whats the best stock in the top 50 and why, page-33

"surely there comes a point at which WOW can no longer grow at the rate it has over the last few years. Where is the growth going to come from? I can see only pharmacy at this stage?"


There is a big difference between growing revenues and growing EPS.

There is a physical limit in the growth of revenues in WOW's existing segments. Nevertheless, revenues can grow along with i) GDP growth ii) inflation iii) market share growth (not only at the expense of Coles - but also independents through superior pricing).

As you mentioned, WOW can also grow by entering new segments but also geographically. For instance WOW does not have an 'Officeworks' type business, it may get into pharmacy, and their Indian JV is an example of geographic growth.

EPS however can grow much faster than revenues, particularly for a FMCG retailer. I small improvement in the Cost of Doing Business has a dramatic effect on EBIT margins. And this is an area where WOW have become expert.

WOW also have capital management at their disposal. They generate a lot of cash and if they cant utilise it profitably in their business they can do some massive share buybacks. A business like how which is very profitable with respect to Invested Capital can really turbo charge EPS through buybacks.

Alternatively, they can pay larger dividends, in which case the share price will be underpinned by its dividend yield.

All in all, WOW are far from finished. In a lot of ways, they are only just starting.

PS. The best thing about investing in WOW is watching your investment grow at a rate of 20% + for years on end while other 'geniuses' routinely misanalyse the simplest business possible and go chasing rainbows. What more can you ask for ? A good investment and a good laugh for a mere $28.