Buffett Management

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Finding Stocks the Warren Buffett Way by John Bajkowski Like most successful stockpickers, Warren Buffett thinks that the efficient market th absolute rubbish. Buffett has backed up his beliefs with a successful track record th Berkshire Hathaway, his publicly traded holding company. Maria Crawford Scott examined Warren Buffett's approach in the January 1998 issue of Journal. Table 1 below provides a summary of Buffett's investment style. In this arti develop a screen to identify promising businesses and then use valuation models to me the attractiveness of stocks passing the preliminary screen. Buffett has never expounded extensively on his investment approach, although it can b gleaned from his writings in the Berkshire Hathaway annual reports. Many books by out have attempted to explain Buffett's investment approach. One recently published book discusses his approach in an interesting and methodical fashion is "Buffettology: The Unexplained Techniques That Have Made Warren Buffett the World's Most Famous Investor Mary Buffett, a former daughter-in-law of Buffett's, and David Clark, a family friend portfolio manager [published by Simon & Schuster, 800-223-2336; $27.00]. This book wa as the basis for this article. Monopolies vs. Commodities Warren Buffett seeks first to identify an excellent business and then to acquire the price is right. Buffett is a buy-and-hold investor who prefers to hold the stock ofa company earning 15% year after year over jumping from investment to investment with t hope of a quick 25% gain. Once a good company is identified and purchased at an attra price, it is held for the long-term until the business loses its attractiveness or un attractive alternative investment becomes available. Buffett seeks businesses whose product or service will be in constant and growing dem his view, businesses can be divided into two basic types: Commodity-based firms, selling products where price is the single most important fact determining purchase. Buffett avoids commodity-based firms. They are characterized wi levels of competition in which the low-cost producer wins because of the freedom to e prices. Management is key for the long-term success of these types of firms. Consumer monopolies, selling products where there is no effective competitor, either patent or brand name or similar intangible that makes the product or service unique. While Buffett is considered a value investor, he passes up the stocks of commodity-ba even if they can be purchased at a price below the intrinsic value of the firm. An en with poor inherent economics often remains that way. The stock of a mediocre business water.

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Transcript of Buffett Management

Page 1: Buffett Management

Finding Stocks the Warren Buffett Way

by John Bajkowski

Like most successful stockpickers, Warren Buffett thinks that the efficient market theory is

absolute rubbish. Buffett has backed up his beliefs with a successful track record through

Berkshire Hathaway, his publicly traded holding company.

Maria Crawford Scott examined Warren Buffett's approach in the January 1998 issue of the AAII

Journal. Table 1 below provides a summary of Buffett's investment style. In this article, we

develop a screen to identify promising businesses and then use valuation models to measure

the attractiveness of stocks passing the preliminary screen.

Buffett has never expounded extensively on his investment approach, although it can be

gleaned from his writings in the Berkshire Hathaway annual reports. Many books by outsiders

have attempted to explain Buffett's investment approach. One recently published book that

discusses his approach in an interesting and methodical fashion is "Buffettology: The Previously

Unexplained Techniques That Have Made Warren Buffett the World's Most Famous Investor," by

Mary Buffett, a former daughter-in-law of Buffett's, and David Clark, a family friend and

portfolio manager [published by Simon & Schuster, 800-223-2336; $27.00]. This book was used

as the basis for this article.

Monopolies vs. Commodities

Warren Buffett seeks first to identify an excellent business and then to acquire the firm if the

price is right. Buffett is a buy-and-hold investor who prefers to hold the stock ofa good

company earning 15% year after year over jumping from investment to investment with the

hope of a quick 25% gain. Once a good company is identified and purchased at an attractive

price, it is held for the long-term until the business loses its attractiveness or until a more

attractive alternative investment becomes available.

Buffett seeks businesses whose product or service will be in constant and growing demand. In

his view, businesses can be divided into two basic types:

Commodity-based firms, selling products where price is the single most important factor

determining purchase. Buffett avoids commodity-based firms. They are characterized with high

levels of competition in which the low-cost producer wins because of the freedom to establish

prices. Management is key for the long-term success of these types of firms.

Consumer monopolies, selling products where there is no effective competitor, either due to a

patent or brand name or similar intangible that makes the product or service unique.

While Buffett is considered a value investor, he passes up the stocks of commodity-based firms

even if they can be purchased at a price below the intrinsic value of the firm. An enterprise

with poor inherent economics often remains that way. The stock of a mediocre business treads

water.

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How do you spot a commodity-based company? Buffett looks for these characteristics:

The firm has low profit margins (net income divided by sales);

The firm has low return on equity (earnings per share divided by book value per share);

Absence of any brand-name loyalty for its products;

The presence of multiple producers;

The existence of substantial excess capacity;

Profits tend to be erratic; and

The firm's profitability depends upon management's ability to optimize the use of tangible assets.

Buffett seeks out consumer monopolies. These are companies that have managed to create a

product or service that is somehow unique and difficult to reproduce by competitors, either

due to brand-name loyalty, a particular niche that only a limited number companies can enter,

or an unregulated but legal monopoly such as a patent.

Consumer monopolies can be businesses that sell products or services. Buffett reveals three

types of monopolies:

Businesses that make products that wear out fast or are used up quickly and have brand-name

appeal that merchants must carry to attract customers. Nike is a good example of a firm with a

strong brand name demanded by customers. Any store selling athletic shoes must carry Nike

products to remain competitive. Other examples include leading newspapers, drug companies

with patents, and popular brand-name restaurants such as McDonald's.

Communications firms that provide a repetitive service that manufacturers must use to

persuade the public to buy the manufacturer's products. All businesses must advertise their

items, and many of the available media face little competition. These include worldwide

advertising agencies, magazine publishers, newspapers, and telecommunications networks.

Businesses that provide repetitive consumer services that people and businesses are in constant

need of. Examples include tax preparers, insurance companies, and investment firms.

Mary Buffett suggests going to your local 7-Eleven or White Hen Pantry to identify many of

these "must-have" products. These stores typically carry a very limited line of must-have

products such as Marlboro cigarettes and Wrigley's gum. However, with the guidance of the

factors used to identify attractive companies, we can establish a basic screen to identify

potential investments worthy of further analysis.

The rules used for our Buffett screen are identified and discussed in Table 2. AAII's Stock

Investor Professional was used to perform the screen. Consumer monopolies typically have high

profit margins because of their unique niche; however, a simple screen for high margins may

highlight weak firms in industries with traditionally high margins, but low turnover levels.

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Our first screening filters looked for firms with both gross operating and net profit margins

above the median for their industry. The operating margin concerns itself with the costs

directly associated with production of the goods and services, while the net margin takes all of

the company activities and actions into account.

Understand How It Works

As is common with successful investors, Buffett only invests in companies he can understand.

Individuals should try to invest in areas where they possess some specialized knowledge and

can more effectively judge a company, its industry, and its competitive environment. While it

is difficult to construct a quantitative filter, an investor should be able to identify areas of

interest. An investor should only consider analyzing those firms operating in areas that they can

clearly grasp.

Conservative Financing

Consumer monopolies tend to have strong cash flows, with little need for long-term debt.

Buffett does not object to the use of debt for a good purpose--for example, if a company uses

debt to finance the purchase of another consumer monopoly. However, he does object if the

added debt is used in a way that will produce mediocre results--such as expanding into a

commodity line of business.

Appropriate levels of debt vary from industry to industry, so it is best to construct a relative

filter against industry norms. We screened out firms that had higher levels of total liabilities to

total assets than their industry median. The ratio of total liabilities to total assets is more

encompassing than just looking at ratios based upon long-term debt such as the debt-equity

ratio.

Strong & Improving Earnings

Buffett invests only in a business whose future earnings are predictable to a high degree of

certainty. Companies with predictable earnings have good business economics and produce

cash that can be reinvested or paid out to shareholders. Earnings levels are critical in

valuation. As earnings increase, the stock price will eventually reflect this growth.

Buffett looks for strong long-term growth as well as an indication of an upward trend. In the

book, Mary Buffett looks at both the 10- and five-year growth rates. Stock Investor Professional

contains only seven years of data, so we examined the seven-year growth rate as the long-term

growth rate and the three-year growth rate for the intermediate-term growth rate.

For our screen, we first required that a company's seven-year earnings growth rate be higher

than that of 75% of the stocks in the overall database. Stock Investor Professional includes

percentile ranks for growth rates, so we specified a percentile rank greater than 75.

It is best if the earnings also show an upward trend. Buffett compares the intermediate-term

growth rate to the long-term growth rate and looks for an expanding level. For our next filter,

we required that the three-year growth rate in earnings be greater than the seven-year growth

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rate. This further reduced the number of passing companies to 213. Not surprisingly, the

companies passing the Buffett screen have very high growth rates--as a group, nearly three

times the median for the whole database.

Consumer monopolies should show both strong and consistent earnings. Wild swings in earnings

are characteristic of commodity businesses. A examination of year-by-year earnings should be

performed as part of the valuation. The earnings per share for Nike are displayed in the Buffett

valuation spreadsheet. Note that earnings per share growth has been strong and consistent with

only one year in which earnings did not increase from the previous period.

A screen requiring an increase in earnings for each of the last seven years would be too

stringent and not be in keeping with the Buffett philosophy. However, a filter requiring positive

earnings for each of the last seven years should help to eliminate some of the commodity-

based businesses with wild earnings swings.

A Consistent Focus

Companies that stray too far from their base of operation often end up in trouble. Peter Lynch

also avoided profitable companies diversifying into other areas. Lynch termed these

diworseifications. Quaker Oats' purchase and subsequent sale of Snapple is a good example of

this common mistake.

Companies should expand into related areas that offer high return potential. Nike's past

development of a line of athletic clothing to complement its athletic shoe business is an

example of a extension that makes sense. This factor is clearly a qualitative screen that cannot

be done with the computer.

Buyback of Shares

Buffett views share repurchases favorably since they cause per share earnings increases for

those who don't sell, resulting in an increase in the stock's market price. This is a difficult

variable to screen as most data services do not indicate this variable. You can screen for a

decreasing number of outstanding shares, but this factor is best analyzed during the valuation

process.

Investing Retained Earnings

A company should retain its earnings if its rate of return on its investment is higher than the

investor could earn on his own. Dividends should only be paid if they would be better employed

in other companies. If the earnings are properly reinvested in the company, earnings should

rise over time and stock price valuation will also rise to reflect the increasing value of the

business.

An important factor in the desire to reinvest earnings is that the earnings are not subject to

personal income taxes unless they are paid out in the form of dividends. The use of retained

earnings delays personal income taxes until the stock is sold.

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Buffett examines management's use of retained earnings, looking for management that have

proven it is able to employ retained earnings in the new moneymaking ventures, or for stock

buybacks when they offer a greater return.

Good Return on Equity

Buffett seeks companies with above average return on equity. Mary Buffett indicates that the

average return on equity over the last 30 years has been around 12%.

We created a custom field that averaged the return on equity for the last seven years to

provide a better indication of the normal profitability for the company. During the valuation

process, this average should be checked against more current figures to assure that the past is

still indicative of the future direction of the company. Our screen looks for average return on

equity of 12% or greater.

Inflation Adjustments

Consumer monopolies can typically adjust their prices quickly to inflation without significant

reductions in unit sales since there is little price competition to keep prices in check. This

factor is best applied through a qualitative examination of a company during the valuation

stage.

Reinvesting Capital

In Buffett's view, the real value of consumer monopolies is in their intangibles--for instance,

brand-name loyalty, regulatory licenses, and patents. They do not have to rely heavily on

investments in land, plant, and equipment, and often produce products that are low tech.

Therefore they tend to have large free cash flows (operating cash flow less dividends and

capital expenditures) and low debt. Retained earnings must first go toward maintaining current

operations at competitive levels. This is a factor that is also best examined at the time of the

company valuation although a screen for relative levels of free cash flow might help to confirm

a company's status.

The above basic questions help to indicate whether the company is potentially a consumer

monopoly and worthy of further analysis. However, stocks passing the screens

are not automatic buys. The next test revolves around the issue of value.

The Price is Right

(Using the Spreadsheet)

The price that you pay for a stock determines the rate of return--the higher the initial price,

the lower the overall return. The lower the initial price paid, the higher the return. Buffett

first picks the business, and then lets the price of the company determine when to purchase

the firm. The goal is to buy an excellent business at a price that makes business sense.

Valuation equates a company's stock price to a relative benchmark. A $500 dollar per share

stock may be cheap, while a $2 per share stock may be expensive.

Buffett uses a number of different methods to evaluate share price. Three techniques are

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highlighted in the book with specific examples and are used in the buffet spreadsheet

template.

Buffett prefers to concentrate his investments in a few strong companies that are priced well.

He feels that diversification is performed by investors to protect themselves from their

stupidity.

Earnings Yield

Buffett treats earnings per share as the return on his investment, much like how a business

owner views these types of profits. Buffett likes to compute the earnings yield (earnings per

share divided by share price) because it presents a rate of return that can be compared quickly

to other investments.

Buffett goes as far as to view stocks as bonds with variable yields, and their yields equate to

the firm's underlying earnings. The analysis is completely dependent upon the predictability

and stability of the earnings, which explains the emphasis on earnings strength within the

preliminary screens.

Nike has an earnings yield of 5.7% (cell C13, computed by dividing earnings per share of $2.77

(cell C9) by the price $48.25 (cell C8)). Buffett likes to compare the company earnings yield to

the long-term government bond yield. An earnings yield near the government bond yield is

considered attractive. With government bonds yielding around 6% currently (cell C17), Nike

compares very favorably. By paying $48 dollars per share for Nike, an investor gets an earnings

yield return equal to the interest yield on bonds. The bond interest is cash in hand but it is

static, while the earnings of Nike should grow over time and push the stock price up.

Historical Earnings Growth

Another approach Buffett uses is to project the annual compound rate of return based on

historical earnings per share increases. For example, earnings per share at Nike have increased

at a compound annual growth rate of 18.9% over the last seven years (cell B32). If earnings per

share increase for the next 10 years at this same growth rate of 18.9%, earnings per share in

year 10 will be $15.58. [$2.77 x ((1 + 0.189)^10)]. (Note this value is found in cells B49 and

E39) This estimated earnings per share figure can then be multiplied by the average price-

earnings ratio of 14.0 (cell H10) to provide an estimate of price [$15.58 x 14.0=$217.43]. (Note

this value is found in cell E42) If dividends are paid, an estimate of the amount of dividends

paid over the 10-year period should also be added to the year 10 price [$217.43 + $13.29 =

$230.72]. (Note this value is found in cell E43)

Once this future price is estimated, projected rates of return can be determined over the 10-

year period based on the current selling price of the stock. Buffett requires a

return of at least 15%. For Nike, comparing the projected total gain of $230.72 to the current

price of $48.25 leads projected rate of return of 16.9% [($230.72/$48.25) ^

(1/10) - 1]. (Note this value is found in cell E45)

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Sustainable Growth

The third approach detailed in "Buffettology" is based upon the sustainable growth rate model.

Buffett uses the average rate of return on equity and average retention ratio (1 average payout

ratio) to calculate the sustainable growth rate [ ROE x ( 1 - payout ratio)]. The sustainable

growth rate is used to calculate the book value per share in year 10 [BVPS ((1 + sustainable

growth rate )^10)]. Earnings per share can be estimated in year 10 by multiplying the average

return on equity by the projected book value per share [ROE x BVPS]. To estimate the future

price, you multiply the earnings by the average price-earnings ratio [EPS x P/E]. If dividends

are paid, they can be added to the projected price to compute the total gain.

For example, Nike's sustainable growth rate is 19.2% [22.8% x (1 - 0.159)].(Sustainable growth

rate is found in cell H11) Thus, book value per share should grow at this rate to roughly $65.94

in 10 years [$11.38 x ((1 + 0.192)^10)]. (Note this value is found in cell B64) If return on equity

remains 22.8% (cell H6) in the tenth year, earnings per share that year would be $15.06 [ 0.228

x $65.94]. (Note this value is found in cell E54) The estimated earnings per share can then be

multiplied by the average price-earnings ratio to project the price of $210.23 [$15.06 x 14.0].

(Note this value is located in cell E56) Since dividends are paid, use an estimate of the amount

of dividends paid over the 10-year period to project the rate of return of 16.5% [(($210.23 +

$12.72)/ $48.25) ^ (1/10) - 1]. (Note this return estimate is found in cell E60)

Conclusion

The Warren Buffett approach to investing makes use of "folly and discipline": the discipline of

the investor to identify excellent businesses and wait for the folly of the market to buy these

businesses at attractive prices. Most investors have little trouble understanding Buffett's

philosophy. The approach encompasses many widely held investment principles. Its successful

implementation is dependent upon the dedication of the investor to learn and follow the

principles.

John Bajkowski is editor of Computerized Investing and senior financial analyst of AAII.

(c) Computerized Investing - January/February 1998, Volume XVII, No.1

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Table 1. The Warren Buffett Approach

Philosophy and style

Investment in stocks based on their intrinsic value, where value is measured by the ability to

generate earnings and dividends over the years. Buffett targets successful businesses--those

with expanding intrinsic values, which he seeks to buy at a price that makes economic sense,

defined as earning an annual rate of return of at least 15% for at least five or 10 years.

Universe of stocks

No limitation on stock size, but analysis requires that the company has been in existence for a

considerable period of time.

Criteria for initial consideration

Consumer monopolies, selling products in which there is no effective competitor, either due to

a patent or brand name or similar intangible that makes the product unique. In addition, he

prefers companies that are in businesses that are relatively easy to understand and analyze,

and that have the ability to adjust their prices for inflation.

Other factors

A strong upward trend in earnings

Conservative financing

A consistently high return on shareholder's equity

A high level of retained earnings

Low level of spending needed to maintain current operations

Profitable use of retained earnings

Valuing a Stock

Buffett uses several approaches, including:

Determining firm's initial rate of return and its value relative to government bonds: Earnings

per share for the year divided by the long-term government bond interest rate. The resulting

figure is the relative value-the price that would result in an initial return equal to the return

paid on government bonds.

Projecting an annual compounding rate of return based on historical earnings per share

increases: Current earnings per share figure and the average growth in earnings per share over

the past 10 years are used to determine the earnings per share in year 10; this figure is then

multiplied by the average high and low price-earnings ratios for the stock over the past 10

years to provide an estimated price range in year 10. If dividends are paid, an estimate of the

amount of dividends paid over the 10-year period should also be added to the year 10 prices

Stock monitoring and when to sell

Does not favor diversification; prefers investment in a small number of companies that an

investor can know and understand extensively. Favors holding for the long term as long as the

company remains "excellent"--it is consistently growing and has quality management that

operates for the benefit of shareholders. Sell if those circumstances change, or if an

alternative investment offers a better return.

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Table 2. Translating the Buffett Style Into Screening

Questions to determine the attractiveness of the business:

Consumer monopoly or commodity?

Buffett seeks out consumer monopolies selling products in which there is no effective

competitor, either due to a patent or brand name or similar intangible that makes the product

unique. Investors can seek these companies by identifying the manufacturers of products that

seem indispensable. Consumer monopolies typically have high profit margins because of their

unique niche; however, simple screens for high margins may simply highlight firms within

industries with traditionally high margins. For our screen, we looked for companies with

operating margins and net profit margins above their industry norms. Additional screens for

strong earnings and high return on equity will also help to identify consumer monopolies.

Follow-up examinations should include a detailed study of the firm's position in the industry

and how it might change over time.

Do you understand how it works?

Buffett only invests in industries that he can grasp. While you cannot screen for this factor, you

should only further analyze the companies passing all screening criteria that operate in areas

you understand.

Is the company conservatively financed?

Buffett seeks out companies with conservative financing. Consumer monopolies tend to have

strong cash flows, with little need for long-term debt. We screened for companies with total

liabilities below the median for their respective industry. Alternative screens might look for

low debt to capitalization or to equity.

Are earnings strong and do they show an upward trend?

Buffett looks for companies with strong, consistent, and expanding earnings. We screened for

companies with seven-year earnings per share growth greater than 75% of all firms. To help

indicate that earnings growth is still strong, we also required that the three-year earnings

growth rate be higher than the seven-year growth rate. Buffett seeks out firms with consistent

earnings. Follow-up examinations should include careful examination of the year-by-year

earnings per share figures. As a simple screen to exclude companies with more volatile

earnings, we screened for companies with positive earnings for each of the last seven years and

latest 12 months.

Does the company stick with what it knows?

A company should invest capital only in those businesses within its area of expertise. This is a

difficult factor to screen for on a quantitative level. Before investing in a company, look at the

company's past pattern of acquisitions and new directions. They should fit within the primary

range of operation for the firm.

Has the company been buying back its shares?

Buffett prefers that firms reinvest their earnings within the company, provided that profitable

opportunities exist. When companies have excess cash flow, Buffett favors shareholder-

enhancing maneuvers such as share buybacks. While we did not screen for this factor, a follow-

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up examination of a company would reveal if it has a share buyback plan in place.

Have retained earnings been invested well?

Earnings should rise as the level of retained earnings increase from profitable operations. Other

screens for strong and consistent earnings and strong return on equity help to the capture this

factor.

Is the company's return on equity above average?

Buffett considers it a positive sign when a company is able to earn above-average returns on

equity. Marry Buffett indicates that the average return on equity for over the last 30 years is

approximately 12%. We created a custom field that calculated the average return on equity

over the last seven years. We then filtered for companies with average return on equity above

12%.

Is the company free to adjust prices to inflation?

True consumer monopolies are able to adjust prices to inflation without the risk of losing

significant unit sales. This factor is best applied through a qualitative examination of the

companies and industries passing all the screens.

Does company need to constantly reinvest in capital?

Retained earnings must first go toward maintaining current operations at competitive levels, so

the lower the amount needed to maintain current operations, the better. This factor is best

applied through a qualitative examination of the company and its industry. However, a screen

for high relative levels of free cash flow may also help to capture this factor.

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Buffett Valuation Worksheet (January/February 1998, Computerized Investing, www.aaii.com)

Enter values into shaded cells

Date of Analysis: ###

Current Stock Data Seven Year Averages

Company: Nike, Inc. Return on Equity: 22.8%

Ticker: NKE Payout Ratio: 15.9%

Price: $48.25 P/E Ratio-High: 18.4

EPS: $2.77 P/E Ratio-Low: 9.5

DPS: $0.48 P/E Ratio: 14.0

BVPS: $11.38 Sustainable Growth 19.2%

P/E: 17.4 (ROE * (1 - Payout Ratio))

Earnings Yield: 5.7%

Dividend Yield: 1.0%

P/BV: 4.2

Gv't Bond Yield: 6.0%

Historical Company Data

Price P/E Ratio Payout

Year EPS DPS BVPS High Low High Low ROE Ratio

Year 8 0.80 0.09 2.62 8.70 3.20 10.9 4.0 30.5% 11.2%

Year 7 0.94 0.13 3.39 11.98 6.00 12.7 6.4 27.7% 13.8%

Year 6 1.07 0.15 4.35 18.94 8.78 17.7 8.2 24.6% 14.0%

Year 5 1.18 0.19 5.33 22.56 13.75 19.1 11.7 22.1% 16.1%

Year 4 0.99 0.20 5.77 22.31 10.78 22.5 10.9 17.2% 20.2%

Year 3 1.36 0.24 6.68 19.13 11.56 14.1 8.5 20.4% 17.6%

Year 2 1.88 0.29 8.28 35.19 17.19 18.7 9.1 22.7% 15.4%

Year 1 2.68 0.38 10.63 64.00 31.75 23.9 11.8 25.2% 14.2%

EPS DPS BVPS High Price Low Price

Annually Compounded Rates of Growth (7 year) [(Year 1 / Year 8) ^ (1/7)] - 1

18.9% 22.8% 22.1% 33.0% 38.8%

Annually Compounded Rates of Growth (3 year) [(Year 1 / Year 4) ^ (1/3)] - 1

39.4% 23.9% 22.6% 42.1% 43.3%

Projected Company Data Using Historical Earnings Growth Rate

Year EPS DPS

Current $2.77 0.44 15.58 Earnings after 10 years

Year 1 3.29 0.52 13.29 Sum of dividends paid over 10 years

Year 2 3.91 0.62

Year 3 4.65 0.74 $217.43 Projected price (Average P/E * EPS)

Year 4 5.53 0.88 $230.72 Total gain (Projected Price + Dividends)

Year 5 6.57 1.05

Year 6 7.81 1.24 16.9% Projected return using historical EPS growth rate

Year 7 9.28 1.48 [(Total Gain / Current Price) ^ (1/10)] - 1

Year 8 11.03 1.76

Year 9 13.11 2.09

Year 10 15.58 2.48

Projected Company Data Using Sustainable Growth Rate

Year BVPS EPS DPS

Current $11.38 2.60 0.41 15.06 Earnings after 10 years (BVPS * ROE)

Year 1 13.57 3.10 0.49 12.72 Sum of dividends paid over 10 years

Year 2 16.17 3.69 0.59

Year 3 19.28 4.40 0.70 $210.23 Projected price (Average P/E * EPS)

Year 4 22.98 5.25 0.84 $222.96 Total gain (Projected Price + Dividends)

Year 5 27.39 6.26 1.00

Year 6 32.66 7.46 1.19 16.5% Projected return using sustainable growth rate

Year 7 38.93 8.89 1.42 [(Total Gain / Current Price) ^ (1/10)] - 1

Year 8 46.41 10.60 1.69

Year 9 55.32 12.64 2.01

Year 10 65.94 15.06 2.40