calculating BNIs Sticker Price given all the homework weve done so far1 Look at

Calculating bnis sticker price given all the homework

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calculating BNI’s Sticker Price given all the homework we’ve done so far: 1. Look at the Growth Rates we got: 14, 24, 8, and 11 percent. I’d be okay with using 12 percent because I think things are heading BNI’s way for the next fifty years. 2. Look at what the analysts’ consensus of growth is. Go to Earnings Estimates on the left menu and click the fourth tab, Earnings Growth Rates. This tells you the analysts are estimating 13.5 percent in the next five years. On average they’re more optimistic than I am. 3. Take the lower of the two estimates. Mine is lower, so we’ll go with 12 percent. 4. Pick the PE ratio—a multiple of earnings that this company trades at. Go to Financial Results, Key Ratios, Price Ratios. The range from low to high BNI PE ratios is from 14 to nearly 34. Add them up. Divide by 2. You get 24 as an average. You can also look at the ten-year statements on MSN Money and see the average annual PE. The highest of these is
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17 at this writing. So which do you use? For a big Moat business like BNI, I like to use an average “high” PE because the buyer is going to have to pay up to get that Moat. If the buyer wants to be in the railroad business in the parts of the country where BNI has track, they have to buy BNI. That’s going to make the multiple of earnings higher, so I’m going to use a higher-than-“average” PE (as long as it doesn’t go more than double the growth rate and it’s not out of line with the historical highs) and I feel good about it. 5. Double your estimated Growth Rate. We’ve chosen a growth rate of 12 percent per year. Double 12 is 24. 6. The two PE ratios are 24 and 24. We choose the lower one. That would be 24. 7. Find the TTM EPS. It’s on the Company Report page: $5.76. 8. Pick a Minimum Acceptable Rate of Return (MARR). Ours is 15 percent. This is a key number. It tells me that if I pay the retail value of this business and everything goes as projected above, I’ll make 15 percent a year. 9. Summarize the four numbers: TTM EPS = $5.76, Growth Rate = 12 percent, PE = 24, MARR = 15 percent. 10. Run the numbers through the calculator on my website ( ) and you get a Sticker Price (the retail value) of $108 per share.
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11. Calculate the Margin of Safety Price. If you are just starting out, I’d go 50 percent off retail —$54. If you know this business and you know your railroad stuff, I’d go no more than 80 percent of Sticker Price, or $86. (See box about MOS.) 12. Check today’s price (March 2009): $52. 13. Decision: This is buyable (in March 2009) even if you’re a novice investor. 14. Action: Finish reading everything you can about this industry and company. Read Atlas Shrugged for a good railroad story, And then start stockpiling it whenever the price goes below $54. (More on that in the next chapter .) In 2008, Warren Buffett bought billions of dollars’ worth of BNI stock at prices ranging from $79 to $84. Why didn’t he wait until it got into the $50s? I haven’t had the privilege of asking him that question, but my best guess is that he’d say, “It’s a great business and at a price in the range of $79 to $84 for a business worth over $100 a share, it’s an attractive deal.” And he might add Charlie Munger’s advice. “It’s better
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  • Spring '20
  • Warren Buffett

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