Here's the start of a homework involving TTI. Read on.
Dear Phil,
I am a recent Investools investor after seeing you at a motivation seminar in Ft Lauderdale. I just finished "reading" your book (by listening to it on CD) and loved it. I've never owned stock, but I'm very excited about the prospect!
Investools valuation analysis shows the following sticker prices:
TTI - $1508.25 but selling for $28.69 WHQ - $110.06 but selling for $48.28 UNT - $1202.26 but selling for $57.18
I wanted to know if my eyes were seeing the right thing, especially TTI and UNT; talk about a huge MOS if it's right.
I'd LOVE your opinion!!
Thanks, cvogt
My response:
TTI at $1500. The reason that you are getting such a high valuation on TTI is that the estimated growth rate from the one analyst willing to guess is 65% a year. Which is crazy.
Maybe they can sustain that for a while, but it has to drop off quickly because nothing except bacteria can compound at that rate for any length of time... and even they eventually run out of food at that rate.
So, this one optimistic analyst not withstanding, we've got to dial down that rate of growth. And that isn't hard to do at all:
Note for example that the ten year EPS went from $0.21 to $0.53. That's more like 11% a year. (You can figure out the growth rate using my calculator.)
Equity growth rate shows about the same number. Free Cash Flow is all over the map and vastly negative last year. And sales over ten years are less than two doubles.
Bottom line, I have no trouble at all dropping my long term expectations down to 11% plus some extra if I think oil shortages will continue. Since I have no opinion on that one, I'll leave it to you.
In fact, what's the moat here? Isn't this business entirely tied to oil prices? Bottom line on this biz is you have to make a decision about the future of oil prices and then add something to the 11% for the long term growth rate. And then be conservative on the PE.
So let's take an example. If the long term PE is 28, that implies a 14% long term growth rate (thinking backwards) -- so I'll use that. That gives me a $37 Sticker.
The stock's at $29, so there is still some room in there, and we've certainly been conservative. I'd need a bigger MOS but if you really know the oil market, it won't take much imagination for you to justify this one. Your call.
Do that to the other two and write me back.
Now go play.
P.S. Relevant Posts:
OIS Homework (Oil States International)
Commodity Stocks & Moat (Using GG, Gold, as an example)
Nailing the Growth Rate (Using DELL and EBAY as examples)
