No. of Recommendations: 28
I'd taken 8.8 eps as a 5 year average to be conservative, grown that by 8% so 12.93 in 5 years with a terminal of 18, equates to 232.. 15% PA equates to a value now of 114$ per share.
Thoughts?
I think you'll feel better about your guess by coming at the future earnings in terms of what you think the revenues per share will be, and what both will be in future, then multiplying the two.
The historical figures probably can't be simply extrapolated, but their general levels will certainly give you a starting point for reasonableness.
First, sales:
I don't see any reason to suspect that sales per share will fall in real terms. Last four quarters of sales, divided by current share count, were about $176.40. Flat real sales seems pretty conservative given that they are still opening roughly 900 stores per year. With the current counts, absent other big changes, that should in theory give 4%/year in real top line sales growth over the next 4 years if kept up.
Second, net profit margins:
Net margins could certainly fall. Maybe some part cyclical from the interest rate cycle, maybe some part permanent for conservatism because of permanently higher labour costs or rising corporate tax rates. (they are one of the few firms that pays near the headline rate--above it, in fact) Net profit margins have ranged from 5.2% to 7.8% in the last decade, average 6.18%. So you could pencil in a new low as the future average for a solid amount of conservatism.
I think that would be a more prudent approach to a margin of safety than using the historical average earnings, even if it gave the same number for current earnings by coincidence.
And of course, try to do it all in after-inflation numbers. Those are the only ones that you can spend on "stuff" that always has inflation-adjusted prices.
As for whether your forecast overall makes sense, sounds fine to me. I think it seems to be towards the conservative end of plausible. I'm a bit more optimistic. I think that before too long they'll be doing $11/share in today's money (maybe $200/share real revenue run rate at net profit margins of 5.5%). Gut feel 12-18 months out? 24 with bad luck? Market multiples will probably vary a lot, but should be above 20 some of the time thereafter unless the business really gets stuck in the mud for some reason I can't foresee. That give a price target of $220, with timing uncertain. If it takes 3 years (just an example), that's a real total return of inflation + 21.6%/year. If it takes six years, inflation + 11.2%/year.
Jim
