Pick the best value stocks with our Stock Ranks, screening and valuation tool. Try the live demo today.
Hi, Jae here.
Daniel Myers is a member of the premium stock valuation spreadsheet and has made the following video valuing Bed Bath and Beyond (BBBY).
If this is a company that fancies you, or if you just want to know more about valuing stocks, watch these videos.
Enjoy.
If you are reading this via email or RSS, come visit the website or watch directly from YouTube.
What is Old School Value?
Old School Value is a suite of value investing tools designed to fatten your portfolio by identifying what stocks to buy and sell.
It is a stock grader, value screener, and valuation tools for the busy investor designed to help you pick stocks 4x faster.
Check out the live preview of AMZN, MSFT, BAC, AAPL and FB.
Well thought out analysis. Great company.
(1) Be careful with the growth rate. Where is the 12% going to come from?
If it is Revenue Growth I’d be more conservative and use the 3-yr avg
9.64% or 5-yr avg 7.5% (morningstar.com). The economy is on an
upswing but it might be more prudent to use the lower numbers. If the
12% growth is going to come from Margins, then it is difficult to see
how that will happen. As you stated margins have been stable with on
plans by management to change that.
Doyou have a quantitative analysis that justifies the assumption that
buybacks will add 3% to growth?
(2)Lowering the discount rate 12% to 7%: Remember not to “count the
same trick twice” per Ben Graham. The business risk, financial
risk and stability, and moat are already counted in the FCF &
Owner Earnings. Be careful not to counted them once in the cash flow
then twice by lower the discount rate.
Have you thought about using the Equity Risk Premium that Dr.Damodaran @
NYU posts on his home page?
His work has been referenced here at OSV.
http://people.stern.nyu.edu/adamodar/New_Home_Page/home.htm
Thanks
Jason
It would be nice if you can talk more about the business unit economics, competitors etc. Then jump into financials relating the unit economics..Just a suggestion!
Video Creator here:
@Gopinath: I am still figuring out the best format for these. Going into the economics first is a great idea. I wanted to highlight the tool in this one, but going forward, I like your suggestion. Thank you.
@Jason Graves: I see the growth coming from additonal store openings (revenue growth) and the scalability (reduction in the % of SG&A to revenue). So FCF will grow in proportion revenue growth plus the economies of scale. SG&A as a percentage was around 27-28% in 2003 and 2004 and it is now 25%. So there is some opportunity here I think. Given thier consistency in the business, I thought historical metrics were fairly reliable. Also, I think they still have room to grow into other markets.
As for the discount rate, I do struggle with this. My thoughts go like this:
If I had enough cash to buy the entire US Market, I would place a 12% discount rate on it. That would be my required rate of return on the entire market. However, in that population, there are companies with more risk and those with less risk. On an individual level, some companies would have a lower discount rate and others would have a higher discount rate.
In BBBY’s case, I see them as less risky than the US market as a whole for reasons I point out in the video. Since I see them as less risky, I gave them a lower discount rate. How much lower can be debated as we are. With interest rates so low, my risk free rate is about 3%. So my range is between 3% and 12%. Because of the equity risk, I say I need at least 3% to put my money into equities. This is my floor. A “risk-free” equity would require an additional 3%. So my range is now 6%-12%. I saw BBBY as a much safer given thier consistency and low debt load. Putting those together, I came to 7%.
On the share buyback premium, I see that they bought about 8% of the float last year. They have consistently been buying back shares. This isn’t something new so thier past performace is reflective of them not using this capital in the business already. They could allocate it to the company purposes to raise thier growth rate or continue to buy back shares. So the 13.3% growth rate in the physical business should stay in place regardless of what they do with this cash.
If they continue to buy back share, which history seems to show that they will, that 13.3% will be spread over 92% of the float next year which is an effective growth rate of 14.4% in year one, 15.7% in year 2, 17.1% in year three and so on. So I get above my growth rate on my shares in year 3 and it is gravy above that. This could be completely wrongheaded, but it is where I was going with it.
Thank you all for your comments.
Video Creator here:
@Gopinath: Thank you
for the suggestion. I like that idea as
it sets the table for the analysis. I
was trying to highlight the tool in this one as well. I will keep that in mind.
@Jason Graves: I see the
growth coming from revenue growth (store count expanding). BBBY has about 1,173 stores today. Per the 10K, they think they can open 1,300+
more Bed Bath & Beyond stores in the US plus expand their other
brands. Their international presence is
virtually nil now so there may be something there. Just on the US BB&B store side, if they
were to grow their store count by 13.3%, it would take them 6 years to do
this. This is if you assume FCF growth
is 1 for 1 with revenue. I think it is a
little steeper as you get more economies of scale. That gives us a little more time for the
build out. I think they have enough room
for growth to do this.
On the share buyback (paste this into Excel):
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Shares Outstanding Today
Stock Spend
$ 500.00
$ 550.00
$ 605.00
$ 665.50
$ 732.05
$ 805.26
$ 885.78
$ 974.36
$ 1,071.79
$ 1,178.97
226.14
Shares Repurchaed
8.89
8.41
7.85
7.33
6.94
6.58
6.23
5.91
5.67
5.44
Share Price
Shares Outstanding
217.25
208.84
201.00
193.66
186.72
180.14
173.91
168.00
162.33
156.89
$56.27
Market Cap
$14,207.82
$16,097.46
$18,238.42
$20,421.56
$22,866.02
$25,603.09
$28,667.77
$31,756.15
$35,177.24
$38,966.89
Market Cap
Share Price
$ 65.40
$ 77.08
$ 90.74
$ 105.45
$ 122.46
$ 142.13
$ 164.84
$ 189.02
$ 216.70
$ 248.37
$12,724.90
Price/FCF
13.2
13.2
13.2
13.2
13.2
13.2
13.2
13.2
13.2
13.2
Purchase
Amount
500
FCF/Share
$ 4.95
$ 5.84
$ 6.87
$ 7.99
$ 9.28
$ 10.77
$ 12.49
$ 14.32
$ 16.42
$ 18.82
FCF/Share Growth
17.9%
17.9%
17.7%
16.2%
16.1%
16.1%
16.0%
14.7%
14.6%
14.6%
So I assumed that they buyback $500M/year in 2013 and add
10% to that amount each year. Given
their growth rate, this is in line. I
also used the P/CF multiple to gauge the price at the time of purchase (higher
price = fewer shares purchased). I took
my FCF numbers from the sheet and my inputs for growth. If you do this, you get 17.9% FCF/share
growth in year 1. Keep in mind, the FCF
numbers I used only use a 13.3% growth rate so we’re not double counting. When we take into account the share buyback,
we get around 16.3%. Also, I’m starting
with a $500M buyback when they in fact repurchased over $1B last year. This discussion could be its own thread.
Lastly, the discount rate discussion is on I struggle with
most. I may be a little aggressive
here. Here are my thoughts on it. If I were to pay cash for the entire US Stock
market, I would pay a price using a 12% discount rate. I see this as my total market required rate
of return. In that basket of stocks I
would buy, some would require a higher rate and some would allow a lower
discount rate. 12% is the weighted
average. For the reasons I go into in
the video, I think BBBY falls on the below 12% side. I think that is pretty clear. How far on that side is where we can
debate. We can tighten the discussion by
saying the risk free rate is 3% (30 year T-Bond) we now have a range of 3% to
12%. I used their Katsenelson Score as a
gauge. BBBY scored 51 out of 60. If the average company is at 30 out of 60,
BBBY is 21/30 above the average (70% better than average). We have a 9% range so I cut off 70% of that
which got me to 6.3%. I rounded up to
7%.
I’m still working on how to get the right discount
rate. It is very tricky.
Thank you for your comments.
I’m always looking to get better at this.
Great video and commentary. I liked the well thought out reasoning behind the numbers. I also liked the videos length – not to brief and not to lengthy. Viewers have to keep in mind this is one of many steps necessary to evaluate a company. I’m looking forward to more of your analysis. Nice Job !
yea the creator did a nice job of going over what is involved. I will try to create some analysis examples myself. Currently working on how to videos first.
Gammstyle
Thanks for taking the time to answer my questions.
Great justification for the growth rate & share buy backs. You sold me on both.
I should have told you before, that like Warren Buffet & Charlie Munge,r I’am not a fan of DCF. So take my critique with a grain of salt. It’s my view that finding a discount rate or a multiple, if you are going to use a relative valuation model, (Which I do.) is the most qualitative, therefore most difficult part of the valuation, and, can be the most damaging if its way off. Going from 12% to 7% almost doubles the value. That can be the difference between buying and not buying a stock. (I understand that is might not be your situation, BBBY might be a BUY for you even with using 12%.)
For me, I try not to get into that situation. Meaning… if I can’t justify buying a company using my base multiplier (which is 10x FCF) but my “adjusted” multiplier (say… 13x), gives me a buy signal… then I take a hard look at my rational for using the adjusted multiplier and make sure it makes sense.
You have a very quantative approach, which is cool to see and be exposed to. For me I feel choosing a dcf rate or multiplier is one of the most artistic, conservative & disconcerting parts of the analysis. I feel your pain!
Great discussion.
Jason
Really impressed with the Video. Thoroughly enjoyed the presentation, Jae Jun’s spreadsheets come alive with your insights. Look forward to more presentations.
One quick comment. In fact, I think the extensive analysis is really a good thing. You mention about tightening up the presentation. But I don’t think that is necessary. I found that the explanation was very clear and interesting. A lot of people who watch these presentations are not going to have the depth of understanding that you do, so clarity is essential. Besides, spending 3/4 hour is a small cost to pay for making an investment in a company. Incidentally, I bought the stock as a result of the analysis. (Need-less to say, I will not hold you or Old School Value responsible for the outcome – I’m a big boy and can take my losses when they occur, but BBBY looks like an excellent long term investment) Many thanks and good work!
I cant get left behind like this 🙂
I will have to start posting my own videos too!
I’m glad we’re not liable. 🙂 As for the length, after doing the video I agreed with your sentiment that 45 minutes is a small price to pay and going though it thoroughly is worthwhile. That’s why Oracle’s is the same length. I do think I could even go longer as I didn’t really touch the other tools or other analysis I did. 45 minutes is enough to wet the appetite I think. I also wait until the end to give my valuation so people have to walk through the process. The thought process is the key element. My opinions should be superfluous to the viewer. It is how they get to thier own opinion that matters.
One interesting note: if you look at the view counts, you see a massive drop off after the first video. A lot of people just won’t take the time to be thorough. Other videos on stocks go about 5 minutes and give no real justification for thier recommendations. I hated that and is one reason I started these.
I guess that’s why there are so many opportunities out there!
Great presentation, it looks like your spreadsheets are
Great presentation and great analysis though I think that net income is overstated by a lot and owner earnings are smaller than stated. My reasoning is simple, over the last 9 years they have “earned“ more than 20 dollars per share but BV has increased only by 12, so 40% of those 20 dollars are not free dollars and are tied to the business so BBBY can maintain its competitive advantage.
Hey Jae, The fact is your spread sheets are AMAZING. I’ve used a lot of investment software in the past but these spreadsheets are THE most effective way of analyzing stocks with all the great analysis tools you have included.
However, it would be great if you could do a series of videos explaining each feature individually. Of course, what I am proposing is a lot of work since there is so many features. But you could do this over an extended period of time.
Each time I use the spreadsheets I learn a little bit more, but there is still a lot of stuff I don’t completely understand.
Best regards,
Richard Gordon
Gammastyle, I hope you won’t get discouraged by the video-count. I am coming back for a second time to go through your presentations because they were so useful.
The type of analysis you have show here is REALLY useful in truly understanding a company. As for the lack of interest in an in-depth presentation, I realized long ago that this is one of the reasons why the market is as inefficient as it is. Despite the information being right under people’s noses, Its truly amazing what people miss. Lack of understanding = blind spots and inefficient markets.
And without inefficient markets there would be few opportunities of making money.
Most people would rather chase hot tips and rely on other people’s pre-digested opinions than figure out what is really going on for themselves .
That’s fine I happy to take advantage of their ignorance.
Hi Richard,
That’s exactly what I’m doing at the moment. Slow progress with other things going on, but I’ve been posting the videos on the members page. I haven’t announced it because I want to do a bit more before everyone sees it.
You can see it at the “Manual and How To’s” page once you log in.
https://www.oldschoolvalue.com/member/content/p/id/3/
Detailed information is always 100% useful for those looking for it. I’ve come across so many tutorials where it only goes through a textbook overview and doesn’t provide insight. These types of videos will be very useful 10-20 years down the road because it is timeless.
That’s exactly what I’m looking for myself and what I hope other intelligent investors will find and enjoy.
and thank you for the vote of confidence!
I’d like more elaboration on this. Does your analysis take into account the share buyback. That would “reduce” total equity and thus book value. That money spent here could easily be considered as “free” since they are not forced to spend it. I also don’t understand how net income is overstated. Did you mean FCF. The money they spend to maintain thier competitive advantage would fall under CapEx and possibly acquisitions (see Oracle video on why I think this). I’m curious on your through process here.
I’m not discouraged. In fact, it gives me more faith that doing your homework has the potential to pay off. I was just pointing out that most people do not take the time to research thier investments. It was an unscientific proof on value investings potential.
Thanks for your interest in my comment. Yep, FCF does it. Capex is just one of the many places companies have to invest to maintain a competitive advantage. Stock options, pension plans, marketing, inventory, days sales outstanding, r&d and so many others are all places where money gets invested in order to maintain a competitive advantage. GAAP is a great financial system but far from perfect. My reasoning about BBBY is simple, it doesn’t matter if you use income for buybacks or reinvestment in the business, if you don’t pay that income as dividends then that money should increase book in order for you to make $1 dollar from every $1 dollar retained, either by reducing the share count or by increasing the amount of money the company has. The only reason this may not happen is if your buybacks are done at a value greater than book, in which case your hypothesis is correct and book won’t grow at the same pace. In this case I always like to check the return on equity (Current Earnings / Last year’s book) and BBBY’s is around 20%, good but far from great for a company that’s boosting this metric with buybacks. Compare it with IBM, a much bigger company with an also big buyback program. IBM’s ROE is more than 50%. I hope this clarifies my position. Thanks.