Rule #1 Finance Blog

With Investor Phil Town

REVALUING GOOGLE AND WHOLE FOODS

Phil_town_111 Two of Phil Town's favorite businesses have turned in less than expected
growth rates for earnings, which prompted fund managers to dump stock in
both of them.  WFMI dropped from $80 to $64 (-20%) and Google dropped
from $460 to $350 (-24%).  If you are using tools either on MSN or
Investools (or wherever), you just paid for whatever they cost by
avoiding taking these horrendous losses.  We were out of Google at $440
and out of WFMI at $77.  Lovely.  But now what?  These are both
wonderful businesses, but now what are they worth?

Let's run the numbers as they are today (and try not to think
about how much we like these guys.  Keep it nice and unemotional…
right!). 

 

WFMI: 

  • Long Term Growth Rate: 21% (The high guess by the CFO and right at
    historical… but you could use the low of 18%.  I'm going with the higher
    number because it's more in line with the equity growth rate, which tends
    to be the long term growth rate of the business.)
  • 2005 TTM EPS: $0.99 (But I ain't using it.)
  • 09/2006 estimated EPS: $1.42
  • PE: 42 (Both historical and 2X the growth rate.)
  • EPS in 10 Years:  $7.90 (I don't want to use the TTM EPS because
    it's an artificially low number.  I'm going with the 2006 consensus
    estimate of $1.45 and running that out for 9 years instead of $0.99 for
    10 years.  I could be wrong, but this is consistent with my longer term
    views of the business.)
  • Stock Price in 10 Years: $332
  • Sticker Price Today:  $83
  • MOS Price Today: $42
  • Current Price: $64

WFMI summary:  The earnings slowed down a
lot this year.  But the officers think the end of year 2006 earnings
will be around $1.40.  That puts the value today at around $83.  Since
it's selling for $64, things are looking good for getting back in to
WFMI when the big guys start liking it again (which will only take a
bit of good financial news).

 

GOOG:

Google dropped like a brick after missing its 4th quarter
estimates by a whole bunch.  That's scary for the big guys, who can't
just bail out quickly like we can, so they started a fairly orderly
exit out of the Google theater just in case the thing is on fire.  They
don't really think it is, but they can't be faulted for getting out
after that news, so running, in this case, is the better part of valor
for these behemoths. 

Meanwhile, we just bail with them and wait
patiently for a new entry down the road, as long as the biz is still
undervalued… So let's see what the new numbers tell us:

  • Growth Rate: 32% (analyst estimates)
  • 2005 TTM EPS: $5.02
  • PE: 50 (my personal max PE)
  • EPS in 10 Years:  $60
  • Stock Price in 10 Years: $3,000
  • Sticker Price Today:  $750
  • MOS Price Today: $375
  • Current Price: $347

GOOG summary:  The earnings dropped a lot
below the estimate, but are still DOUBLE a year ago, well above the
analysts'  32% long term estimate.  But who knows for sure?  So we want a
big MOS and green to get back in.  Looks like we've got the MOS.  Now
we just wait for the big guys to get over their flight from the Google
theater.

 

At the very least, those of you who are watching these two stocks
just learned how important it is to get out.  In this STILL overpriced
market, you have to believe that ANY business can lose another 50% of
its value and YOU don't want to be there when that happens.  Take the
extra time, set your stops and get the heck out.  And don't forget Rule
#1 by Phil Town

 

Now go play. Phil Town