I think you guys are way off base in this discussion. Let's start with a benchmark for comparison. For a free cash flow basis (defined as operating cash flow minus net capital expenditures),I chose CL. Last years 10-K indicated that CL garnered around $2.25 per share in FCF. Based on current prices that gives a multiple on free cash flow of roughly 24x. So let's estimate that on a forward looking basis we are talking about a slow to moderate growth company commanding a price of roughly 20x projected free cash flow.
The first six months of this year Dell generated FCF of roughly $.73,and I expect that for the full year the number will come in at around $1.60. Now let's assume that Dell grows at 35% for the next two years, $30% for the two years following, 25% for the two years following, 20% for the next two years and 15% thereafter. Those assumptions will give us the following FCF numbers: $2.16, $2.92, $3.79, $4.93, $6.16, $7.70, $9.24, $11.09, and $12.75 after the first year of 15% growth. Applying the terminal ratio of CL (20x FCF), we get a value of $255. Now we need to discount all of those numbers back to the present. Assume that we use a risk-free rate of 6% and apply a 15% risk premium for a total discount rate of 21%. If you have taken the time to follow the math, then you would come to the conclusion that Dell ought to be selling at around $58.35 today, based on the assumptions I have enumerated. But his does not take into account Dell's current disposable cash which is around $3.5BB, or $1.25 per share. That raise the value to $59.60.
A point about the terminal value: the $225 assumes that Dell spins off the FCF numbers calculated above. If it retains a portion then the terminal value increases commensurate with the retained cash plus the interest earned.
Of course, the devil is in the details, (or in this case, the assumptions). But this is the only rational way I know to evaluate stockprices.
TTFN,
CTC |
