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View Full Version : ODP QUANTITATIVE analysis for Adios


squiffy
12-19-2003, 06:32 PM
Since you seem to be into the numbers, maybe you can teach me something about your approach.

Here is the kind of basic analysis I do for a stock. Nothing fancy. But just a little bit I picked up from very basic reading about value investing.

First I look at the chart and compare various highs and lows, say 10 year, 5 year, 1 year, etc. If a stock is at a 10 year high I am very leery of it. If it is at a 5 year low, I am interested, but want to make sure it is a temporary stumble, and not a permanent problem that will bring on bankruptcy.

I want to bet on Michael Jordan (in his prime) with a sprained ankle. I know he has to sit out a few games. But when he gets back on the court, he's going to put up some big numbers and put some baskets in, maybe 30 points a game.

So ODP is trading now at 16.35. Friday's close.

This years median predicted earnings were $1.03 per share according to Ameritrade. Next year projected earnings $1.20 per share.

Now the problem is, just looking at Ameritrade data or Yahoo data, you have no idea what this projection is based on or the track record of the person putting up these numbers.

So with a retailer, just the fact that they have a certain number of brick and mortar stores, gives me comfort. This is very different than whether or not a company is going to come up with the next huge blockbuster movie, toy, or cancer cure.

All I have to be confident of is that ODP has, say 10,000 stores and sells paper and office supplies. Very boring, but much more predictable and reliable.

So I look at historical highs and lows for the stock going back 5-10 years (realizing of course that the economic climate may be very different)

With ODP you have to be careful to realize that it is probably in a mature phase and not growing at the rapid rate that it did when it first got started, opening tons of new stores. So very different than say a StarBucks or BBY that may still be growing.

I also compare high and low PE going back 5 to 10 years, to see how low it may go when undervalued, and how high it might go when overvalued.

Currently assuming a share price of 16.35 and current annual earnings of $1.03, PE is 15.87.

That is not a great PE. I would much rather buy ODP at a price of $10. But I like the fact that ODP had taken a huge drop from about 18 to 14 or 13. I feel a lot more comfortable buying in after a huge drop, assuming the drop was not due to a long-term permanent problem.

As far as I can tell, ODP still has let's say 1000 stores in 40 states (I am going off old data). So there is at least some kind of floor. They are absolutely not going to quadruple in value, but they are not going broke overnight either, barring accounting fraud.

Actually I bought ODP at 15.76 so assuming earnings of 1.03, I bought at a PE of about 15.3 to 1.

So I invested $15 to earn an annual profit per share of $1.

If profits next year really do increase to $1.20 per share, then my forward looking PE is more like 13.13 to 1.
As if I had invested $13 to earn $1 in profit.

If annual earnings really do increase by 20%, I can expect a jump in the stock price. Though I am not sure how you can predict or quantify that expected increase.

I suppose if $15 per share is fair value, and a PE of 15 to 1 is fair value, then if earnings increase to $1.20 per share, that would justify a share price of $18 per share, as 18/1.20 = 15.

However, we all know from reading Warren Buffett, Fischer, and Graham that the stock market is manic/depressive.

So if and when ODP starts reporting improved earnings, the market will likely rush in and overpay for ODP and analysts will start to tout ODP, after the fact and upgrade it. When it is upgraded the stock will jump up 5 to 7% in one day.

So when it hits 18, 19, or 20, it will probably be overvalued, and I should sell.

Of course, it is impossible to be precise about these numbers without studying a balance sheet. But these are rough approximations.

And if you look historically at ODP, a 15 PE is traditionally on the low end for ODP and the high end PE is closer to 20, 30, or even 40.

I doubt a 40 is likely for ODP, given that it is no longer a hot growth stock. But historically 15 is probably not a peak PE.

And it has traded as high as 22 or so within the last year or two, and as high as 18 or so, within the last 6 months or so.

Again, there may be thousands of stocks that offer a better return than ODP. I just am not aware of them.

But ODP is a stock I am familiar with, they have a simple business model. They seem to be highly cyclical and volatile. They have a strong and recognizable brand name. And they have a reliable foundation of brick and mortar stores.

They don't need to be inventing cutting edge software and technology to keep making a profit, like say a MicroSoft or Intel.

I also check the debt ratio to make sure the company does not have too much debt, which can be dangerous, of course, if their profits decline during a downturn and they are.

Whoops. GOt to get back to work. More numbers later.

adios
12-19-2003, 08:07 PM
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First I look at the chart and compare various highs and lows, say 10 year, 5 year, 1 year, etc. If a stock is at a 10 year high I am very leery of it. If it is at a 5 year low, I am interested, but want to make sure it is a temporary stumble, and not a permanent problem that will bring on bankruptcy.

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Ok.

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This years median predicted earnings were $1.03 per share according to Ameritrade. Next year projected earnings $1.20 per share.

Now the problem is, just looking at Ameritrade data or Yahoo data, you have no idea what this projection is based on or the track record of the person putting up these numbers.

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A lot of times it's based on guidance given to analysts. Most big companies provide guidance during the quarter to analysts and that's why you'll often see analsyst estimates so close to what's actually reported. The farther out the prediction of course the more tenuous it is. For instance CFC is offering guidance for the end of 2003 that's much narrower than the range they've offered for 2004. Try and use both ends of the range to get worst and best case. Do check about how much ODP keeps the analysts informed.

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So with a retailer, just the fact that they have a certain number of brick and mortar stores, gives me comfort. This is very different than whether or not a company is going to come up with the next huge blockbuster movie, toy, or cancer cure.

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Yeah I agree that stamping out franchises if you will is a good a way to go.

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All I have to be confident of is that ODP has, say 10,000 stores and sells paper and office supplies. Very boring, but much more predictable and reliable.

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Ok.

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So I look at historical highs and lows for the stock going back 5-10 years (realizing of course that the economic climate may be very different)

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Ok sure I concur.

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With ODP you have to be careful to realize that it is probably in a mature phase and not growing at the rapid rate that it did when it first got started, opening tons of new stores. So very different than say a StarBucks or BBY that may still be growing.

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I understand and agree. I would say that's normal and a good analysis.

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I also compare high and low PE going back 5 to 10 years, to see how low it may go when undervalued, and how high it might go when overvalued.

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I like that a lot.

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As far as I can tell, ODP still has let's say 1000 stores in 40 states (I am going off old data). So there is at least some kind of floor. They are absolutely not going to quadruple in value, but they are not going broke overnight either, barring accounting fraud

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Yep I concur.

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I doubt a 40 is likely for ODP, given that it is no longer a hot growth stock. But historically 15 is probably not a peak PE.

And it has traded as high as 22 or so within the last year or two, and as high as 18 or so, within the last 6 months or so.

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IMO very good thinking. I like it a lot FWIW.

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Actually I bought ODP at 15.76 so assuming earnings of 1.03, I bought at a PE of about 15.3 to 1.

So I invested $15 to earn an annual profit per share of $1.

If profits next year really do increase to $1.20 per share, then my forward looking PE is more like 13.13 to 1.
As if I had invested $13 to earn $1 in profit.

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Almost perfect for a year holding period. You should however "discount" your return by the approriate risk premium which is based on what you would get as a return if you invested $15 or so in riskless asset which for a 1 year holding period is a 1 year treasury. The risk premium is the compensation above the risk free rate. Typically it's about 5.5% but there's more. There's a formula that's an key part of finance theory called the capital asset pricing model and it used to calculate the appropriate return for the risk taken. Here it is:

Rate of Return Required
= Risk Free Rate of Return + ( Beta * Risk Premium ).

Let's make the math simple and use 1% as the return on a 1 year treasury and traditionally the risk premium has been 5.5%. Therefore all we need to know is the Beta which is too long to explain right now. The beta for ODP occording to Yahoo is 1.242. The beta for the overall market (S&P 500) is 1.0. Therefore according to finance theory ODP is riskier than investing in the overall stock market. To plug in the numbers

Rate of Return Required =

1% + 1.242 * 5.5% or 7.83%.

Therefore when you purchase ODP at 15.76 you should expect a return of:

15.76 * (.0783) greater than or equal to 1.17 for a one year holding period. So you exceeeded that since you held it for 14 weeks or so. Remember that's the theory and your approach in reality samples data from the market to arrive at an appropriate rate of return which FWIW is a great approach IMO.



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However, we all know from reading Warren Buffett, Fischer, and Graham that the stock market is manic/depressive.

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Yes and I prefer to think of it as the risk premium in the market rises and falls which it does.

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And if you look historically at ODP, a 15 PE is traditionally on the low end for ODP and the high end PE is closer to 20, 30, or even 40.

I doubt a 40 is likely for ODP, given that it is no longer a hot growth stock. But historically 15 is probably not a peak PE.

And it has traded as high as 22 or so within the last year or two, and as high as 18 or so, within the last 6 months or so.

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I concur and I like this approach FWIW.

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Again, there may be thousands of stocks that offer a better return than ODP. I just am not aware of them.

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As wildbill alluded to, the opportunity costs (other stocks that you could have owned that did better) are enormous. Since you bring this up it would probably be worth discussing in a thread how we might screen stocks that are suitable for investment.

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But ODP is a stock I am familiar with, they have a simple business model. They seem to be highly cyclical and volatile. They have a strong and recognizable brand name. And they have a reliable foundation of brick and mortar stores.

They don't need to be inventing cutting edge software and technology to keep making a profit, like say a MicroSoft or Intel.

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Yes I agree, good points and analysis.

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I also check the debt ratio to make sure the company does not have too much debt, which can be dangerous, of course, if their profits decline during a downturn and they are.

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There's an optimal debt ratio for a company in theory (refers to a company's capital structure) but that's more numbers and probably better for another thread. Nice post.