Newsflash: "Jubak KO'd -- Quits Day Job" <g>
from Trader Dave at Apr 17, 2000 8:31 PM ET:
>If coke has a 40 pe and can sustain 10% growth for 5 years and pmcs has a 150 pe and can sustain 60% growth for 5 years, you'll come out ahead with pmcs even with significant pe compression.<
from Jim Jubak on Apr 21:
Comparing Coca-Cola and PMC-Sierra
Let's go through this process for Coca-Cola (KO), a blue-chip growth star from years past that reported better-than-expected earnings this week. (Wall Street had expected 21 cents a share; Coca-Cola reported 32 cents.)
On April 14, the Friday that took the Nasdaq Combined Composite Index ($COMPX) down 25% and that resulted in all that weekend advice to buy blue chips, Coca-Cola closed at $47. Adding the most recent earnings surprise into analyst projections results in an earnings estimate of $1.56 a share in 2000. That's a forward P/E ratio of about 30. In its most recent conference call, Coca-Cola's management said that it was targeting 15% growth in earnings per share. That's higher than analysts expect for 2000, but I'll give the stock the benefit of the doubt, since I don't want to be accused of shooting only crippled ducks here. That means Coca-Cola has a forward PEG ratio of 2.
Now let's go through the same process for PMC-Sierra. On April 14, the stock closed at $118.50. The day before, the company had reported earnings per share of 17 cents, a penny above Wall Street estimates. Adding that very modest surprise into analyst projections brings earnings estimates for the full year 2000 to 77 cents. So on April 14, the stock traded with a forward P/E ratio of 154 -- considerably higher than Coca-Cola's forward P/E ratio of 30.
But then PMC-Sierra has been growing earnings much faster than Coca-Cola, and analysts project that it will continue to do so for 2000, 2001 and beyond. Using their 80% earnings per share growth rate projected for 2000 -- a whopping six times the projected growth rate for Coca-Cola -- the PEG ratio for PMC-Sierra comes to a surprisingly modest 1.9. Adjusting for the difference in projected growth rates, this "expensive" technology stock is actually cheaper than the blue-chip growth stock.
Of course, all these calculations use projections. There's no guarantee that any of the numbers Wall Street analysts now expect will actually materialize. That's why I think it's good to risk-adjust, at least approximately, any stock's forward PEG ratio.
In scary and hard-to-read markets like this one, individual stocks tend to become very mispriced, simply because a lot of investors and Wall Street strategists are looking for a quick fix.
What are the chances, for example, that Coca-Cola won't make the 15% target for earnings growth that the company promised to deliver? Pretty high, I'd say. In the most recent quarter, worldwide unit volume rose only 2% (on a comparable basis). To get that 15% earnings growth, Coca-Cola's management is looking for 7% to 8% unit growth. Not an impossible number to reach, but not a slam-dunk, either. Increasing unit growth from 2% to 8% takes very aggressive marketing and more than a bit of luck.
What are the chances that PMC-Sierra won't hit the 80% growth rate that Wall Street has estimated? Pretty low, I'd say. The company shows one of my favorite earnings patterns -- accelerating earnings growth, quarter by quarter. (In the old days, we called this momentum; now, it's better to call it earnings momentum to distinguish it from the recently more-popular price momentum.) In the most recent quarter, the company grew earnings per share by 183% over the same quarter in 1999. In the previous quarter, the fourth quarter of 1999, the company grew earnings by 107% over the same quarter a year earlier. Companies showing accelerating earnings growth like this are better than average bets to make or surpass projected earnings for at least the next two or three quarters. Once a technology company's products are on a roll -- with the company racking up design wins that result in more customers using its product -- the good news goes on for quite a while. That makes it relatively likely that PMC-Sierra will make analyst projections over the next year. Its forward PEG ratio actually includes less risk than Coca-Cola's does.
moneycentral.msn.com |
