Here is a pretty good observation from Raging Bull for SUNW vs MSFT valuation:
(http://www.ragingbull.com/mboard/boards.cgi?board=SUNW&read=1814)
Here is the original post that outlined the poster's "value range",
(based on prevailing interest rates is 2.3:1 to 2.7:1). Anything below is a "value play" and anything above is "over priced."
(http://www.ragingbull.com/mboard/boards.cgi?board=SUNW&read=1732)
Ticker___5 Year___P:E____P:E/G
MSFT____25.4%____70.9____2.8
SUNW____30.0%____75.5____2.5
By: bulldoug
Reply To: 1732 by pmcw Friday, 24 Sep 1999 at 9:57 PM EDT Post #1814 of 1825
Fair value for PE/G -> 1
PMCW,
I thought your analysis was very interesting, and generally I agree with your approach. I would like to understand better your contention that "fair value" for PE/G is 2.3 - 2.7. Given that the "value" of a company is the net present value of its future earnings, over time the fair value for PE/G should approach 1.0.
The reason a company would justify a PE/G of > 1 is that its growth is
ACCELERATING - since that means the the growth in the future will be larger(so with the denominator going up - the numerator -PE- can go up). This rate of acceleration of growth (2nd derivative of the earnings curve) is therefore very important in determining what a companies PE should be. Unfortunately, this number tends to swing wildly.
So for example, Sun's y/y earnings growth from FY97 - FY98 was 0.13% But from FY98 - FY99 it was 35%. So what long term growth rate should be used? If we assume 35% earnings growth and consider earnings through 2014, SUNW is worth $140 / share (pre-split, using discount rate of 10%). This means that they should have earnings in 2005 of $6.2B (w/ rev. of $71B assuming same growth in rev.)
The consensus projections suggest a 20-25% growth rate and I believe than Sun execs have suggested a similar range. If you use 25% growth and keep the other assumptions the same, SUNW is worth $61/ share. This suggests earnings in 2005 of just over $3B on rev of $35B.
The true value of SUNW is probably somewhere between the two senarios
above. As a point of comparison a 35% growth assumption translates to a $165 stock price for MSFT and 25% growth translate to $72/sh.
SO, are tech stocks such as MSFT and SUNW overvalued? Not if they can
grow earnings at 35% / yr - but that is a very big IF. I certain disagree with the assertion by javier that MSFT is the ONLY tech company that is overvalued.
Regards,
bulldoug
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The main point for valuation is the future growth in earnings and how long management can sustain that growth. IMO SUNW will not grow at a 35% for many years compounded, but it is possible for SUNW to experience a growth of 30%-35% for two or three years compared to their compounded growth rate of 20%.
Based on the above review, the author finds SUNW slightly undervalued to MSFT. Both MSFT and SUNW (in the author's opinion) are considered "value plays".
IMO it is a lot to pay for estimated future growth which is not guaranteed.
EKS |
