the problem with PEG is that it is used mainly to justify high PEs. (this is also the main reason for pro forma figures.) e.g., a co growing earnings 300% can have a 300 PE and still have a PEG of 1, or be cheaper than the market according to you.
the problem is, significantly above-par earnings growth does not persist for very long. this should be obvious to you given QCOM's poor earnings growth these last several years. you can come up with a low PEG if you like by linearly extrapolating from a good year or two (especially one that hasn't occurred yet!), but you are ignoring the zero-growth years that significantly reduce the annualized geometric average growth.
hence i believe it is prudent to rely on much, MUCH lower assumptions than your 35%. i think QCOM will be VERY lucky to do 10% annualized geometric average growth for the decade of the 2000s.
[edit: just as an example of a different set of assumptions by an informed analyst, the Wells Fargo analysis just posted says: "For FY04, we
project revenue of $3.3 billion and EPS of $1.08, based primarily on our
expectation of lower chipset sales in FY04 and slower growth in royalty
payments." so they expect EPS to DECLINE from 03 to 04. hardly consistent with your 35% geometric gains but very consistent with my point that earnings growth tends to come in irregular spurts, with periods of flat to negative growth in between. their analysis may or may not turn out to be true, but it is an informed perspective that should be considered in making earnings projections and considering whether the current price is fully valued, imo.]
What is the actual "out of pocket cost" to the company? Did the company go out on the open market and by these options to give to their employees?
that is the wrong way to look at it. you are looking for an up-front cash cost. but you are starting with the wrong assumption (that is, the assumption that nothing is a cost unless it is an up-front cash cost).
instead, you need to look at economic value. a co can theoretically issue any number of options or authorized shares from its "printing press" at zero up front cash cost. but zero up front cash cost is not the same as zero value transfer.
the concept of value as distinct from tangible assets should be very familiar to QCOM investors, who like to harp on about how valuable QCOM's parents are. well, fine, they are valuable. but so are the options that QCOM gives away by the bucketful.
if QCOM gave away patents to employees or other cos, would you say there's no cost? no, because QCOM is transferring something of value. the same goes for options, and they are easier to value than patents.
Would it then be appropriate at the time management is including this “ongoing value transfer”- option expense on the income statement, to also inform the shareholders of the estimated increase to profits (“ongoing economic value”) of doing such in the form of increased employee productivity/ loyalty?
i didn't answer this before because i thought you were joking. how the hell are they going to estimate this? and while you're at it, why don't they estimate it for every public co?
what i would suggest is, the more options a co gives, the lower its earnings should be. because studies have shown that cos that rely heavily on options tend to underperform the more parsimonious cos out there. this is especially true among cos that overweight the amount of options given to top mgmt, as discussed in a recent article in the NYT or the WSJ (i forget which).
i'm not aware if QCOM is one of those cos with a "top-weighted" options compensation structure, but i would consider that a minus rather than a plus if true. |
