<<QCOM has been growing its share base these last few years in spite of a lack of earnings per share growth. and more generally, tech
companies continue to dilute their share bases via options issuance even as their growth slows>>
QCOM's employee stock options are granted with exercise prices equivalent to the stock's market price on the date of grant. So they're only dilutive to the extent the stock price goes up. Last year's grant, according to Q's Schdle 14A, totalled about 2% of the outstanding stock, and more than half of that was at exercise prices 2X the current price. Your earnings growth model assumes (correctly, imo) that QCOM's growth will level off and do little more than match the overall economy at a certain point. OK, when that point comes, the share price appreciation and dilution due to stock options should also level off.
If we start with 27.50$ as your NPV, reducing the annual dilution from 3% to EPS growth X 0.1 improves the NPV to about $31.5.
I understand your point that " the expected return from the NPV price is equal to
the discount rate." However, we started this dialogue comparing QCOM to Treasuries which have a well established risk and a predictable YTM. Clearly QCOM or any stock should be expected to provide a significant premium to a T-bond's. But no one knows what the SPX will return in the future...I would be very pleasantly surprised if it is as high 11%. And discounting QCOMs future earnings stream by 11% + 200bp on the theory that it should "beat" the SPX by a significant margin is kind of artificial, imho, especially when you constrain Q's EPS growth to 6% for 20 out of 30 years.
Using 8% instead of 13% for the discount rate increases the NPV from $31.5 to about $57.
i guess "terminal multiplier" is a way to turn 27.50 into 83. that's pretty cool
Well, actually it turns 57 into 87 (I think the 83 was my mistake), so it's not that cool.
It's simply a method of assigning present value to the security based on its earnings potential subsequent to the 30 year period over which we calculated earnings NPV. After all, if you bought a 30year bond, you wouldn't calculate it's NPV on only the interest payments...you'd also remember you were entitled to get your principal back (albeit reduced by inflation). The 57$ is the NPV of assumed earnings discounted at 8% per the above assumptions. There is still the value of the stock, which, according to your 30/15/6 earnings profile, will be earning 15$/share in the 30th year. Discounted at 8% the NPV of the 30th year EPS is $1.50, and at a multiple of 20, is worth 30$ in today's dollars.
Now, I hasten to add my opinion that the 30/15/6 earnings growth scenario is awfully optimistic. But I think 20/10/4 is doable, and that's consistent with a 40$+ stock price. |
