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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Jurgis Bekepuris who wrote (51169)	3/26/2013 11:31:02 AM
From: Jurgis Bekepuris	Respond to of 78773

Couple more observations/elaborations: - My comments are based on Mike Burry's Buffettology spreadsheet. It might be that you have different Buffettology implementation that accounts for some issues that I raise. - Buffettology is not directly comparable to DCF. DCF determines NPV based on some discount rate and FCF/earnings projections. Buffettology does not determine NPV. It determines market cap in the future and then uses that to calculate the return rate from current point. Therefore it does not use discounting, but uses future P/E (or P/FCF). And it uses ROE to determine the growth rate. - Buying back shares above book yields worse reinvestment rate than ROE. Buying back shares below book yields better reinvestment rate than ROE. Most Buffettology companies buy back shares above book, so you have to discount such "reinvestment". In either case, buybacks do not mesh well with Buffettology calculations that try to predict future market cap and then get return rate. Buying back shares does not increase future market cap, it just increases your slice in it, so it's not trivial to merge the two. - It is a bit easier to account for dividend in Buffettology, since it is paid out and you can assume that it's invested in some securities yielding some rate of return. Still, if payout is nontrivial you end up with a lot of assumptions (tax rate? reinvestment rate? etc.). In the past I have assumed that you can reinvest the divvie at the same ROE as company's ROE, but that's usually not true, especially if ROE is 20-30% range. I could see what my Buffettology calcs are for BBBY later today, however, they do not account for buybacks and divvies, so I think they are not that useful.

To: Jurgis Bekepuris who wrote (51169)	3/26/2013 11:57:07 AM
From: Chid	Read Replies (1) \| Respond to of 78773

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?