“Beverage Digest reported that the total sales volume of soft drinks in the United States fell 0.6 percent in 2006, following a 0.2 percent decline in 2005. The industry sold 10.16 billion cases of soft drinks in 2006, down from 10.22 billion in 2005(reuters.com).”The carbonated soft drink industry has moved from roughly 3 percent growth in the 1990s to modest declines in the last two years,” Beverage Digest reported, saying the estimate included energy drinks, a very fast-growing segment.”

Someone mentioned just buying the market vs one of these mega giants. You know I was thinking about that and it makes sense. When KO, MMM get a valuation they more deserve the market will have rebounded. So, you could buy an ultra ETF of the S&P (SSO) that goes up 50% when the market goes up 25%. These giant companies aren’t going to grow earnings fast enough to get the same performance you can get in this ETF and you get way, way less externalities and uncertainty. If the market crashes or is flat for 2 yrs will KO MMM be much higher. I doubt it.

As for KO, the old goat has gotten in everyone’s head w/ this one. KO is yesterday’s news. The OG did so well with it because he bought before the bull market went crazy and management did a massive restructuring of a bloated enterprise. Those days are long gone. The Chinese don’t even like it. One simple fact. When I was a kid, we rode our bikes to the local convenience store after finishing up a baseball game or whatever and everyone of us kids bought a Coke or Pepsi. When was the last time you saw a kid drinking a coke? Case closed!

Conclusion: Should have stuck with AAPL rather than over thinking the whole thing.

We will have to see how this plays out in 3-10 years time, 14$ purchase may be solid… too bad Joe unloaded this one IMO too soon.

I am also a newbie at this, but I did the almost exact same thing. I figured a growth in free cash flow of 10% for the next ten years and then 5% after that. As you pointed out, thats 1/3 of the growth rate that they experienced in the last ten years.

I got a fair value (15% DCF) of about $103 per share . I like to use a 30% Margin of Safety on that, bringing me to a purchase price of about $72. Unfortunately, I also have a currency issue, as the Cdn dollar is what I earn and, for the short term, it’s down big time against the US dollar. I figure thats a short term thing and we’ll be back closer to par once the comoodity issues work themsleves out. So I have to work in some currency valuations also, to cover my butt when the Cdn dollar shoots back up and I am stuck with shares in US currency..

Of course, that will be a mute point when the Cdn dollar gets stronger than the US dollar and we come down and buy your fine country at a discount. ( that assumes the chinese don’t beat us to it) Hope y’all like pancakes and maple syrup!! *S* If not, hope y’all like dim sum….

So, now..what am I doing “wrong” here. This seems like a no-brainer, as they say in the vernacular. It can’t be this easy..I must be missing something here… I reduced growth by two thirds and took another 30% off that and still I can buy for less than I calculated. Are things that out of wack???

A request for someone smarter than me (not difficult) to straighten me out on this one.

Darren

I am planning to stick with Phil’s 3 year rule & studying the business progress. After all Its 99% art as you mentioned ..

Gopi

You said: “I won’t be “way wrong” like I was with AEO”

Could you please share your thoughts on why your opinion of the business and the valuation of the future perspectives of AEO changed?

I know that AEO’s price is down roughly 60% from when you valuated and put it into the portfolio. But have you really been wrong on the future perspectives of AEO? Did something dramatically change in the business? Did the future really became cloudier?

In your post “Where Are We With AEO?” (about 2 month ago) you said “I have to say that, in my opinion, management is handling this downturn well…if not brilliantly” and you had good arguments for this. What did change in the past two month or which deeper insights into the company or the company’s business did you get?

Why aren’t you applying Phil Fisher’s 3-year-rule to this stock?

Many questions, but I anyhow got the impression that the currently generally negative situation is also starting to have an effect on your decisions.

I will keep on following your advise “Do As I Say, Not As I Do” (May 29) and can only give you the advise to re-read your “Where Are We With AEO?”-article.

Cheers,

Eric

Cash returned on invested capital – 12.3% median 98-07

FCF growth at 32.5% median 98-07

If FCF slows to just a 1/3 of what it has been for the last 10 years, the discounted cash flows valuation should be in the ballpark of 558,083,000,000. (cash growth rates of 10%, 5%, both 10 yrs, and a discount rate of 15%)

If FCF continues to grow as it did for the past 10 years, it could be estimated as worth 1.9 trillion, using cash growth rates of 32.5%, and 5% both for 10yrs, and discount rate of 15%. This gives per share fair value of around $340.

With the total valuation at 558 billion, per share value is around $100. With a price at 69, its selling at around 2/3 of full value, and this is if growth SLOWS by 2/3rds.

Does anybody tend to disagree with this valuation?, I’m open to constructive criticism as I am currently a student, and still attempting to grasp the big picture.

Thanks all!

I think Joe is right. It makes sense to back the best horses offering the best odds.

cheers