Here is some interesting commentary I found in response to someone trying to justify BRCD's PE. The original justification had 100% for quite a few years and 30-50% for a couple.Wooly's looking for a rationale to pay a P/E of 296. He did a great job, too, using income sheet information. Brocade's numbers impress the pants off of me as well.
To review:
Gross Margins of 58%
Net Margins of 20%
Sales Growth of 383% (!!)
Great stuff, the stuff of legend. Not sustainable, but shoot, most companies never get close to that kind of growth. This year's is projected at 135%. Actually, let's just take Wooly's numbers. So the market for Brocade's products grows like this (assuming no decrease in margins)
2000 $328 mln
2001 $770 mln
2002 $1.616 bln
2003 $2.994 bln
2004 $4.791 bln
And he comes up with an ending P/E of 31. So these projections are looking at revenues 1500% above where they are now. Fine, I'll buy that. But there is one thing that is not included here which would keep me far, far away from Brocade stock.
"Whazzat", you say?
Dilution. Gobs of it. Brocade's diluted share count went from 204 million in FY1999 (split-adjusted) to 242 million in FY2000, an increase of 19%. These additional shares are not accounted for in these earnings. Nor are future employee grants. How much are authorized? Let me summarize:
Under the Employee option plan, the lesser of 2.5% or 20,000,000 shares annually are authorized.
2.5% is not so bad. But we're not done. For the Incentive grats, the number is the lesser of 5% or 40,000,000 shares annually.
That's 7.5%. But there's also a director's option plan and a NSO plan as well. When all those are entered in, that's big time dilution which muct be acocunted for out of existing shareholders' hides. So let's sum up.
In 2000, 30 million option shares were granted. Let's just look at the share count increasing due to options at, say, 12%, 10% and 7.5% per year.
Sharecount(in thousands)2000 242,504 242,504 242,504 12% 10% 7.5%2001 271,604 266,754 260,6912002 304,197 293,429 280,2432003 340,700 322,722 301,2612004 381,584 355,050 323,856
All of these percent numbers are below what the company is allocating in options this year, but let's play along. none of them come close to bouncing up against the 20 mln + 40 mln cap set in the 1999 option plans. So, what do these earnings yield in P/E then?
In thousands Earnings Per Share at Earnings 12% 10% 7.5%2001 154,000 .568 .578 .5922002 323,000 1.06 1.10 1.152003 598,000 1.76 1.85 1.982004 958,000 2.51 2.69 2.96Which equal 2004 P/E's (using Wooly's 12% assumption of shareprice at $130.59) at: 52 48 44
Those P/E's are significantly higher, and they come after all that growth we've already built in, plus a 12% CAGR in the share price. Finally, I undercounted the dilution from this year's actuals by a large amount, less than 30 million in next year's worst case, as compared to 40 million this past year.
That's what people are betting on when they buy Brocade at this price. I am in no position to deny that it is possible, but I look at the stock option plan that shareholders agreed to at Brocade and I say to myself "What the hell were they thinking?"
There are plenty of companies out there with some awfully rich Stock option plans, but not on my nickel.
sorry to bust in here Wooly, but in the spirit of knowing what you buy, ya also ought to know what you own now that will be given away in the future.
Here's the schedule from which I took this info.
quote.fool.com
Keep smiling everyone, and Wooly's got exactly right, know what you own.
Foolishly,
Bill Mann |
