Rule #1 Finance Blog

With Investor Phil Town


This question comes from Tom in Edmond, OK:

Hi Phil Town. I am just beginning this venture and am paper trading at this time. I have ran the numbers 3x for SONC and I think I finally got the correct MOS ($19.50).  However, I am not 100% sure how to calculate this stock as it just went thru a 3 for 2 split about 2 weeks ago. What is the correct method to do this?

Thanks for the book.

Here's my response:

Hi Thomas,

Stock splits do not change the size of the pie, as you know.  They only slice the pie into more pieces. 

When a business splits its stock, all the services that tabulate the data and provide it to websites like MSN Money and Investools recalculate all the old numbers all the way back to reflect the new number of shares.

That means that shortly after the stock split, all the numbers all
change, including the stock price numbers on the chart historically all
the way back

So when the chart says that SONC stock sold for $20 a
share a few months ago, that price per share reflects SONC's stock
split.  At the actual time that the chart shows $20 today, the stock
was actually selling for $30.

What that all means is that you don't have to fool around with the
stock split numbers at all as you do your homework for Rule #1.  It's
all been done for you.

By the way, I don't know how you got on to SONC, but in the process of
answering your question, I dug in on the numbers a bit and was
pleasantly surprised at how well the business is being managed.  The
Big Five
look excellent and consistent. 

So I did a quick MOS on it and
got a Sticker of $36.  MOS of $18.  Selling for $21.  In the ball park,

The stock just got hammered because some analysts think the blue collar
workers who eat there are not going to have the money because of higher
gas prices cutting into their wallets.  I could argue with that.  The
numbers just rocked during the 2001-2003 semi-recession.  And when I
was working as a guide making $4000 a year, I had money for a burger.
You gotta eat some place, and Sonic makes good cheap burgers.  A
recession might actually help these guys.

So, Thomas, how about some homework on this one for us.  Tell me what
the Moat is for these guys (I'm guessing Brand and Price) and how they
compete with Micky D's. 

And also who is running this beast?  You like
him her or it?  Do they have a BAG as cool as Dave Thomas's at Wendy's
when he started?  (Dave's BAG was to prove to KFC that he was better
than they thought.  Hey, what gets that CEO fired up in the morning to
go make us money is what I want to know.)

Meaning is straight up for a burger joint.  And the MOS is looking
good.  And the Big Five are cool.  So let's nail the rest of this and
maybe we'll all join you on this one.  (Or at least those of you who
hold no moral distaste for fast food!)

Now go play,

Phil Town