And her minimum acceptable rate of return the MARR for buying a business was 15

And her minimum acceptable rate of return the marr

This preview shows page 186 - 189 out of 263 pages.

And her minimum acceptable rate of return (the MARR) for buying a business was 15 percent per year. That number never changed. Here were her numbers for her Rule #1 Valuation calculation: 1. TTM EPS: $1.51 2. Growth Rate: 24 percent 3. PE: 42 4. MARR: 15 percent She ran the calculation using my website and got the following: 1. Sticker price: $136
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2. MOS price: $68 per share 3. Current price: $48 4. Was there a Margin of Safety? Yes (MOS $68. Price $48) She ran through the same process with McDonald’s. ROIC was just below 10 percent. Sales and Cash were growing below 10 percent, while Earnings and Book Value growth were at 12 percent. Debt could be paid in exactly three years from earnings. Then she ran the Rule #1 Valuation using 12 percent Growth Rate and a 24 PE—well above average for MCD but doable—and she got a Sticker Price of $42 with an MOS Price of $21. But the stock was selling for $32. 1. Here’s the MCD summary: 2. Sticker price: $42 3. MOS price: $21 4. Current price: $32 5. Was there a Margin of Safety? For a novice, no. But for an expert, yes (80 percent MOS $34. Price $32) And then she did it again for Buffalo Wild Wings. Return on Capital was low but coming up fast. Almost no Debt. Book Value was growing, at 15 percent, Earnings growth was off the charts over the previous three years, at 49 percent, Sales were going strong, at 32 percent for the last six years, and Cash was growing, at 28 percent. Analysts were giddy about the future. She dialed it down a bit because of the 15 percent BVPS and put the Growth Rate at 20 percent with a 30 PE—well within the range for BWLD. Her calculations arrived at these numbers: 1. Sticker price: $37 2. MOS price: $19 3. Current price: $15 4. Was there a Margin of Safety? Yes (MOS $19. Price $15) NOTE: For the complete step-by-step four M analysis of McDonald’s and Buffalo Wild Wings, go to PaybackTimeBook.com . Check Payback Time . To check Payback Time, Susan needed to know
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how long it would take the growing earnings to pay off the MOS Market Cap, the price she was willing to pay for the whole company. To get the MOS Market Cap, she multiplied Chipotle’s MOS Price of $68 per share by the total number of shares in the company, 29 million. She found the shares number on the Company Report page on MSN Money. The Chipotle MOS Market Cap was $1,972 million. Now she grew the earnings at 24 percent per year and accumulated the total earnings year over year until the total equaled or went just over the MOS Market Cap. She found it would take almost eleven years of accumulating earnings to pay off the business at the MOS Market Cap—a little more than the ideal ten-year maximum Payback Time. The spreadsheet on the right shows the number of years and the cumulative earnings for CMG as it grows 24 percent per year. The graph below shows the accumulating earnings over ten years.
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