This week we go over the valuation of the Whole Foods & Amazon deal to see if it was a smart, Rule #1 purchase. We will define basic investing terms and cover some hard to understand topics like earnings versus free cash flow.

In Episode 119 You’ll Learn:

  • Charlie Munger’s 4 Steps to Choosing a Stock
    1. You have the capability of understanding the business itself.
    2. The company has a moat or barrier that is intrinsic to the business’s success.
    3. The company has a management team with integrity and that you trust.
    4. There is a reasonable Margin of Safety, meaning the price is discounted from its public value.
  • Whole Foods Deal Numbers
    1. Sold for 13.4 Billion
    2. How Bezos & Mackey agreed to $42 a share
      1. Currently 319,685,753 shares available
    3. Purchase Price = Outstanding Shares (319,685,753) X Price ($42 dollars/share)
    4. Danielle’s  Experience:
      1. Purchase Price – $29 (last year)
      2. Adjusted Basis – $28 (to include dividends)
      3. Return – $14 (1 year)
  • Why would Bezos buy Whole Foods? & Why would would he pay that price?
    1. By purchasing he was able to acquire 1 hour food delivery for 70% for entire US population.
    2. AmazonFresh Efficiency + Whole Foods Quality Control + Choice + Amazon’s Price Focus = Total Market Disruption
    3. Free Cash Flow: Whole Foods holds 800 million, within 10-13 years Besos will have made his money back on his purchase price even if Whole Foods earnings do not increase or go negative.
    4. Earnings = Revenue – Expenses (can be lower than actual cash flow)
    5. Free Cash Flow = Operating Cash – Capital Expenditures
  • Market Disruption
    1. Stock price for most general grocers has dropped 8-15%; & credit risk gone up 30% since the deal was announced.
  • Bottom Line: This deal fits the formula for a good purchase and accurate valuation.
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