FOOL ON THE HILL
Beware of Bedazzling Numbers

Even though investors are used to poring over numbers in the hundreds of billions for their favorite blue-chip companies, there's plenty of value on the other end of the spectrum. Don't let the barrage of billion-dollar figures streaming from the business sky cloud your ability to spot the value of $37 million.

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By Richard McCaffery (TMF Gibson)
November 16, 2000

Investors who read news stories by the dozen and pore over annual reports get hit by enormous numbers.

Here are a few whoppers, the kind of facts you read in the business press every day, set in relief against similar numbers to add perspective.

Across the universe
Software giant Microsoft (Nasdaq: MSFT) has more than $40 billion in cash, short-term and long-term investments on its latest balance sheet. It's staggering when you consider the Earth is just 4.5 billion years old, that the universe itself is just 15 or 20 billion years old, and that the diameter of the known universe, assuming it has an edge, is roughly 35 billion light years.

Therefore, on a trip across the universe, Microsoft could spend a billion dollars every billion light years and finish the journey with cash to spare, or at least investments it hasn't liquidated, provided the market holds up during the trip.

Bringing the good things to life -- millennium after millennium
General Electric
(NYSE: GE) has a current market capitalization of about $523 billion, making it the highest valued company in the world. It has a value almost 62 times the median market value of the S&P 500, which is about $8.5 billion. Compare this to, say, Benjamin Moore & Co., a little company on the over-the-counter market (ticker: MBEN) recently scooped up by Berkshire Hathaway (NYSE: BRK.A). Until the Berkshire tender offer, the company had a market value around $650 million. How do you compare $650 million with $523 billion?

To put this in perspective, let's turn to mathematician John Allen Paulos' book about mathematical illiteracy, Innumeracy. We know a million is a one followed by six zeros, and a billion is a one followed by nine zeros. It's hard to relate to three placeholders, however, so Paulos gives us a handy way to think about it. It takes about 11.5 days for a million seconds to pass, and about 32 years for a billion seconds.

So, if every second we spent $1 of Benjamin Moore's market value, it would take about 20.5 years to reduce the sum of its brand name and tangible assets to zero, whereas it would take 16,736 years to repeat the same process at GE -- longer, presumably, than Jack Welch will be around.

You can fly or you can drive
Communications chip maker Broadcom (Nasdaq: BRCM) has seen its stock price soar about 1,233% in the last two-and-a-half years, to about $222 per share from $12 per share. As noted in earlier Fool on the Hill columns, the average investor is lucky to find one stock in a lifetime that lifts off vertically and maintains this trajectory for anything longer than the time it takes institutional investors to flip the shares.

To put this kind of growth in perspective, consider auto maker Ford Motor Company (NYSE: F), which grew just 269% from December 1989 through December 1999. That seemingly slow pace, however, provided a 14% average annual return (a 21.4% average annual return with dividends reinvested). What's important here is that a 14% annual return is marvelous, even in a decade when the S&P 500 soared.

Consider what money manager Ralph Wanger, who headed the Acorn Fund for 30 years, pointed out regarding compounding and risk. An investment that grows 12% annually will double in just six years. Do this early enough, and you'll probably retire with a boatload of cash. Take $5,000, compound it annually at 12%, and you'll have $150,000 in 30 years. This is without adding a dime to the initial investment. Does the average investor need to do better than this, or need to take on the additional risk?

Investors don't have to hitch their wagons to a high-flying stock to do well in the market. For most folks, building wealth in the market is more like John Neff's four yards and a cloud of dust than a ride on Broadcom's starship.

Down to Earth with Eratosthenes
This is why I hope the commonsense message of The Motley Fool -- understand the power of compound interest, stay invested in high-quality stocks for the long term, start early -- catches on a lot faster than, say, Eratosthenes' discovery in the third century B.C. that the Earth is spherical and roughly 25,000 miles in circumference.

From Carl Sagan's Cosmos: "Eratosthenes' only tools were sticks, eyes, feet, and brains, plus a taste for experiment. With them, he deduced the circumference of the Earth with an error of only a few percent, a remarkable achievement for 2,200 years ago." Yet, centuries later, many folks still believed the Earth was flat, even though Eratosthenes' simple experiment could be understood in minutes by almost anyone, whether they sailed through geometry or never heard of Euclid.

To pull this all together, let's turn to the cash flow statement of Bed Bath & Beyond (Nasdaq: BBBY).

This solid provider of home furnishings is a pricey stock at 50 times trailing earnings, but it's also a business that's pretty easy to understand -- at least relative to the fabless semiconductor chip industry -- and it's about the right size for our present discussion. Over the last three years, Bed Bath & Beyond has increased capital expenditures 118%, yet has grown its free cash flow (a measure of unrestricted profits) 457%. The company has funded its entire expansion over this period with cash from operations. Check out the financing section of the cash flow statement and you'll see the company hasn't borrowed from banks or sold additional shares in the public markets.

In addition, even though sales jumped 76% from 1998 to 2000, days inventory outstanding remained flat, and more than 50% of its working capital needs are funded by suppliers in the form of payables, accrued expenses, and deferred taxes.

At the end of last year, Bed Bath & Beyond had about $37 million in free cash flow (minus tax benefits from exercising stock options). This might not sound like much next to a big-fry like Microsoft, but it's worth examining what a company like Bed Bath & Beyond can do with that kind of cash. After all, that's the real worth of money to a company, an investor, or a guy on the street.

Going into this fiscal year, the company had leased sites for 50 new superstores, which it planned to open at an estimated total cost of $146 million for inventories, furniture, fixtures, and pre-opening expenses. This cost breaks down to about $2.9 million per store, so that $37 million in FCF at the end of fiscal 1999 was enough to fund the opening of 12.7 stores.

So, while it's easy to lose track of numbers in a sky of fast-moving, 12-digit objects, $37 million still counts for something. Maybe it's not much compared to a universe with an estimated 100 billion galaxies -- each with, on average, 100 billion stars -- but, it's enough to get a running start in the world of bathroom furnishings.

Don't let the barrage of billion-dollar figures streaming from the sky cloud your ability to spot value in smaller places -- not necessarily at Bed Bath & Beyond, but any company you know that's growing smartly, profitably, and with minimum leverage.

Have a great day.