1. Mike Torbenson Puget Sound Chapter
283 Estimating EPS Growth
Mike Torbenson
Puget Sound Chapter

2. Disclaimer
The information in this presentation is for educational purposes only and is not intended to be a recommendation to purchase or sell any of the stocks, mutual funds, or other securities that may be referenced. The securities of companies referenced or featured in the seminar materials are for illustrative purposes only and are not to be considered endorsed or recommended for purchase or sale by BetterInvesting™ National Association of Investors Corporation (“BI”) or its Puget Sound Chapter (“PSC”) or volunteers. The views expressed are those of the instructors, commentators, guests and participants, as the case may be, and do not necessarily represent those of BetterInvesting™ or PSC. Investors should conduct their own review and analysis of any company of interest before making an investment decision.
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3. Core Class I: Methodology
Build wealth by over the long term by investing regularly
In a well managed [club] portfolio of stocks
Of Quality, Growth companies;
Judged to be consistent and predictable;
Diversified by number, sector, & size;
With a potential portfolio return of 15% or more;
Buying stocks near the bottom of what we judge to be the company’s business cycle (buy low)
Selling stocks near the top of what we judge to be the company’s business cycle (sell high)
Resulting in portfolio returns of 15% or more
Using BI’s SSG, Management Guide, and PERT
Focus for this class

4. Core Class II: Judgment
Build wealth by over the long term by investing regularly
In a well managed [club] portfolio of stocks
Of Quality, Growth companies;
Judged to be consistent and predictable;
Diversified by number, sector, & size;
With a potential portfolio return of 15% or more;
Buying stocks near the bottom of what we judge to be the company’s business cycle (buy low)
Selling stocks near the top of what we judge to be the company’s business cycle (sell high)
Resulting in portfolio returns of 15% or more
Using BI’s SSG, Management Guide and PERT
Focus for this class

5. Core Class III: Portfolio Mgt
Build wealth by over the long term by investing regularly
In a well managed [club] portfolio of stocks
Of Quality, Growth companies;
Judged to be consistent and predictable;
Diversified by number, sector, & size;
With a potential portfolio return of 15% or more;
Buying stocks near the bottom of what we judge to be the company’s business cycle (buy low)
Selling stocks near the top of what we judge to be the company’s business cycle (sell high)
Resulting in portfolio returns of 15% or more
Using BI’s SSG, Management Guide and PERT
Focus for this class

6. Course Objectives
Students will demonstrate the required knowledge and skills to use the processes and resources to analyze and forecast EPS growth.

7. Agenda QUALITY (SSG 1 & 2) Growth History Growth Forecast VALUATION
P/E History (SSG 3)
P/E and Price Forecast (SSG 4)
Potential Return (SSG 5)

8. QUALITY GROWTH Forecast EPS Forecast Sales Growth Profit Margin Taxes
Shares
EPS Growth

9. Increased consistency = Increased confidence
Purpose
Forecast the 5-year EPS % growth and $ value by
Comparing historical trends with analysts expectations for consistency and predictability
Calculated future EPS using estimated future sales, profit margin, tax rates, and shares
Verify consistency with life cycle evolution and
The company’s strategic growth plans
Increased consistency = Increased confidence

10. Process Analysts’ growth estimates Life Cycle stage in 5 years
Review analysts' comments
Evaluate success of growth strategy for future
Review company guidance …

11. Process (cont.) Select and justify a 5-year forecast for:
Sales
Profit Margin
Tax Rate
Outstanding Shares
Calculate, select and justify a 5-year EPS $ forecast
Verify EPS selection is supported

12. 1. Analysts’ growth estimates
Purpose – use analysts growth forecast with historic trends to estimate future growth rate
Resources
Value Line
TK6 (Morningstar)
Finance.Yahoo.com
NASDAQ.com
Standard and Poors
Company guidance

13. Analyst’s Forecasts
Professional analysts estimate future sales and earnings; occasionally profit margin
Estimates tend to be more optimistic than pessimistic
Estimates are provided normally for quarterly results usually for 1-2 years and occasionally annually up to 5 years
Estimates tend to be more accurate for shorter durations
Analysts’ Consensus Estimates (ACE) are an average of analysts estimates

14. Company Guidance
When company’s publish their estimated results of future sales and earnings this is known as “company guidance”
Company guidance is not always provided
Company guidance should be considered more accurate than analysts estimates
When company guidance is below analysts estimates; analysts will often adjust their estimates and downgrade their recommendation

15. 1. Analysts’ growth estimates
Resource: Value Line for BWLD
Annual Rates
3-5 years future
Revenues = 16%
Earnings = 18%

16. 1. Analysts’ growth estimates
Resource: Value Line for BWLD
‘17-’19 (3-5 yr)
EPS = $8.50
Revenues = $2.4B

17. 1. Analysts’ growth estimates
Resource: Toolkit
5yr EPS
Growth rate = 20.1%
EPS = $7.66

18. 1. Analysts’ growth estimates
Resource: Nasdaq.com
Analysts’ Estimates
TK6/SSG Section 1/ Analysts Est./Internet/ 5 yr EPS Estimates NASDAQ.com

19. 1. Analysts’ growth estimates
Resource: Nasdaq.com
Analysts’ Estimates
TK6/SSG Section 1/ Analysts Est./Internet/ 5 yr EPS Estimates NASDAQ.com
EPS Growth = 20.1%

20. 1. Analysts’ growth estimates
Resource: Nasdaq.com
Analysts’ Estimates

21. 1. Analysts’ growth estimates
Resource: Yahoo.com
Analysts’ Estimates
TK6/SSG Section 1/ Analysts Est./Internet/ Next Two Qtr/Years ACE

22. 1. Analysts’ growth estimates
Resource: Yahoo.com
Analysts’ Estimates
TK6/SSG Section 1/ Analysts Est./Internet/ Next Two Qtr/Years ACE

23. 1. Analysts’ growth estimates
Resource: Yahoo.com
Analysts’ Estimates

24. 1. Analysts’ growth estimates
Resources: Value Line, Yahoo, Nasdaq.com Results: SSG Forecast Graph, Result ranges
Sales
History: 14%-25%
ACE: 14%-16%
EPS
History: 12%-24%
ACE: 18%-20%
Sales Growth
VL= 16%, $2.4B
Yahoo 2014= 17%
Yahoo 2015 = 14%
History = 14% – 25%
EPS Growth
VL = 18%, $8.50
TK(M*) = 20%, $7.66
Nasdaq = $8.04
History 12%-24%

25. 2. Life Cycle Stage in 5 years
Purpose –compare current life cycle stage with recent trends and analysts’ forecasts to determine if the company’s growth is slipping into the next stage or staying in the current stage for the foreseeable future
Resources
Growth history research and trends
Analysts’ growth forecast

26. 2. Life Cycle Stage in 5 years
Resources: Sales Growth rates
Stages
Startup (≤ 0%)
Explosive (>10%)
Mature (< 10%)
Stable (7-10%)
Declining (<5%)

27. 2. Life Cycle Stage in 5 years
Stages
Startup (≤ 0%)
Explosive (>10%)
Mature (< 10%)
Stable (7-10%)
Declining (<5%)
History (1yr, 3yr, 5yr)
Sales = 22%, 28%, 35%
Lows = 2007=19%, 2010=14%
Earnings = 24%, 21%, 23%
Lows = 2007=20%, 2012=12%
Analysts’ Forecasts (3-5yr)
Sales = 14-16%, $2.4B
EPS = 18%-20%; $7.66-$8.50
Conclusion?

28. 2. Life Cycle Stage in 5 years
Stages
Startup (≤ 0%)
Explosive (>10%)
Mature (< 10%)
Stable (7-10%)
Declining (<5%)
History (1yr, 3yr, 5yr)
Sales = 22%, 28%, 25%
Lows = 2007=19%, 2010=14%
Earnings = 24%, 21%, 23%
Lows = 2007=20%, 2012=12%
Analysts’ Forecasts (3-5yr)
Sales = 14-16%, $2.4B
EPS = 18%-20%; $7.66-$8.50

29. Types of Growth Strategies
Organic
Acquisition & Merger

30. Organic Growth Definition
What?
Selling more products
Selling to more buyers (market segment)
Increasing the profit margin
Increasing production efficiency
Increased innovation
Advantages?
Sustainable
Builds on core competencies
Disadvantages?
Time to market
Cost of new product research & development
The growth rate that a company can achieve by increasing output and enhancing sales. This excludes any profits or growth acquired from takeovers, acquisitions or mergers. Takeovers, acquisitions and mergers do not bring about profits generated within the company, and are therefore not considered organic.
Organic growth represents the true growth for the core of the company. It is a good indicator of how well management has used its internal resources to expand profits. Organic growth also identifies whether managers have used their skills to improve the business.

31. Acquisition Growth Definition
What?
Buying new products
Buying new buyers (market segment)
Buying production efficiency
Buying innovation
Disadvantages?
Not Sustainable
May not build on core competencies/“deworsification”
Advantages?
Time to market
Cost of new product research & development
Diversification

32. Identifying Growth Strategy
Look for comments explaining how they grow revenue in
Company’s Annual Report Summary
Found on Yahoo Finance “SEC Filings / 10-K Summary
Analysts’ Comments
Found in Value Line
Found in Morningstar Stock Analysis

33. 3. Review analysts' comments
Purpose – review analysts’ comments about growth strategy, future forecasts, share buy-backs, and justifications
Resources
Value Line
Morningstar
Standard and Poors
Morningstar does not complete a forecast for BLWD.

34. 3. Review analysts' comments
Conservative guidance
Organic growth
Resource: Value Line
Looking for growth, future trends and estimates
Reduced expenses
Strategic adjustment
Increase margins

35. 4. Evaluate success of growth strategy for future
Growth strategy for 2013 was to open 105 new locations and grow earnings by 25% actual earning = 23.8% growth.
Finance.Yahoo.com / SEC Filings /
As of December 30, 2012, we owned and operated 381 company-owned and franchised an additional 510 Buffalo Wild Wings Grill & Bar restaurants in North America. We believe that we will grow the Buffalo Wild Wings brand to about 1,700 locations in North America, continuing the strategy of developing both company-owned and franchised restaurants.
We believe we will open 60 company-owned and 45 franchised restaurants in 2013 and have set an annual net earnings growth goal of 25% based on a 52 week basis

36. 5. Review company guidance
Resource – Yahoo/Company Press Releases
No guidance found in news, however ...
In VL, “…management reiterated … 20% EPS growth…”

37. 6. Select and justify a 5-year forecast for: Sales, PM, Tax Rate
Resources: Research for Sales, Strategy & Life Cycle
SSG was straight, up and parallel
Historic sales slowing 28% to 22%
Historic sales lows 14-19%
Analysts’ 3-5yr sales estimate 16% future.
Analysts’ 2yr sales growth slowing 17-14%
Historic sales lows support at least 14%
14-16% consistent with current life cycle stage
Growth strategy has been successful
Bad year sales growth estimate at 14%
Good year sales growth estimate at 16%+

38. 6. Select and justify a 5-year forecast for: Sales, PM, Tax Rate
Resources: Research for Profit Margin
SSG was straight, up and parallel
Historic Profit Margin is steady at 8%
Analysts’ estimate a 1% increase in margin
Bad year margins estimate at 8%
Good year estimate at 9%

39. 6. Select and justify a 5-year forecast for: Sales, PM, Tax Rate
Resources: Research for Tax Rate
SSG was straight, up and parallel
Last year’s tax rate = 29.5%
Analysts’ 3-5yr estimate = 32%
5yr rates 35.2% % (declining)
Bad year tax rate estimate at 35%
Good year estimate at 29.5%

40. 7. Calculate, select and justify a 5-year EPS $ forecast
Research results:
Sales growth 14-16%+ (declining but explosive)
Profit margin 8-9% (steady)
Taxes % (declining)
Shares 19.5M + (increasing .2M yearly)
EPS 12-21%, $6.80-$8.98 (steady between 21-24%)
Next, calculate high risk and low risk EPS

41. Risk & Reward Management
History and analysts’ estimates will result in a range of possible futures
When selecting your estimates you can increase or decrease your potential risk and reward
Increase both risk and reward to increasing growth estimates
Decrease both risk and reward by reducing growth estimates

42. 7. Calculate, select and justify a 5-year EPS $ forecast
Low (14%, 8%, 32%, 19.5) = EPS 12.4%

43. 7. Calculate, select and justify a 5-year EPS $ forecast
High (17%, 9%, 29.5%,18.8) = EPS 19.8%

44. 7. Calculate, select and justify a 5-year EPS $ forecast
Description % $
Comments
History
25-22% (14% Low)
ACE
18%-20%
$7.66-$8.50
Calculated
12%-20%
$6.80-$8.98
Selected EPS
Most Conservative
Most Aggressive
Adding calculated results to History and ACE
Now, let’s consolidate …

45. 7. Calculate, select and justify a 5-year EPS $ forecast
Description % $
Comments
History
25-22% (14% Low)
ACE
18%-20%
$7.66-$8.50
Calculated
12%-20%
$6.80-$8.98
Selected EPS
$6.80
$7.96
$9.37
Most Conservative
Most Aggressive
All are justified.
Selection based on risk tolerance.

46. 8. Verify EPS selection is supported
$6.80 @
12.4%
Consistent with history?
Consistent with analysts?
Reflects appropriate risk?

47. 5-year Growth Forecast Summary
What are you forecasting 5 years in the future?
EPS
Why are you calculating EPS instead of using trend analysis?
To use an income statement to establish the relationship between Sales & EPS.

48. 5-year Growth Forecast Summary
How do you increase or decrease your risk?
Decrease risk by lowering sales, margin, and earnings; increase taxes and shares.
How are you justifying your forecast?
Checking visual SSG, and consistency with history and analysts.

49. Questions?

50. Agenda QUALITY (SSG 1 & 2) Growth History Growth Forecast VALUATION
P/E History (SSG 3)
P/E and Price Forecast (SSG 4)
Potential Return (SSG 5)

51. Core Class I: Methodology
Build wealth by over the long term by investing regularly
In a well managed [club] portfolio of stocks
Of Quality, Growth companies;
Judged to be consistent and predictable;
Diversified by number, sector, & size;
With a potential portfolio return of 15% or more;
Buying stocks near the bottom of what we judge to be the company’s business cycle (buy low)
Selling stocks near the top of what we judge to be the company’s business cycle (sell high)
Resulting in portfolio returns of 15% or more
Using BI’s SSG, Management Guide, and PERT
Focus for this class

52. Core Class II: Judgment
Build wealth by over the long term by investing regularly
In a well managed [club] portfolio of stocks
Of Quality, Growth companies;
Judged to be consistent and predictable;
Diversified by number, sector, & size;
With a potential portfolio return of 15% or more;
Buying stocks near the bottom of what we judge to be the company’s business cycle (buy low)
Selling stocks near the top of what we judge to be the company’s business cycle (sell high)
Resulting in portfolio returns of 15% or more
Using BI’s SSG, Management Guide and PERT
Focus for this class

53. Core Class III: Portfolio Mgt
Build wealth by over the long term by investing regularly
In a well managed [club] portfolio of stocks
Of Quality, Growth companies;
Judged to be consistent and predictable;
Diversified by number, sector, & size;
With a potential portfolio return of 15% or more;
Buying stocks near the bottom of what we judge to be the company’s business cycle (buy low)
Selling stocks near the top of what we judge to be the company’s business cycle (sell high)
Resulting in portfolio returns of 15% or more
Using BI’s SSG, Management Guide and PERT
Focus for this class

54. Questions?