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Hey Steve, that post by Kevin Hanson was very rookie-ish.
First of all, the 70 P/E he alluded to is a "trailing" 12 month P/E. That is, He took the last 4 quarter EPS and simply divided by a KNIC price of $5.75/share. The last 4 quarters were 3Q(.02), 2Q(.05), 1Q(.02), and 4Q-1995(-.01). for a total of $.08, then 5.75 divided by .08 is a P/E of 71.9.
The problem with this simplistic calculation is that KNIC is a much different company now than it was the last 4 quarters! For once they added $65M dollars to annual revenues in acquisitions in the last 5 months alone! That would equate to an additional $13m in annual profits or .75 in EPS!!
Also Pure Energy did not become part of KNIC until April/May 1995 and is a much more developed company now than when KNIC to the 40% stake.
SECONDLY, Wall Street does not value companies on the previous 12 months in earnings. Its values companies on expected future profit growth, in other words, Wall Street "discounts" future earnings today. That's why you have companies in different industries such as "high tech", biotechnology etc. that have massive losses for years and years but yet they trade at 40, 50, even 60 dollars a share. Thats only because Wall Street is " discounting" future earnings. The same will happen to Pure Energy once management begins to tell Wall Street "the story" in order to generate enough interest for their expected Late Spring IPO.
Now Since, KNIC's management already stated pubicly TWICE, that the 4q will be begin KNIC's quarter by quarter torrid growth, Wall Street will then look at 4q EPS and therby project its next 4-8 quarter growth, consequently moving the stock higher.
Lets say I'm right and KNIC does $.20 EPS in the 4th Q, now Wall Street will take a second look at Knic and say, if given its current volume of business, they can generate $.20-.25 per quarter they next 4 quarters, then 1997 EPS should come in around $1.00/share. At current prices of just under $6/share it would be trading at a P/E of 6 on next years earnings, pretty cheap, INDEED!
Also remember, P/E of 20, of 40, of 70, or even 100 on next years EPS could even be justified if "Wall Street", anticipates EPS growth in the next 2-3 years to exceed the P/E ratio. In other words, lets say Company A is expected to grow its EPS by 300% per year over the next 2-3 years and is trading at a P/E of 150 and Company B is expected to grow its EPS by 20% per year over the same 2-3 year period and has the same P/E of 150. CAN YOU GUESS WHICH IS THE BETTER INVESTMENT?
The answer is Company A because the EPS is double the P/E, Company B in this example is way TOO expensive and a good SHORT candidate.
So don't be fooled by idiots that think that the only way to invest in a stock is by P/E. THERE IS MUCH MORE TO IT THAN THAT!!!
Getting back to KNIC, if Knic now begins its 150-200% annual EPS growth as Lou Knickerbocker first envisioned during the 1996 Knic annual meeting, then the market should reward KNIC with a P/E of 100X on future EPS for at least 2 years. Then As KNIC;s EPS growth slows when it eclipses $1B in sales, the P/E should contract.
Hope That helped all |
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