Joe, although the PE of 20 includes a one-time gain, the real question is how many "one-time" gains can we expect? For one thing, there's still more stock from the UMC sale that can be sold. For another, there's a high probability in favor of a significant monetary judgment against Lexar. Who knows how many other "one-time" gains there are? My point is that relying solely on operating earnings as a basis for the PE is not altogether reasonable in a young, fast growing company.
I favor a composite approach. Use the operating earnings, factor in at least part of the one-time gains, and take into account growth in royalties as well as unit sales. Add to this the important factor of being dominant in the industry (meaning that the company can set prices) and you get a better idea of the quality of the earnings. In a situation where a company has proprietary products and where there are few substitutes that will work (e.g., SmartMedia cards, but only where you can get along with lower capacity), the PE for a given rate of operating earnings growth can and should be much greater than that for a company in a commodity business. In the latter situation, a commodity producer is valued on the basis of whether it is the low cost producer, and a reasonable PE will be lower than for a company with proprietary technology.
This is an area (i.e., understanding the nature of the business and the position of a company within that business) that tends to be overlooked by professionals with a background in financial management. They just don't understand enough of the technology to separate the so-so companies from the really excellent ones.
Art |
