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Strategies & Market Trends : Professional Equity Analysis - the Pursuit of True Value
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To: Reginald Middleton who wrote (1)1/23/1997 8:57:00 PM
From: Brandon Scott   of 102
 
Your model is very interesting. I'd like to download it, but I use a Macintosh.

I have a question about on of your formulas:

>Average Multiple Models
The valuation estimates are the result of the Market Relative
>section of the RCM model. The value-to-price
ratio provides an overview of how the valuation compares to the
>current stock price. A ratio of 100% means
that the valuation is equal to the current price, ratios above
>100% indicate valuations above the current price,
and ratios below 100% indicate valuations below the current
>price. A ratio of 150% indicates that the valuation
is 50% above the current price. In the case of Microsoft, the
>Average Close P/SPS X Estimated SPS is 125%
(where Sales = S and Sales per share = SPS).

Average close P/SPS X Estimated SPS, by simple algebra, must equal Average Close Price times the ratio of estimated SPS / SPS (nominally, one). So the result would not be a percent, it would be a stock price. If we compare this result to the current price (which would yield a percent), then the only real variable is SPS compared to estimated SPS. Is it fair to say that MSFT is a good or bad buy solely because of inaccurate estimates of SPS? Please explain- I'm sure that I must have misinterpereted something somewhere.

Brandon
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