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Politics : Idea Of The Day
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To: IQBAL LATIF who wrote (29647)11/10/1999 11:46:00 AM
From: jim kelley  Read Replies (3) of 50167
 
Re: SUNW fair Value

Thanks for the article.
It had me laughing in disbelief!

At a price of $160 per share SUNW would have a market price of about 123B.

At a price of $316 per share SUNW would have a market price of about 245 B.

Currently the stock is earning 1.43 per share or about 1.1 B dollars a year.

Assuming nothing changed for the next hundred years, an investment of 245 B today in government bonds would yield 16.4 billion before taxes and perhaps 10 b after taxes immediately with no risk.

If I borrowed to 245B and bought SUNW, the 1.1 B in after tax income would not even service my bank loan.

So only a FOOL would buy SUNW at that price!

Let us look at it another way. SUNW has a current market price of 87 B. Assuming nothing changes, I could invest the 87 B in government bonds and get annual cashflow of 3.7 B with no risk. I get 1.1 B from SUNW with huge risks!

This suggests that SUNW is overvalued by at least factor of 3. Thus, the price that a reasonable, prudent person would pay for SUNW today would be no more than $37 per share.

Remember in this analysis, I have not discounted the stock for the sector risks which are very large given the intensely competitive nature of the computer business.

A prudent person would not put his 87 B into buying SUNW when he could triple his return by buying government bonds.
Only a fool or a momentum stock player would.

Jim Kelley
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