They see the business is undervalued, realize it is mispriced, conclude that other fund managers will see that, too, and they start sneaking into the stock. It takes them about 8 to 12 weeks to sneak in.How long has it been, Mark? About 12 weeks or so? If so, the first ones in are in. But others are still sneaking in who are buying based not on the fact that it is undervalued but on the fact that it is going up. They don't want to be left behind, so they buy what is going up. Which makes it go up more, which brings in more institutional sheep who buy more because it is going up ....
That process continues until the first guys in decide that the business is now fully priced and is no longer a good deal. That means, to them, that it is unlikely to continue to go up much longer, so they begin to quietly get out. Their selling slows the momentum upward, which cools the ardor of the sheep, and they start selling -- and then the price begins to slide sideways and finally goes down until it reaches some equilibrium -- often on the basis of the business buying back its own stock to prevent further erosion of the stock price.
So the key to knowing when to get out is -- just like the key to knowing when to get in -- knowing the Sticker Price of the business. As the business is priced closer and closer to Sticker it becomes less and less attractive to the Big Guys who watch the value of the business, since it is becoming less and less a bargain. And, of course, they want to take their profits so they can look good for the next quarter.
In this case, we need to know the current Sticker Price of Garmin. To get that I am going to look at the latest 12 months of earnings per share. This is called the "TTM EPS", the Trailing Twelve Months EPS. At MSN it's the 'earnings per share' on the 'Company Report'. At Success/Investools its the Phase II Snapshot TTM EPS. Both say it's $2.17.
The price of a business is always some multiple of the current EP, so to figure out the price in the future, I need a reasonable multiple for this business. That multiple of the EPS is called a PE. At MSN I get that by clicking on Financial Results, Key Ratios, Price Ratios, where I see Garmin's PE has been ranging between 12 and 35 for the last five years, averaging a PE of about 32 or more lately, so we'll use 32.
And we need a growth rate to grow the earnings into the future. I prefer to see the equity growth rate first, which I need to calculate myself. On MSN its located under Financial Results, Key Ratios, Ten Year Summary and called Book Value/Share (bvps).
Now I'll show you a good trick called the Rule of 72. I look at the bvps and see that for 1999, the oldest year, the bvps was roughly $2. Five years later it was over $8. That is 2 doubles: 2 to 4, 4 to 8, in 5 years. That means about 2.5 years to double once. Divide that into 72 and you get roughly 30. That means roughly 30% per year growth rate for equity at Garmin. (The actual growth rate is 35%). It's growing at about 24%.And one more thing: the analysts say it's going to grow at 16%. So what do we use for a growth rate when there is that big a disparity between historical growth and what the pros think? It depends on how well you know the company and the industry. Can Garmin continue to grow at between 24 and 30%? Or is 16% a better number? Let's use 16% for starters:
The Sticker Price is calculated with the Rule of 72 by understanding that a 16% growth rate divided into 72 tells you the years to double: 4.5 So that's a bit more than two doubles in ten years. Which means the $2.17 EPS is going to be $4.34 in 4.5 years and in nine years it will be $8.68 plus another year -- so say $9. Our PE is 32 historically and it's also 32 by doubling the growth rate -- our default way of finding PE.
$9 times 32 is $288 per share value in 2015.
The Sticker Price is just one quarter of that: $72. That makes our MOS price $36. And the stock is selling for $62. That's if the analysts are right.
In this case I'd be happy with a projection of EPS Growth at 20% just because the future of the business and industry look awesome and the historical EPS and Equity are much higher than 20%. Yeah, it's windage, but it's useful windage. That rate of growth gives us 3 doubles in ten years and that puts the Sticker at $100 and the MOS at $50. And it's selling for $62.
So back to our question: When do we get out? If we go with the analysts, the real value of the business is $72. And if we go with gut, our estimate is $100. Either way there is up side if you are ready. And the get out price is somewhere between $70 and $100. Your call.
Follow all that?
