Discounted Cash Flow Analysis

[Perisher]

a funny thing i noticed about WFM

Even though the growth is there, but its share price is in down trend

Morale of the story, dont be hard up over growth!

Isn't downtrend good, so eventually the price would be fair to cheap even with growth and solid FA?

 

[wahkao3]

Isn't downtrend good, so eventually the price would be fair to cheap even with growth and solid FA?

yes, eventually

wait till grow beard

 

[allan_nalla]

If you don't wish to post the image, let me know. Will take it down.

Oh. That's what I wanted to do, but couldn't. No worries. Thank you!

so whats the fair value according to your DCF ah??? why no fair value??

Hmm.. I don't think I should post my fair value result over here.

Furthermore, the point of this is not whether my analysis reaps a 'BUY' or 'SELL' rating. Like you said, DCF is a garbage-in-garbage-out kind of analysis. So I think the focal point should be on whether my inputs are reasonable or garbage, not whether my outputs justify a 'BUY' or 'SELL'.

a funny thing i noticed about WFM

Even though the growth is there, but its share price is in down trend

Morale of the story, dont be hard up over growth!

For the record, I'm not vested in WFM, nor am I advocating people to buy, or sell it. I chose WFM to analyze because of their stable track record and the recent hoo-ha on their 'Whole Price Check' reputation as of late.

I'm not a TA guy. But I think the share price downtrend is because of all the negative news recently. With slowing comparable store sales growth (4% for the past year compared to 8% for the past 15 years), huge average costs in their products as compared to its competitors like SFM and Trader's Joe.

I disagree with the fact that we should avoid a company just because its share price has been on downhill recently. Of course, I'm not saying they are inherently perfect too. I guess it's just how TA and FA contrasts each other?

 

[SpeedingBullet]

I think I got a distorted image but what I can't see is:

Your Teminal Value (and how u derive ur TV)
Your justification for the aggressive growth rate of 7.5% to 8%.
Your justification for the increase in capex. What's your thesis?

Your discount rate of 11.6% is based on..? WACC? CoE? Perpetual growth rate?

And most importantly, the ending value, where's your intrinsic value?

 

[allan_nalla]

And most importantly, the ending value, where's your intrinsic value?

Hmm.. I am actually rather hesitant to post my ending figure since I think that shouldn't be where the focus is. But since you guys are asking for it, here it is.

Your Teminal Value (and how u derive ur TV)
Your discount rate of 11.6% is based on..? WACC? CoE? Perpetual growth rate?

My TV is calculated using the Gordon Growth Method and CoE is derived using CAPM.

Your justification for the aggressive growth rate of 7.5% to 8%.

Looking back at WFM's historical data, it has been growing its revenue at 9.53% and 11.68% CAGR for the past 5 and 10 years respectively. The initial 7.5% projections is decided after factoring in the current outlook and personal opinions on their corporate actions as of late. I estimate that they should take approximately 2 years before gradually stabilizing its growth to a figure that is slightly below its historical level.

Your justification for the increase in capex. What's your thesis?

Since their growth strategy is dependent on the development on stores, my CapEx figure is derived using a certain percentage of its sales generated. In this case, an average percentage of the last 3 years would be approximately 1.8%. Hence, you see a growth in CapEx alongside the growth in revenue.

 

[SpeedingBullet]

Hmm.. I am actually rather hesitant to post my ending figure since I think that shouldn't be where the focus is. But since you guys are asking for it, here it is.



My TV is calculated using the Gordon Growth Method and CoE is derived using CAPM.



Looking back at WFM's historical data, it has been growing its revenue at 9.53% and 11.68% CAGR for the past 5 and 10 years respectively. The initial 7.5% projections is decided after factoring in the current outlook and personal opinions on their corporate actions as of late. I estimate that they should take approximately 2 years before gradually stabilizing its growth to a figure that is slightly below its historical level.



Since their growth strategy is dependent on the development on stores, my CapEx figure is derived using a certain percentage of its sales generated. In this case, an average percentage of the last 3 years would be approximately 1.8%. Hence, you see a growth in CapEx alongside the growth in revenue.

Nice, more comprehensive view now. My personal opinion on WFM is that they don't have a moat at all, and their recent hoohaa about overcharging customers would make things alot worse lolol. (well, better than the Subway boss that was a pedo)

Ok I now see how you got your d/c rate - WACC. What are the comps for WACC? Maybe can look at others and determine the average.

Your perpetual growth rate is too optimistic. Try using 0.5%, I use that all the time.

Hmmm, what are their growth plans? They hit a speed bump recently by admitting they blatantly overcharge customers in New York, how has that affected their sales? How about their SSS? 7.5% should be ok I guess.

Can bring in inventory turnover as well, to see how well they're converting receivables to cash (the trend). If it's getting bad to worse, must lower your projections (7.5%).

 

[boiboi123]

Your perpetual growth rate is too optimistic. Try using 0.5%, I use that all the time.

0.5% seems super conservative, any particular reason for that?

I generally use ~1-2%

 

[wahkao3]

 

[allan_nalla]

Ok I now see how you got your d/c rate - WACC. What are the comps for WACC? Maybe can look at others and determine the average.

Thanks for your inputs!

Hmm.. I actually didn't thought of finding out competitors' WACC and use the average figure. Maybe I should try it for my next analysis.

Your perpetual growth rate is too optimistic. Try using 0.5%, I use that all the time.

Ha! Incidentally, I was using 0.5% the first time. This was a revised version. I changed it because I read somewhere that the P.Growth Rate should be higher than inflation and lower than GDP (typically); which is why I revised it upwards. Doesn't it sound pretty logical?

For the record, my rationale for using 0.5% initially was because of WFM's overall current position and outlook. Pretty bleak. What's yours?

Hmmm, what are their growth plans? They hit a speed bump recently by admitting they blatantly overcharge customers in New York, how has that affected their sales? How about their SSS? 7.5% should be ok I guess.

Sorry what's SSS? Their growth strategy is primarily by expanding new stores. You might have heard about this too.
The most worrisome thing is whether their new 'millenial' stores are going to cannibalize current store sales.

Can bring in inventory turnover as well, to see how well they're converting receivables to cash (the trend). If it's getting bad to worse, must lower your projections (7.5%).

I actually have a comparison table of almost all the ratios on one of my excel sheet. I will then select the main metrics that are relevant to their industry and compare against competitors. Here it is if you wanna take a look.
They're also relatively stable on their cash flow efficiency, except for a surge in 09' to CCC of 14. Thereafter, it has stabilized back to 11-12.


But overall, is my valuation process on the right track?

P.S: Thanks wahkao for posting up the image.

 

[wahkao3]

managed to get some reference for calculation of WACC for WFM

WACC = E / (E + D) * Cost of Equity + D / (E + D) * Cost of Debt * (1 - Tax Rate)
= 0.9961 * 12.1% + 0.0039 * 0% * (1 - 38.58%)
= 12.05%

 

[wahkao3]

 

[SpeedingBullet]

0.5% seems super conservative, any particular reason for that?

I generally use ~1-2%

It's for my own margin of safety. 0.5%-1.0% is good enough. 2% is too optimistic in the current deflationary environment, hell i fear 0.5% may be the new 2%.

If a company has an IV that's at $x which is trading below $x even after a 0.5% input, that would be a great buffer. Of course other metrics must come into play.

The denominators in any fwd looking model - Rfr, d/c rate, perp rate play a huge role lol, best to stay conservative esp in a macro environment like now. I've seen before perp rate at 5%

 

[allan_nalla]

Thanks for all of your inputs. I will keep those points in mind.

Meanwhile, I'm off reading some more annual reports and find some that looks interesting to me!

Sorry, quick question:
It's easy to analyze competition and financials when the company only has one reporting segment, like Whole Foods. But what about those with more than 1 segment?

I supposed we're supposed to analyze competition based on specific segments, but wouldn't it be hard to analyze the financials if we had to do an apple-to-apple comparison? Since, a company that has these few reporting segments would not necessarily meet a competitor with the same exact reporting segments.

 

[boiboi123]

Thanks for all of your inputs. I will keep those points in mind.

Meanwhile, I'm off reading some more annual reports and find some that looks interesting to me!

Sorry, quick question:
It's easy to analyze competition and financials when the company only has one reporting segment, like Whole Foods. But what about those with more than 1 segment?

I supposed we're supposed to analyze competition based on specific segments, but wouldn't it be hard to analyze the financials if we had to do an apple-to-apple comparison? Since, a company that has these few reporting segments would not necessarily meet a competitor with the same exact reporting segments.

i would just do a simple sum of the parts analysis

 

[wahkao3]

Thanks for all of your inputs. I will keep those points in mind.

Meanwhile, I'm off reading some more annual reports and find some that looks interesting to me!

Sorry, quick question:
It's easy to analyze competition and financials when the company only has one reporting segment, like Whole Foods. But what about those with more than 1 segment?

I supposed we're supposed to analyze competition based on specific segments, but wouldn't it be hard to analyze the financials if we had to do an apple-to-apple comparison? Since, a company that has these few reporting segments would not necessarily meet a competitor with the same exact reporting segments.

yes if you wish to compare with its peers, you will need to strip out the different businesses, which can complicate the analysis a lot.

for me, i dont bother with peer analysis. I dont think there's much insights to be derived. So what if the company has a better ROE,ROA than its competitors? So what if it has more growth? These comparisions dont help much.

what about companies without public listed competitors? How are you going to do the analysis then? Are you going to knock on their competitors and ask for their financial statements so that you can do analysis? You cant do that. Peer to peer analysis is not reliable, time consuming, dont give much insights and you need to obtain a lot of information which might be impossible to obtain.

I focus more on value creation

 

[allan_nalla]

yes if you wish to compare with its peers, you will need to strip out the different businesses, which can complicate the analysis a lot.

I see. That sounds like a lot of work, but it sounds like a lot more fun too.

I like to think of peer analysis as a same story written by another author. It tells me a different kind of story. To me it's not about achieving higher metrics or performance than the other company. Of course, if it does, I'm more than happy. But it's more of hearing what the other author has to say and decide which author tells a more interesting story. I guess we just have differing views. Hahaha.

i would just do a simple sum of the parts analysis

Hmm.. I was thinking of doing that. Then I realized it wouldn't be an apple-to-apple comparison. But it's fair enough, everyone has their own philosophies.

 

[wahkao3]

try doing peer to peer comparision on big conglomerate like keppel corp, GE