i have run a number of scenarios. typically, if i want a NPV for a high expected return (e.g., 13% return), i assume something like 30% or more growth for 5 years, followed by 15% growth for another 5 years, followed by 6% growth for another 20 years. in this case, the discount rate, which is the same as the expected return (some people do not seem to understand this basic point of discount rate and fundamental expected return being the same, but i will not try to explain it again and instead refer interested parties to investment primers), is 13%. 13% is only mildly better than the SPX's long-term average of 11%. meanwhile, 30% for 5 years followed by 15% for 5 years would, i believe, make QCOM far and away the greatest earnings performer in the SPX over the next decade. Buffett, for example, is on record saying he thinks only 1% of SPX companies will manage 15% CAGR for the next decade, and the particular cos that manage this are unpredictable (according to Buffet). so i think i am justified in calling such a scenario "wildly bullish". under this scenario, i calculate QCOM's NPV at just under $25. of course i could be wrong.
if i assume less stratospheric growth, such as 15% CAGR for a decade, which is still in the top 1% according to Buffett, and if i then assume only a 5% discount rate (which is less than a 10yr bond), i calculate NPV at 36.75.
under this same CAGR scenario, if i raise the discount rate to 9%, then my calculated NPV falls to a little under $22.
of course, if i assume QCOM does less than 15% CAGR, which according to Warren Buffett is something only 1% of SPX companies will do for a decade, then, predictably, NPV calculations decline.
at 40$/share, QCOM will outperform a 3.5% TIPS with significantly less than 5% annual growth in earnings
keep in mind that a 3.5% TIPS means the REAL RETURN is 3.5%. the nominal return is more like 5%. in any case, one can lock in upwards of 6% on longer dated US government bonds.
the other thing which is rather generous of me in my calculation is my assumption that QCOM's pro forma earnings are all really "see through earnings" as Buffett defines them. whereas the reality may be somewhat different. for example, i have experimented with other calculations (on QCOM and others) where i assume they pay no dividends for 5 yrs (as they busily invest all the pro forma earnings back in the business in their rapid growth phase), after which i assume that they start paying dividends (or buying back stock, or delivering investors a "coupon" of some sort) to the tune of 50% of projected pro forma. so in that type of scenario, i would calculate NPV by discounting the "coupon" series. these scenarios typically result in lower NPVs than my assume-all-the-pro-forma-is-100%-coupon-from-day-one scenario.
of course, all my calculations and assumptions could be completely wrong. |
