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Strategies & Market Trends : Buffettology

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To: James Clarke who wrote (469)	10/22/1998 2:09:00 AM
From: Shane M	Read Replies (2) of 4690

Jim, Thx for the comments. I think Safeway is a short if anything. Why would I pay 30 times earnings for a supermarket? How many more acquisitions can they do? The thing that impresseses me about SWY: They've increased book value over 40% each of the past 5 years. Minimum ROE over the past 5 yrs has been 25.9%. I also think grocery stores have a barrier to competition despite the low margins. I can't recall the last time myself or my wife shopped at a different grocery store, and the last time I went into an unfamiliar store on vacation I couldn't find anything. Your point about "how many more acquisitions can they do" is well taken. Up to now they've continually been able to reinvest their cashflow ro great ROE. I will think about how long this can continue. Microsoft is not even close - its just too easy because the stock is loved by every institutional investor in the world. I'm not sure I see I can see an end in sight for MSFT's growth, and if the company is evaluated in terms of book value growth and ROE a case can be made that it's not terribly overvalued. Book value has been increasing at a compound annual rate of over 30%. ROE has consistently been between 25% and 35%. Recent Book=$5.63. Compounded at 25% growth rate for 5 yrs gives book value of $17.18. A ROE of 25% gives us EPS in 5 yrs of $4.30. Assigning a PE of 30 to Earnings gives us a stock price of $140. Based on these estimates - which represent conservative ratios by MSFT historical standards - I could buy MSFT at 90 and expect a 10% annual return. Honestly I was suprised when I ran the figures, because looking at the current PE of 60 and PS of 18 makes MSFT look so expensive to not be worth considering, but there's a case that maybe all the MSFT investors aren't so crazy. I would be interested in what price of MSFT would make you interested in the stock? Shane

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