Therefore if we can buy stock in a wonderful public business at a private

Therefore if we can buy stock in a wonderful public

This preview shows page 119 - 122 out of 263 pages.

Therefore, if we can buy stock in a wonderful public business at a private business Payback Time price, then we’re getting a heck of a Margin of Safety. BNI’S MARKET-CAP PAYBACK TIME So with that in mind, let’s see what happens when we look at a public business without adding in any value for liquidity—in other words, we’ll
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evaluate a public business as if it were a private business and we were going to buy all of it. If you have only $20,000 to invest, it’s a bit of a stretch to think of buying an entire $20 billion railroad, but hey, $20,000,000,000 is just $20,000 with a whole lot of zeros after it. Take away six zeros and you’re buying a $20,000 railroad. Financial statements show the numbers in millions anyhow. If it helps to think of it that way, go for it. I’ll use that financial standard below. So how long will it take us before we’re playing with just house money if we buy all of BNI at its March 2009 price of $52 per share? At $52 per share, BNI has a market price (called Market Cap on Wall Street) of $17,680 million. I found that by looking at the Company Report (MSN Money) online, but I could figure it out myself by finding the total number of shares outstanding on the Company Report. BNI has about 340 million shares outstanding and it’s priced at $52. Do the math: 340,000,000 shares × $52 per share = $17,680,000,000. If I cough up $17,680 million out of my spare change and buy the whole enchilada at this price, here’s how to figure out how long it’ll take to get my money back out of earnings: 1. Find the Market Cap for the company on the Company Report: $17,680 million. 2. Find the last 12 months’ earnings on the Income Statement (add up all four quarters): $2,115 million. Or just look it up on the Company Report. 3. Grow it forward at 12 percent for ten years or until you get your investment back, whichever is first, using Excel (see box below) or by using the calculators on my website. Here’s how the net income at BNI could grow for the next few years assuming a 12 percent annual growth (again, we didn’t have to go to ten years because we surpassed the Market Cap in the sixth year). These dollar figures are in millions.
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4. Add it up. Is it more than the $17,680 million we are thinking about paying? Yes. In 5.5 years we’ve got our money back. Saaaaah … weeeeeet! We’ve got a Payback Time that’s right in there with private- equity deals. Wow! FIGURING OUT EARNINGS GROWTH THROUGH THE YEARS Calculating earnings growth through the years is easy. We start with net earnings of $2,115 million if we buy today (year 0). We grow it at 12 percent in year 1 (0.12 × 2,115 = 254. Remember, we decided on 12 percent growth for BNI earlier in the chapter. Add that to $2,115 million and we arrive at $2,368 million for year 1). Now do it again: 0.12 × $2,368 million = $284 million. Add that to $2,368 million and we get $2,653 million for year 2. And so on. Eventually you’ll see that you surpass the Market Cap for this company midway through year 5—so you can stop there. If you’re looking for a shortcut, my website also has a free Excel spreadsheet template, as well as a free tool designed to do Payback Time analysis.
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  • Spring '20
  • Warren Buffett

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