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Non-Tech : RAINFOREST CAFE -- Ignore unavailable to you. Want to Upgrade?

To: John Carragher who wrote (3940)	2/1/1998 11:41:00 PM
From: Dennis Vail	Respond to of 4704

Subject: RAIN Projections - Past and Present Date: Sun, Feb 1, 1998 14:19 EST From: Woyanne Message-id: <19980201191901.OAA16432@ladder03.news.aol.com> Late last year, I posted a couple notes outlining a simple spreadsheet model that I created based on a new book on Warren Buffet called Buffettology, by Mary Buffett. As I noted in those posts, there are a number of reasons why Warren Buffett would never be interested in RAIN--including its small size and limited operating history, a generally less than solid senior management team, and the lack of a well-defined and established brand name like McDonalds, Starbucks, or Coca Cola. But, in any case, I still find the model derived from the Buffett book to be another useful way to measure RAIN's investment potential. To make the model work: -- I make an assumption about the average EPS growth rate in the first five years. -- For years 5 to 10, I make assumptions about what Return on Equity (ROE) RAIN might generate each year to determine estimated earnings per share (EPS). ROE should rise rapidly in the early years of RAIN if only because the company will be investing its large cash assets into restaurants with better investment returns. -- For years 1 to 10, I also make assumptions about likely P/E ratios to generate a price for RAIN in each year. Here's the most conservative of two spreadsheet models for RAIN that I posted--at the time, the stock could be bought for about $35, or $24 post-split. I posted the more conservative model after some a reply from Idid on my first model that wisely pointed out that more conservative assumptions should be looked at as well. To the best of my knowledge, I have adjusted all the figures correctly for the split. I will let you all judge for yourselves how conservative the model looks after the RAIN crash and poor SSS news: EPS Growth rate, years 1-5, was set at 40 percent annually. Year Equity/Share ($) EPS ($) ROE (%) 1997 7.91 0.53 6.74 1998 8.44 0.74 8.84 1999 9.19 1.04 11.38 2000 10.23 1.46 14.32 2001 11.70 2.04 17.48 2002 13.75 2.86 20.84 2003 16.61 3.32 20.00 2004 19.94 3.98 20.00 2005 23.93 4.78 20.00 2006 28.71 5.16 18.00 2007 33.88 6.09 18.00 Year Projected P/E Price 1997 44.4 23.66 1998 35 26.13 1999 35 36.63 2000 30 44.00 2001 30 61.40 2002 25 71.66 2003 20 66.47 2004 20 79.76 2005 18 86.14 2006 18 93.03 2007 18 109.78 Proj. annual Return for 5 year period: 24.8% Proj. annual Return for 10 year period: 16.6% The projected returns above were close to the minimum I would have looked for to invest in a risky small stock like RAIN--especially with questionable management. If I had been a new buyer, I doubt I would have done more than begun to nibble on RAIN shares at $24 to avoid being hurt substantially in a major correction. Now, I wish I had just sold some shares at $24. :-) If RAIN fails to make notable changes to its management team as the year wears on, I certainly will consider scaling out of at least a portion of my RAIN shares. As I said before, I accuse myself of failing to properly weight the risks associated with a management team and board so heavily dominated by one person and the risks of several less than top notch figures in management such as Ercu Ucan who heads retail. -- I've been fairly hard on Ercu in my posts, but this is an investment for me, not an effort to fund his early retirement. Thirty percent drops in retail sales at Tysons and Sawgrass are pretty hard to overlook especially given Ercu's hefty options package. -- In addition to the management issue, the SSS issue also is something I intend to weight more heavily in deciding how many shares of RAIN to hold. Now, lets see what the model looks like after the RAIN crash to $11.25 and with some even more conservative earnings growth and P/E assumptions: EPS Growth rate, years 1-5, is now set to 30 percent annually--currently the lowest projection by analysts tracking RAIN: Year Equity/Share ($) EPS ($) ROE (%) 1997 7.91 0.51 6.44 1998 8.42 0.66 7.83 1999 9.08 0.86 9.46 2000 9.94 1.12 11.26 2001 11.06 1.46 13.19 2002 12.52 1.89 15.09 2003 14.41 2.16 15.00 2004 16.57 2.48 15.00 2005 19.05 2.66 14.00 2006 21.72 2.82 13.00 2007 24.55 2.94 12.00 Year Projected P/E Price 1997 22.05 11.25 1998 25 16.5 1999 25 21.5 2000 25 28 2001 25 36.5 2002 20 37.8 2003 15 32.42 2004 15 37.28 2005 14 37.35 2006 13 36.71 2007 12 35.35 Proj. annual Return for 5 year period: 27.4% Proj. annual Return for 10 year period: 12.1% Even assuming only a 30 percent five year growth rate, RAIN--as a unit growth story--looks to be a pretty good buy at $11.25 as an investment for the current five year period, presuming it attains price-to-earnings ratios of at least 20 to 25. Years 5 to 10 could be a lot brighter than the above model projects if management can keep its ROE from declining steadily, and hence the P/E from nose diving. Of course, its not prudent, in my view, to think any more than 5 years out with RAIN as an investment when the unit growth story will be far less compelling. Moreover, I do not believe there is much basis to believe that the current board and management team can overcome the SSS and other problems any maturing restaurant concept would face. I'd love to hold all my RAIN shares for five years and at least some shares for ten years or more; it would be a lot easier to image holding RAIN for 5 to 10 years if a top notch management team were in place to maximize the potential in RAIN that almost all of us on this BB believe exists in the concept. A top notch President/COO, better yet a full-time CEO/president (not Berman), would be a large step in the right direction. We shall see. Woyanne AKA RAIN Rebel AKA Steve