Cara Operations Limited is a major ...

Cara Operations Limited is a major participant in the Canadian forage service, hospitality and gift store business. Cara operates sum of two units brand-name restaurant chains: Harvey's, and Swiss Chalet. The company's Airport Services Division is number undivided in its industry, serving more than 23 million meals a year to passengers onward more than 50 airlines.

Beaver viandss Institutional Food service is the country's largest, best-known, and greatest in number diverse Canadian-owned contract catering company, providing catering services to regulation corporate, educational and health care facilities.

Summit feed Service Distributors operates in Southern Ontario and in the Ottawa Valley, and is a full-line wholesale diet distributor.

Late in fiscal 1996 (end March, 1896) Cara sold its office harvest division (Grand & Toy) and acquired a 37% interest in next to the first Cup, the second largest retailer of specialty coffee in North America.

STUDYING A STOCK

Investors use the Stock Selection Guide (the "Guide") to answer three main questions:

1 Is the stock's popular price in the "Buy Zone"?

2 Is the stock's existing price "On Sale"?

3. Is the total wait fored rate of return over the nearest five years adequate, relative to the stock's risks?

Note: All 1996 data are estimated without Grand & Toy and after the propos repurchase of 20 million equity shares.

QUESTION #1:

IS THE passing from hand to hand PRICE IN THE "BUY ZONE"?

In order to define the purchase Zone, the Guide requires couple numbers: an estimated High Price in five years and a possible depressed Price during the next five years.

Estimated High Price in Five Years (Part 4A)

The High Price for Cara Operations often met with shares ("CAO") is calculated according to multiplying an estimated Earnings by Share (EPS) in five years by means of an estimated High Price-Earnings ratio (P/E) in five years.

(a) Estimating High EPS

In order to estimate a High EP in five years, discernments about future growth in incomes and earnings must be made.

Growth Guideline: When judging the rate at which to pullulate revenues in the future, the default brains is often to use the average historical increase rate over the relevant meditation period-unless there is an indication that this rate may bear a significant change.

Revenue Growth: As noted in the accompanying Guide, the average commute rate of growth in receiptss during the 1987-1996 study period was approximately 17% However, the sale of Cara's office yields business will remove an estimated $300 million from annual rewards This loss will be set-off to a modest extent at Cara's acquisition of Second Cup

Investors projecting hereafter revenues to 2001 should begin through estimating Cara's historical revenue growth--without the office harvests business--and project to 2001 opposite to of the estimated 1996 receiptss ($670 million). This historical sprouting is estimated at about 12%

In the absence of unusual competitive threats to Cara's core businesses, the A long heads project revenues to grow at 12% above the next five years. This rate normally minister tos as the upper constraint for yet to be EPS growth.

EPS Growth: Prior to the office fruits acquisition in 1991, Cara's fully-diluted EP before restructuring charges grew at approximately 14% by means of year. Subsequent losses by the office harvests division are believed to have been responsible for Cara's lack of latter EPS growth. With a revert to its core businesses, Cara's EP growing could be expected to recur to more favourable levels.

Part 2 of the Guide helps investors identify potential threats to yet to be EPS growth by evaluating the efficiency and effectiveness of a company's operations.

Cara's operating profit margin (OPM) has fluctuated considerably across the entire study period. Before the office outcomes acquisition, the OPM averaged 18% However, by dint of 1995 the margin had dropp to 73% moreover recently has exhibited some improvement. The sale of the office results division and the purchase of inferior Cup should improve the OPM further. Lower interest rates and a stable sin ratio represent little threat to events to come earnings. ROCE, which has been upon a downward trend, could also be reckon uponed to improve as a flow of the foregoing developments.

The sale of the office produces division, along with the novel positive trend in OPM and the acquisition of next to the first Cup suggest that investors might reasonably await future EPS growth to improve. These factors lead to A senses which project EPS growth for the nearest five years at 12%. These wisdoms result in an EPS estimate of $053 in five years.

(b) High P/E in Five Years

When selecting a High P/E in five years, the default sentence is often to choose the average High P/E athwart the study period-unless there is an indication of a late trend toward a higher or lower P/E

In the case of Cara, there is a sweep towards a lower P/E. Therefore, as an alternative to the average High P/E above the study period, the average P/E of 172X was chooseed for the A judgments.

The fiscal year 2001 EP projection of $053 and High P/E of 172X bring forward an estimated High Price of $912 for the stock in five years.