It was obvious that the company was low-balling their original guidance. I provided rationale for this opinion on Yahoo over the last few months (don't have the links handy) and here on Silicon Investor the other day. Message 19336916
The two questions now are:
1. Is the company still underestimating their sales/earnings so they can over deliver? I think that the answer to that question is yes, and this gives me reason to believe that sales will be up even more than yesterday's new guidance, and that earnings will come in at the upper end of the 25 to 30 cent range, and more likely above it. Based on their new guidance, I'm thinking that 35 to 40 cents per share this year is more likely.
2. What PE will the market place on this stock?
We can try to predict the answer to question 2 by assuming that earnings will come in at 30 cents per share this year. I think that is the worst case since I believe that management is low-balling the guidance. Matrixx earned 14 cents per share last year, so earnings would be up at least 114% this year.
Now let's assume that Matrixx grows revenues 40% from 2003 to 2004 as well. Based on a 69% gross margin, R&D at 6% of sales, and operating expenses 15% above this years estimate (which I put at 14% above last years estimate), the company would earn about 66 cents per share in 2004. That would be a 120% increase in earnings from 2003 to 2004.
What PE will the market place on a company that is expected to grow earnings 114% this year, and will in all likelihood grow earnings more than 100% next year, with further growth in 2005? Is a PE of 50 x this year's estimate reasonable? That would value the stock at $15 today, which is only 23 x next years estimate and 3 x next years sales estimate. Actually, I think that the stock is worth more, but this is a reasonable estimate based on the company's guidance and a little number crunching into the future. |
