My .02 re: BRCM valuation
I don't want to be accused of "piling on", and I like to think of myself as having at least some morals (disgusting though they may at times be). So, unlike banker's lady, I will refrain from addressing the number of teeth Buy Signal may (or may not) have (nor speculating on their color, or what fascinating new species of fungi clever scientists may one day discover thereon, if they ever get bored with Borneo and the upper Amazon and decide to undertake field studies investigating trailer dwellers in the wild).
However, usually being rather value oriented as well, I would like to consider what Buy Signal suggests: that BRCM is way overvalued (I'll leave it to others to comment on whether it is a "P.O.S").
Personally, I am a buy and hold type; when I buy a stock, I usually have to first be convinced that it will be a good investment for 5 years (at least). So, I bought BRCM not too long ago, not because I thought it was a good value now, but because I thought it would become one; if so, that may make it a good value now. Myself, I am convinced that BRCM will gain tremendously regardless of which of several scenarios plays out in this rapidly changing arena. So the reasons I bought this company have very little to do with traditional measures of valuation, which certainly have their place, but IMHO do not apply to a company like BRCM to the extent that they might to, say, GT or S or MRK or KO. In other words, it seems to me that valuation measures apply best to companies which grow linearly, but the greater the deviation from linearity, the less appropriate it becomes to apply current valuation measures (consider the relevance of P/E or P/B to AOL or DELL over the last couple of years).
But, let's not simply dismiss Buy Signal outright and leave him to the pokings and proddings of curious anthropologists. Warren Buffett is a hope-to-die value fiend also, so Buy Signal may yet have a point (with apologies to any who might object to my using the "Oracle of Omaha's" name in the same sentence with that of the "Sage of the Trailer Park")............
Currently, BRCM sports a P/E of about 200, several times higher than the S&P average. Revenues increased 72% in 1997, 452% in 1998. Through Q1 1999, revenues have increased for 8 straight quarters. But let's assume that Q1 revenues remain static through the rest of the year. This will still result in a 1999 revenue increase of 89%.
How about earnings? EPS have gone from $ -.03 in 1997 to $0.38 in 1998; extrapolating Q1 EPS through to the rest of the year, 1999 EPS should be approximately $0.76 (estimates range from $0.64 to $0.93; consensus, $0.78). This figure ($0.76) represents an increase in EPS of 100% in 1999 compared to 1998. While obviously fraught with unknowns good and bad, let's extrapolate a bit further: Let's assume EPS continue to grow, but at a slower pace than in the last year; say, an annual increase of 70% instead of 100%. At this rate (70%), EPS in 2000 will be $1.29, in 2001 $2.19, and in 2002 $3.72.
Then, using the CURRENT stock price as a benchmark, P/E will decrease from slightly over 200 at present to 148 at the end of 1999, 88 at the end of 2000, 52 at the end of 2001, and 30 at the end of 2002.
Now, this assumes that the stock price will remain unchanged. Not fair, you say? Okay. Let's assume the stock price doubles by the end of 2002. In that scenario, the P/E will be 60, as compared to 200+ at the moment. So, the stock may, at that time, be considered overvalued (though not as much as it is now), but on the other hand I will have a 100% gain in 3 years to use to steady my nerves (and rationalize holding the stock further). Assuming, of course, that the fundamentals are not significantly changed for the worse for BRCM.
Since I bought this stock for at least 5 years, by the year 2004 the price I paid for it this year should be quite a bargain. And I believe the wait will be well worth it.
Well, quite a bit of assumption and extrapolation here, and JMVHO.
Others???
Walkingshadow |
