Comments on: Looking At Wal-Mart http://www.fwallstreet.com/article/44-looking-at-wal-mart/ Value Investing Blog Mon, 16 May 2011 10:55:06 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Ginola http://www.fwallstreet.com/article/44-looking-at-wal-mart/#comment-3551 Ginola Wed, 03 Nov 2010 20:18:43 +0000 http://www.fwallstreet.com/article/44-looking-at-wal-mart#comment-3551 Joe - firstly, I greatly appreciate this demonstration on owner earnings. I have ordered your book and respect your work. I would greatly appreciate if either yourself or a visitor to this site who understands Joe’s application of owner earnings to answer the following: My query relates to whether in the Wal-mart example you are using interim owner earnings to derive intrinsic value. The salient difference between a discounted cash flow (DCF) valuation and an owner earnings cash flow valuation model is that a conventional equity DCF models the cash flows available to equity holders after ALL cap ex requirements (maintenance and cap ex). In the owner earnings model Joe is calculating the cash flows available to equity holders after maintenance cap ex only and assuming that this amount is re-invested in the business. Let’s go back to the Wal-Mart example and apply the numbers. Let’s take 2007 as the base year and project owner earnings for 2008. Taking CFO of 20,164 and subtracting MAINTENANCE CAP EX of 13,642 derives owner earnings of 6,522. If the 6,522 of owner earnings is withdrawn by the owner i.e. paid out, the business will be unable to grow. If the 6,522 is re-invested as growth cap ex into the business the following year it is rational to assume owner earnings will grow, say by 23.9%. However, you cannot have both! If the 6,522 goes onto the balance sheet as part of PPE, that is an investment in the business. These cash flows cannot be distributed and cannot therefore count towards intrinsic value. If you are re-investing 100% of all owner earnings (or free cash flows) for growth, these interim cash flows must NOT be discounted. Instead, the entire value of the business will lie in the terminal value. In the Wal-mart example, none of the interim owner earnings (i.e. years 2008-2017) ought to be discounted and counted towards the present value. The only figure that may be discounted is the terminal value of the business. In your comment to BP you write: Going back to Wal-Mart: I expect the company to keep opening new stores. When it does, I have a reasonable basis for knowing what to expect from each store. Still, the CapEx associated with opening stores generally goes to the balance sheet (in the form of shelves, buildings, etc) and I become part owner in the new store. In that case, the future CapEx for growth is not a charge to or reduction of owner earnings, it is a reinvestment of owner earnings. I agree that the future cap ex for growth is not a charge to owner earnings. However, the 6,522 of owner earnings in 2007 should not count as an interim cash flow in deriving the present value of the business. Cash after maintenance cap ex cannot be used in a DCF model to derive intrinsic value if the business is using the cash to grow, otherwise that would be double counting. Joe – firstly, I greatly appreciate this demonstration on owner earnings. I have ordered your book and respect your work. I would greatly appreciate if either yourself or a visitor to this site who understands Joe’s application of owner earnings to answer the following:
My query relates to whether in the Wal-mart example you are using interim owner earnings to derive intrinsic value. The salient difference between a discounted cash flow (DCF) valuation and an owner earnings cash flow valuation model is that a conventional equity DCF models the cash flows available to equity holders after ALL cap ex requirements (maintenance and cap ex). In the owner earnings model Joe is calculating the cash flows available to equity holders after maintenance cap ex only and assuming that this amount is re-invested in the business.
Let’s go back to the Wal-Mart example and apply the numbers. Let’s take 2007 as the base year and project owner earnings for 2008. Taking CFO of 20,164 and subtracting MAINTENANCE CAP EX of 13,642 derives owner earnings of 6,522. If the 6,522 of owner earnings is withdrawn by the owner i.e. paid out, the business will be unable to grow. If the 6,522 is re-invested as growth cap ex into the business the following year it is rational to assume owner earnings will grow, say by 23.9%. However, you cannot have both! If the 6,522 goes onto the balance sheet as part of PPE, that is an investment in the business. These cash flows cannot be distributed and cannot therefore count towards intrinsic value. If you are re-investing 100% of all owner earnings (or free cash flows) for growth, these interim cash flows must NOT be discounted. Instead, the entire value of the business will lie in the terminal value. In the Wal-mart example, none of the interim owner earnings (i.e. years 2008-2017) ought to be discounted and counted towards the present value. The only figure that may be discounted is the terminal value of the business.
In your comment to BP you write:

Going back to Wal-Mart: I expect the company to keep opening new stores. When it does, I have a reasonable basis for knowing what to expect from each store. Still, the CapEx associated with opening stores generally goes to the balance sheet (in the form of shelves, buildings, etc) and I become part owner in the new store. In that case, the future CapEx for growth is not a charge to or reduction of owner earnings, it is a reinvestment of owner earnings.
I agree that the future cap ex for growth is not a charge to owner earnings. However, the 6,522 of owner earnings in 2007 should not count as an interim cash flow in deriving the present value of the business. Cash after maintenance cap ex cannot be used in a DCF model to derive intrinsic value if the business is using the cash to grow, otherwise that would be double counting.

]]> By: Eric http://www.fwallstreet.com/article/44-looking-at-wal-mart/#comment-3101 Eric Fri, 18 Dec 2009 08:07:37 +0000 http://www.fwallstreet.com/article/44-looking-at-wal-mart#comment-3101 As for finding the cost of opening another store or unit in order to seperate growth from maintenance capex, sometimes you do not have to do all calculations as Joe has here. Sometimes the company will tell you how much a new store costs. Take for example the Buffalo Wild Wings (BWLD) conference call in october. When asked, The CEO said that in the past it cost about 220 to 230 thousand to open a new store, and in the future she expects the cost to be under 200 thousand per store. This info makes seperating growth capex very easy, since you can just take the number of new stores opened times 200 thousand. That gives you a pretty accurate estimate of that years growth capex. You can even estimate future growth capex easier, because the company might reveal how many new stores it plans to open. Knowing roughly what it costs to open those new stores, tells you almost exactly what it will cost. <a href="http://seekingalpha.com/article/169342-buffalo-wild-wings-q3-2009-earnings-call-transcript?page=5" title="http://seekingalpha.com/article/169342-buffalo-wild-wings-q3-2009-earnings-call-transcript?page=5" target="blank" rel="nofollow">http://seekingalpha.com/a...</a> As for finding the cost of opening another store or unit in order to seperate growth from maintenance capex, sometimes you do not have to do all calculations as Joe has here. Sometimes the company will tell you how much a new store costs. Take for example the Buffalo Wild Wings (BWLD) conference call in october. When asked, The CEO said that in the past it cost about 220 to 230 thousand to open a new store, and in the future she expects the cost to be under 200 thousand per store. This info makes seperating growth capex very easy, since you can just take the number of new stores opened times 200 thousand. That gives you a pretty accurate estimate of that years growth capex. You can even estimate future growth capex easier, because the company might reveal how many new stores it plans to open. Knowing roughly what it costs to open those new stores, tells you almost exactly what it will cost.

http://seekingalpha.com/a…

]]> By: Joe Ponzio http://www.fwallstreet.com/article/44-looking-at-wal-mart/#comment-2977 Joe Ponzio Fri, 14 Aug 2009 11:49:38 +0000 http://www.fwallstreet.com/article/44-looking-at-wal-mart#comment-2977 Ron, I don't put too much faith in a single quarter or year. I compare the quarter with the previous year's quarter, but only to see if something really jumps out at me. For me, it's a starting point for looking closer at the company, not an end point to make a decision to buy more or sell. Make sense? Ron,

I don’t put too much faith in a single quarter or year. I compare the quarter with the previous year’s quarter, but only to see if something really jumps out at me. For me, it’s a starting point for looking closer at the company, not an end point to make a decision to buy more or sell.

Make sense?

]]> By: Ron http://www.fwallstreet.com/article/44-looking-at-wal-mart/#comment-2962 Ron Sat, 08 Aug 2009 04:53:02 +0000 http://www.fwallstreet.com/article/44-looking-at-wal-mart#comment-2962 Hi Joe, If we wanted to reanalyze our portfolio quarterly, is it better to use ttm instead of the annual numbers as a starting point for calculating future cash flows? I understand that reacting too quickly to change our growth rate assumptions would be unwise especially for large businesses but the ttm owner earnings and quarterly shareholder equity seem more relevant as a starting point than using the last annual numbers. Would it be better to use those more current numbers as a starting point before investing initially in any stock? Thank you Joe! Hi Joe,

If we wanted to reanalyze our portfolio quarterly, is it better to use ttm instead of the annual numbers

as a starting point for calculating future cash flows? I understand that reacting too quickly to change

our growth rate assumptions would be unwise especially for large businesses but the ttm owner earnings and quarterly shareholder equity seem more relevant as a starting point than using the last annual numbers. Would it be better to use those more current numbers as a starting point before investing initially in any stock? Thank you Joe!

]]> By: Kiriakos Georgiou http://www.fwallstreet.com/article/44-looking-at-wal-mart/#comment-2324 Kiriakos Georgiou Sat, 25 Oct 2008 12:39:25 +0000 http://www.fwallstreet.com/article/44-looking-at-wal-mart#comment-2324 Hello everyone! Although I own WMT (along with AAPL, JNJ, and PG) there is a problem with your "owner earnings" analysis because it doesn't account for the significant debt, $31B of which is due in 5 yrs, the cost of refinancing it will go up, or if they slowly pay it down out of the cash flows, the owner earnings won't be what you projected. IMO companies like WMT and PG are still good investments if you catch them at the right price, but the true gems are JNJ and AAPL below $55 and $90 respectively - they have virtually no debt and are true cash cows. The market gave us a small window on Oct 10th, but I believe we'll all have a second chance to buy again at those prices, at least once more, I hope. In the mean time I am happily sitting on 37% cash. Hello everyone!

Although I own WMT (along with AAPL, JNJ, and PG) there is a problem with your “owner earnings” analysis because it doesn’t account for the significant debt, $31B of which is due in 5 yrs, the cost of refinancing it will go up, or if they slowly pay it down out of the cash flows, the owner earnings won’t be what you projected.

IMO companies like WMT and PG are still good investments if you catch them at the right price, but the true gems are JNJ and AAPL below $55 and $90 respectively – they have virtually no debt and are true cash cows. The market gave us a small window on Oct 10th, but I believe we’ll all have a second chance to buy again at those prices, at least once more, I hope.

In the mean time I am happily sitting on 37% cash.

]]> By: John Allen http://www.fwallstreet.com/article/44-looking-at-wal-mart/#comment-2054 John Allen Mon, 08 Sep 2008 03:21:07 +0000 http://www.fwallstreet.com/article/44-looking-at-wal-mart#comment-2054 I'm not sure how much they spend to open a store is calculated. $4 Million to open a 200,000 square foot store on 12-25 acres of high quality commercial land just doesn't cut it. Are they mortgaging them? $15-20 Million sounds much more accurate. I’m not sure how much they spend to open a store is calculated. $4 Million to open a 200,000 square foot store on 12-25 acres of high quality commercial land just doesn’t cut it. Are they mortgaging them? $15-20 Million sounds much more accurate.

]]> By: cory http://www.fwallstreet.com/article/44-looking-at-wal-mart/#comment-2039 cory Sun, 31 Aug 2008 22:56:26 +0000 http://www.fwallstreet.com/article/44-looking-at-wal-mart#comment-2039 Hi Joe, When you say: "Assuming owner earnings grew at 23.9%, and discounting back at 15% (our desired return), Wal-Mart's present value of cash flow is $176,343 Mil." I can't seem to get at that number, 176343. I tried starting with owner earnings of 6522 and calculating future value for 10 years at 23.9%, then calculating future value of that for 10 years at 5% and finally discounting to 15%. Can you help? Much appreciated! Hi Joe,

When you say:

“Assuming owner earnings grew at 23.9%, and discounting back at 15% (our desired return), Wal-Mart’s present value of cash flow is $176,343 Mil.”

I can’t seem to get at that number, 176343.

I tried starting with owner earnings of 6522 and calculating future value for 10 years at 23.9%, then calculating future value of that for 10 years at 5% and finally discounting to 15%.

Can you help? Much appreciated!

]]> By: Joe Ponzio http://www.fwallstreet.com/article/44-looking-at-wal-mart/#comment-1755 Joe Ponzio Wed, 14 May 2008 05:55:09 +0000 http://www.fwallstreet.com/article/44-looking-at-wal-mart#comment-1755 David: You can't do just one future value and then present value. You have to figure out the present value for each year's cash flow. In your math, you asked: What is the future value of $6,522 growing at 23.9%? (Answer: $55,602) Then, you asked: What is that worth today if I want 15%? (Answer: $13,744). What you need to ask is:<ul> <li>How much cash will the business generate next year? Then, what is the present value of that cash?</li> <li>How much will it generate in two years? What is the present value of that cash?</li> <li>How much will it generate in three years? What is the present value of that cash?</li> <li>And so on.</li></ul> In your math, you figured out the value of the tenth year's cash flow, but you didn't get the value of the cash flow for years one through nine. Make sense? David: You can’t do just one future value and then present value. You have to figure out the present value for each year’s cash flow.

In your math, you asked: What is the future value of $6,522 growing at 23.9%? (Answer: $55,602) Then, you asked: What is that worth today if I want 15%? (Answer: $13,744).

What you need to ask is:

  • How much cash will the business generate next year? Then, what is the present value of that cash?
  • How much will it generate in two years? What is the present value of that cash?
  • How much will it generate in three years? What is the present value of that cash?
  • And so on.

In your math, you figured out the value of the tenth year’s cash flow, but you didn’t get the value of the cash flow for years one through nine.

Make sense?

]]> By: David http://www.fwallstreet.com/article/44-looking-at-wal-mart/#comment-1744 David Fri, 09 May 2008 00:23:52 +0000 http://www.fwallstreet.com/article/44-looking-at-wal-mart#comment-1744 hello joe, you said in this post:"Assuming owner earnings grew at 23.9%, and discounting back at 15% (our desired return), Wal-Mart's present value of cash flow is $176,343 Mil" when i take the 6,522 of free cash flow(=owner earnings) and do a simple Future Value of it in a compunded rate of 23.9% for 10 years i get 55,602.4. discounting it at 15% doesn't get me 176,343 like you wrote. how did you get to that number? what is the calculation? hello joe,

you said in this post:”Assuming owner earnings grew at 23.9%, and discounting back at 15% (our desired return), Wal-Mart’s present value of cash flow is $176,343 Mil”

when i take the 6,522 of free cash flow(=owner earnings) and do a simple Future Value of it in a compunded rate of 23.9% for 10 years i get 55,602.4. discounting it at 15% doesn’t get me 176,343 like you wrote.

how did you get to that number? what is the calculation?

]]> By: Joe Ponzio http://www.fwallstreet.com/article/44-looking-at-wal-mart/#comment-1328 Joe Ponzio Thu, 31 Jan 2008 04:34:32 +0000 http://www.fwallstreet.com/article/44-looking-at-wal-mart#comment-1328 Great visual Nick! Great visual Nick!

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