Rule #1 Finance Blog

With Investor Phil Town

YOUR HOMEWORK: TTI AND GROWTH RATE

Here’s the start of a homework involving TTI. Read on.

Dear Phil,

I am a recent Investools investor after seeing you at a motivation seminar in Ft Lauderdale.  I just finished “reading” your book (by listening to it on CD) and loved it.  I’ve never owned stock, but I’m very excited about the prospect!

Investools valuation analysis shows the following sticker prices:

TTI – $1508.25 but selling for $28.69
WHQ – $110.06 but selling for $48.28
UNT – $1202.26 but selling for $57.18

I wanted to know if my eyes were seeing the right thing, especially TTI and UNT; talk about a huge MOS if it’s right.

I’d LOVE your opinion!!

Thanks,
cvogt

My response:

TTI at $1500.  The reason that you are getting such a high valuation on
TTI is that the estimated growth rate from the one analyst willing to
guess is 65% a year.  Which is crazy.

Maybe they can sustain that for
a while, but it has to drop off quickly because nothing except bacteria
can compound at that rate for any length of time… and even they
eventually run out of food at that rate.

So, this one optimistic
analyst not withstanding, we’ve got to dial down that rate of growth.
And that isn’t hard to do at all:

Note for example that the ten year
EPS went from $0.21 to $0.53
.  That’s more like 11% a year. (You can figure out the growth rate using my calculator.)

Equity
growth rate
shows about the same number.  Free Cash Flow is all over
the map and vastly negative last year.  And sales over ten years are
less than two doubles.

Bottom line, I have no trouble at all dropping
my long term expectations down to 11% plus some extra if I think oil
shortages will continue.  Since I have no opinion on that one, I’ll
leave it to you.

In fact, what’s the moat here?  Isn’t this business entirely tied to
oil prices?  Bottom line on this biz is you have to make a decision
about the future of oil prices and then add something to the 11% for
the long term growth rate.  And then be conservative on the PE.

So let’s take an example.  If the long term PE is 28, that implies a
14% long term growth rate (thinking backwards) — so I’ll use that.  That
gives me a $37 Sticker.

The stock’s at $29, so there is still some room
in there, and we’ve certainly been conservative.  I’d need a bigger MOS
but if you really know the oil market, it won’t take much imagination
for you to justify this one.  Your call.

Do that to the other two and write me back.

Now go play.

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