How to evaluate stocks

Buy low sell high

going to take a lot more of an answer than can be provided on the MT IMO.

It's funny how this board will have speculation talk on stocks all the time, but fundamental analysis is like the great big mysterious black hole of the MT board.

I mean, in a way, the responses are correct. There are tons of different nuances in the way people value stocks, and so you have to do whatever you're doing carefully, even though there's no particular set way to do anything, and for just about any stock in the market, there are solid reasons for betting on it in both directions, which is sort of why the market price is the market price.

But since the MT never seems to have any valuation methodology threads, we might as well take just a small peek into TTS.

Finance Yahoo webpage: LINK.

Market Cap = $1.16 billion
Share Price = $22.76
EPS = ($1.53)
P/E = N/A

FINANCIALS --> Income Statement: LINK.

Income Statement
(Financial Statistic, FY 2011, FY 2012)
(in millions of USD)
Revenue, 152.7, 182.7
Gross Profit, 112.4, 133.0
Operating Income, 32.6, 34.4
(no D&A listed, but huge $82 million loss for "other" expenses in 2012)
EBIT, 32.5, (47.6)
NI, 31.4, (46.9)

Yahoo has no quarterly statements given.

ANALYST COVERAGE --> Analyst Estimates: LINK.

Future Estimates
(Financial Statistic, 2013E, 2014E)
Revenue, $231.9m, $298.1m
EPS, $0.44, $0.61



Here's the Wikipedia entry on business valuation: LINK.
Here's the Wikipedia entry on stock valuation: LINK.
Here's the Wikipedia entry on DuPont analysis: LINK.
Here's the Wikipedia entry on the First Chicago method: LINK.
Here's the corporate webpage where you will find annual and quarterly financial reports by TTS: LINK.



What about TTS in particular? It has some funky things going on in 2012. In particular, if you look at the annual statement for 2012 ( LINK), you'll see on pg. 20 that the $82 million expense was related to "change in value of warrants."

You'll see also that the firm went up in debt from $4.9 million in 2011 to $74.8 million in 2012, and also that it had $95.6 million in new warrant liability in 2012.

Same-story sales growth has only been 11%, 7%, & 6% in recent years, but TTS seems to be betting on big sales growth with the opening of many new store locations.

They opened 15 stores in 2012 to get to 70, and they will probably open another 20 or so in 2013 (at least according to their 2012 annual report).

On pg. 27, TTS explains:

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In 2012, cash provided by operating activities was $47.2 million, driven primarily by our net loss of $46.9 million, which was reduced by noncash charges of $98.3 million, including $82.1 million of change in fair value of warrants, $10.5 million of depreciation and amortization, $1.4 million of stock-based compensation, $3.0 million of deferred rent, and $3.9 million of deferred compensation costs, offset by a non-cash income tax benefit of $2.6 million. In addition, these cash inflows were decreased by an increase in working capital of $4.2 million, which included a $0.3 million increase in trade receivables, a $.3 million increase in inventories, a $4.6 million increase in prepaid expenses, prepaid inventory and other current assets, a $1.1 million increase in accounts payable, and a $3.4 million decrease in accrued expenses and other liabilities, and a $2.5 million increase in income tax receivable.

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So basically, what you've got is a company that is having its revenues grow at a rate of about 25% per year (19.6% to 2012, 26.9% est. to 2013, 28.5% est. to 2014), and that has recently leveraged up from nearly zero to what still seems a small amount, < 10%.

From pg. 20, you'll see that it's adj. EBITDA margins are pretty consistent at around 28%, and so adj. EBITDA will probably be around $64 million for 2013.

If the market cap is at $1.16 billion, that gives an enterprise value (EV) of about $1.23 billion, then that's a 2013 EV / EBITDA multiple of about 19. There are also P/E ratios and PEG ratios, but seeing as how erratic the net income accounting was for 2012, I'd just stick with the EBITDA or EBIT multiples in this case.

I'd say 19 seems like a somewhat higher than normal EV / EBITDA multiple, but then again, I don't know this industry for shite.

This is where an investment professional would use a research service like S&P Capital IQ or FactSet to get comparable financial ratios of industry competitors. Also, equity research reports from big i-banks like Credit Suisse or JP Morgan, or even niche banks like William Blair, could help here a lot.

In a case like this, though, we're essentially looking at a firm investing big in expansion, and so you have to come up with some model of how those huge growth percentages are going to come down over time. This is where private equity firm types get paid for their financial modeling DCF skills.

At this point in my life, I still have no idea how to make reasonable estimations for how these growth curves rise up and then come back down again--at what rates, at what points in time? But somehow people can do these forecasts.

People on this board bash economists all the time, but really it's not very fair, because they are essentially bashing business economists who are paid by the business world to execute an impossible task. It's not like the economists of the world want to focus on how to prognosticate the future. It's just what the financial industry happens to pay them to do, because without somebody making those economic projections, none of these financial valuation models can get done, and nobody can put a final valuation price on a given business.

But in any case, if you do EPS for a long enough time horizon, you can build up a case for valuation based solely on that, or you can do it with a comp / multiple, or you can do it with free cash flows (the de-accounting-ized version of the bottom line) in a DCF analysis.

For me, I'd take a look at this company, get a comp ratio for EV / EBITDA, adjust a little bit for how fast this particular company is growing relative to its closest peers in the industry, look into its most recent quarterly reports to see if the store revenues and margins are really healthy, and then create a valuation out of all that. If it's a good bit over $1.16 billion, then buy. If not, then don't buy.

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Doc Fenton

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Good post Doc

I recommend picking a sector to focus on because all the financial numbers are relative to the industry so you can really make sense of the numbers.