Value Investing Forum

Post edited 9:48 am – May 16, 2012 by mt

Another option is to find the median YOY change in revenues.  It won't be much different in most cases.  I'll show two examples of why I feel the median YOY change is better than CAGR and the average YOY changes in revenue.

Hibbett Sports, HIBB

CAGR from 2003-2012 is 10.1%

Average YOY growth is 11.9%

Median YOY growth is 13.5%

I don't like CAGR because it focuses on two years.  Here it is 2012 and 2003.  Without getting too technical, it's basically two points in time.  If either year was a great year or bad year the CAGR will be skewed.  If you took say the average of 2010, 2011, 2012 and the average of 2003, 2004, 2005 or something like that it would probably be a bit more accurate in regards to the growth that has happened in the past.

Average YOY growth considers all years in the ten year window, which I feel is better than the two years considered in the CAGR, but it still includes outliers.  Like in the example given by stocki711 it will also skew the growth rate as to what actually took place.  Although the company did have the big year, the other 9 years are represented clearly.

Using the median YOY growth we're able to account for each year in the period while excluding the outliers (which skew the average YOY growth) and we're also able to negate to chances that one of the two years (in the CAGR growth) are better or worse than the average.

Using the example of HIBB, average YOY growth and CAGR growth are both less than the median YOY growth.  The YOY growth numbers are listed here from 2003-2012.

15.8%

15.0%

17.6%

16.6%

16.3%

1.7%

8.3%

5.2%

12.0%

10.2%

2008,2009, and 2010 were the worst years, and 2011,2012 were better but still not as good as the 2003-2007.  Obviously the economy was much different in second five year period, but as the economy has "started/is" recovering the growth rates have been recovering as well.  If I were to pick what I'd think the realistic and or normal growth is in normalized sense, I'd go with the 13.5%.  Now the question of whether the growth will slow because the company is larger is a different consideration and you may come to the conclusion that 13.5% is too high.  That's ok but in regards to seeing what the company has done in the past I feel median YOY growth shows the true growth potential in a normalized sense.

The second company I'll use is Birner Dental Management Services, BDMS.

CAGR is 7.6%

Average YOY growth is 8.8%

Median YOY growth is 4.8%

The problem with both CAGR and average YOY in this example is that in 2007 BDMS changed how it records revenues in VIE (I believe it's variable interest entities).  As a result its revenue jumped from around $39M to $59M.  This obviously wasn't an economical increase in revenues, just a different way of accounting for VIE's.  Using either CAGR or average YOY growth shows a misleading growth rate.  Using median YOY growth treats 2007 as an outlier and shows us a more realistic growth rate as to what really happened at BDMS.

The difference in the three choices of growth rates probably won't be materially different for most companies but by using the median you'll be able to get a more accurate portrayal of the past and be better informed to make an educated decision on the future.

This is just my opinion so let me know if there's anything you guys disagree with.

Matt

Graeme, if you go to the OTC Markets website you can find the annual reports.  They file them under their conditions now.

"The first thing I do is look at the past 10 years of revenue and find the average % increase/decrease over that 10 years. So add up all the changes in % year to year and then find the average."

Consider a company with $1 in revenue. The next year they have $1000 in revenue and the remaining years have $1 in revenue again. Compound annual return shows 0% gain in revenue (the number you are seeking). Your method would return (99,900 + (-99.9) + 8*(0))/10 = 9,980% average revenue growth over 10 years. I know this is a dramatic example but, you should consider using compound annual growth in the future.

No opinion on the stock just thought I'd add.

Nice find Tom, although it isn't without it's risk. I'll show you how I go through the number to try to find an intrinsic value for the company.

A little note however. According to the SEC EDGAR database (ie: the place where companies file their stuff) the last 10-k (annual report) was back in 2009. They have released all the rest of their numbers via quarterly conference calls. The reuters website has some of the numbers published, but they don't have everything. So that is something to consider. 

The first thing I do is look at the past 10 years of revenue and find the average % increase/decrease over that 10 years. So add up all the changes in % year to year and then find the average. As noted there is no 10-k for 2010 or 2011, but the revenue is listed on the reuters site (55mil for 2010 and roughly 47mil for 2011.) The 10 yr average revenue % was 5.7%. But notice that it's pretty much been falling from 2005 onwards, so not a good trend. 

Second number I get is the 10 yr average of earnings per share, but instead of taking the EPS I look for the operating/share. In my opinion it's a number that's harder to…uh…massage than EPS (also FCF/share is even better than operating/share, so I get that too. But that's later.) Over ten years they have averaged $0.86, but again have been struggling more recently. 

Next I try to find the Tangible book value/share, the NCAV/share and the 10yr average FCF/share. For ALDA I went with the 2009 numbers since they haven't filed anything. Since 2010 revenue is higher than 2009, but 2011 is lower, I'm assuming that there haven't been massive shocks to the system in terms of FCF, asset or the book value. Again, these are assumptions. 

Tangible book is pretty easy to find. The reuters gives number of $4.64 and I have no real reason to not agree that that is a good figure. NCAV is calculated as Cash+Recievables+Inventories-Liabilities. When I do that for 2009 I get 12mil. With 5 mil shares outstanding, that's $2.40. Aldila is trading pretty close to this right now, which is a sign that the market predicts suckage in the future. 

I wont talk about CROIC, because you can read really good articles on it on OSV or of FWallstreet. But the past five years has it in the north of 10% which is good news for me. 

The last thing I see is FCF/share. This to me is the real earnings. This is the free cash that the business can use when everything is said and done. Generally I like to see the FCF/share number close to or higher than the operating income/share. If there are crazy wide differences, I'll look into it. But I see the FCF as the true profits and thus the per-share number I want in order to do a DCF and Graham formula (you should read about these too.) So, take FCF every year and divide it by the number of shares outstanding that year, add em all up and divide by the number of years you looked at (I look at 10). Aldila has roughly $0.76 and it's good to see that they only had one negative year in that span. 

Ok, so some predictive valuation models–take em for what they're worth, with a big focus on that word predictive. 

First, the Discount Cash Flow. There is tons of good stuff on this site, investopedia and other places talking about DCF. In fact, learn this. What we are trying to do is ask what we would be willing to pay now in order to own the future profits based on what we think are their earnings per share, growth rate and then a discount value (I always use 15%.) For a ballpark DCF I use the FCF/share and the ten yr revenue number. Gurufocus.com has a great DCF calculator that I use. When I plug these numbers in, I have a value of $6.94. I also use Jae's modified Graham formula as well, which is [(10 yr FCF/share)(8.5+2(growth rate)4.4]/6 and I get $11.09. 

Now, don't go crazy yet even though the DCF and Graham Intrinsic value calc are well above the $2.60 a share. Now you have to answer the qualitative questions.

But to sum up

Tangible book value: $4.64

NCAV/share = $2.40

DCF = $6.94

Graham = $11.09

The fact that these numbers are quite divergent troubles me. We've noted that they have been decreasing in revenue since 2005, and by running a reverse DCF (you can read about it on OSV.com too) I see that the market is giving ALDA a -12% growth rate. I think that's a big pessimistic, but I also think my 5.7% is too optimistic based on the more recent numbers. 

So you need to ask youself: will they be able to sell their products or not. They seem well managed, so all it comes down to is whether they can maintain that historical $0.76 of FCF per share. If they can, I'd put them in the $4-$6 camp which would mean they are a good buy now. The market is saying "these guys are goig to shrink year over year" and they've priced that in accordingly. If you disagree (remember, they don't even need to grow, just not shrink by 12% a year) then they may be seen as a good buy. In my opinion, they don't have a high hurdle to jump. But they also don't have much of a moat. If you're convinced these guys are the poster-boy for pro golf, I'd say they are cheap. 

Hope this helps!