Tom, IMO you need to make two adjustments to your calculations:
First, you need to value the stocks base on the next 4 fiscal periods, not the coming fiscal year-end. Since we are very near to the end of this quarter, I suggest you start with 3Q '97.
Second, from all indications, growth is looking up for the networkers. Cisco said today that it expects growth of 30%-50% for the networking sector as a whole, and while that is a guestimate, it is probably more reasonable to use a 40% growth rate. Besides, valuation of growth stocks is a hip shot anyway.
The final issues, which have yet to be discussed in detail are the cost savings that can be realized by the merger (Mory has alluded to them, but they have not been spelled out in detail), and decent projections resulting from synergies utilizing cross-selling in marketing channels, both of which could substantially improve earnings.
Even if the stock is fully valued under your assumed growth rate, you would expect it to return 35% per annum (not a bad rate of return!), all other things being equal (as economists love to say).
Regards,
Paul |
