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Strategies & Market Trends : Value Investing

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To: Jurgis Bekepuris who wrote (51169)	3/26/2013 11:57:07 AM
From: Chid	Read Replies (1) of 78753

Absolutely agree with you on that. BBBY is certainly not going to grow at +15% as its ROE implies. BBBY uses a lot of of its FCF to buy back stock which trades at 3-4x P/B. However, on the resulting BVPS it earns +15%. Just for clarification an example, stock is trading at $3, BVPS is $1, ROE is 15% therefore it's EPS is $0.15. If it uses all of it's earned cash to buyback shares (resulting in 0.95 shares), the resulting BVPS is $1.053 If it earns 15% on equity than that years EPS will be $0.157. So effectively it is growing at 5.3% despite 15% ROE because of the buybacks at a premium P/B. Notice there was no earnings growth, just EPS growth. Earning growth will only enhance this return. So in the case of high buyback activity maybe the best thing to do is to translate the ROE to an EPS growth rate and use that instead. This was as much for me as it was a reply. On this basis I think BBBY looks quite good as all that is needed is single digit growth in EPS. Does this look right?

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