What is a good price for this stock?
There are currently no analysts covering this company and is very thinly traded on most days. It is very difficult to put a valuation on such a small company with no professional opinions to help out. But fools rush in where Angels fear to tread, so I will give it a shot.
I have posted 10 years of financial data up on the I box for you to follow along with my attempt at a valuation. Please remember I could be way off the mark. I am going to try to be conservative with my figures.
Here goes... First notice the incredible improvement in the numbers after 2004. The most important numbers start on top with
ROIC, return on invested capital. All are important, but ROIC, book value per share, and earnings per share are arguably the most important.
To put a value on this stock we must estimate future earnings the best we can. Book value growth, believe it or not, is probably the best indicator of future earnings per share. Notice book value per share and earnings skyrocketed between 2005 and 2007! Over 100% a year book value growth!
These numbers are just not sustainable for any company. As the company matures they will probably settle into a more stable and reasonable growth rate. How can we get a reasonable estimate of growth?
There are some clues. Edward Kang, the CEO of Ever-Glory, has stated that they plan to open as many as 1,000 La Go Go outlets by 2015. Let's say they have about 200 now for ease of calculation.
We can use the rule of 72 to help us out a little here. The rule states that if you know how many years your money will double, divide the number of years into 72 to get a growth rate.
So, in about 5 years they expect to open up about another 800 outlets. Let's do the math. Starting with 200 stores, double once to 400. Double again to 800. That is two doubles in 5 years. I know 1000 stores is the mark, but let's be conservative.
That means they need to double their number of outlets about every 2.5 years. Seventy two divided by 2.5 is about a 29% growth rate. I don't know if they can do it, but if they continue with that growth rate they will be as big as Polo Ralph Lauren in ten or 15 years!!
Anyway, call it 30% because the goal is 1000 stores by 2015. Remember they also have a wholesale business as well. Even with the spectacular numbers in the recent past, I am not comfortable with a 30% growth rate in earnings for the next ten years. They might pull it off, but I want to be conservative.
If they can grow at 24%, earnings will double about every 3 years. Rule of 72 again...
This is only a 40 million dollar company with a lot of room to grow and a good business model that has been proven to work. I think I am comfortable with a 24% growth rate in earnings for the next 10 years.
That was the hard part! Now to put a value on this company we need a few more numbers. We need to estimate a PE ratio. The average historical PE for this industry is about 18.
A fairly valued company will have a PE equal to it's growth rate. Again, I want to be conservative. I am uncomfortable with a higher PE. After all, there is a lot more risk buying this stock over Polo Ralph Lauren! Speaking of which, I would love to buy that stock for $30 a share...
Okay back to EVK. I have seen a few different numbers out there for the TTM earnings. I have seen .35 and .38 a share. Let's use .35 for the TTM earnings.
Finally, we have some useful info here. We have an estimate for growth, and PE ratio, and the TTM EPS. Now let's get to the fun stuff!
At 24%, the earnings should just about double every three years. Starting at .35 how many doubles in ten years?
First double .70
2nd double 1.40
3rd double 2.80
That is three doubles in 9 years. Close enough. In ten years EVK, if our estimates are close, will be earning $2.80 a share. Given that PE of 18, the stock could be priced about $50.40 in ten years.
Okay, that's great, but what should we pay for it now? Now we factor in the discount rate of 15%. This is the discount rate many great investors use all the time. What it means is that if we buy the stock today, we want to make 15% compounded over the next ten years. At least 15%.
Many people get confused about discount rates and the such, and I think I can see your eyes glazing over, but I will show you a little trick. If you can estimate the stock price in ten years and you want to know what price to buy it today and make 15% compounded a year, simply take the future price and divide by 4.
It works every time! Very cool little trick I learned from reading Phil Town's most excellent books. In fact, I would highly recommend reading Rule #1 and Payback Time by Phil Town.
Sorry, back to EVK. So if we can estimate in ten years this stock could be priced at about $50, to get a 15% return we need to buy at $12.6. That is $50 divided by 4.
It would be a little naive to figure on EVERYTHING going right for the next ten years. There are numerous risks and things just way beyond our control. So maybe we should buy this with a margin of safety.
A margin of safety is simply trying to buy a $1.00 worth of value for $.50. We want to buy this on sale big time! Simply take our price of $12.60 and divide by 2 to get our margin of safety price.
If my estimates are worth a bowl of beans, buying this stock for $6.30 is an attractive price. Currently EVK is trading for $2.75. Can you say, load up the truck?