Nero,
thanks for the response. It certainly looks like fiscal 1997 is going to be a stumble in the year-to-year improvements we've been seeing. Revenue, earnings, ROE, net margin falling. The question is, is this a secular trend,
or is it a temporary example of EK spending lots of money and time on a
market that isn't quite ready for them yet. Are people buying digital cameras
in large volumes yet? I don't know...but I've never met anyone who has yet.
I believe the latest quarterly announcement backs up your claim that they
haven't been able to make a buck in this crucial business. But should we
really be expecting them to yet? It seems mighty early in the game. But you
are right in suggesting that the long term future seems uncertain.
As for valuation, I work under the assumption that the true payoff to owners
of a going-concern is the free cash flow thrown off by operations. Companies
that bring in a lot more cash than they need to reinvest to maintain current
operations and grow into new ones (i.e. non-capitally intensive) often have
an intrinsic value not well quanitified by a P/E ratio. This excess cash can
be used to pay down debt (taken care of), buy back shares or make
strategic aquisitions. All of these can enormously and directly impact the
return that shareholders see. Based on the cash that's been thrown off in recent
years, and projecting conservatively into the future, the present value of
future free cash flows suggests that an investment at current prices will pay off
handsomely.
BUT, that assumes moderate growth in free cash flow, not decline. So before
one blindly accepts the results of the above analysis, one must be extremely
confident about such growth occuring. I'm not there yet. But a couple of poor
quarters during the transition is not necessarily evidence that that growth
won't happen. In fact it may be offering the opportunity to invest at low prices
for when that growth begins.
I'm not suggesting that this stock won't drop more. Signs sure seem to point
that way. But short term thinking has always dominated short term price
movements. For all I know, these next two poor quarters could drive the
price down to $10. But if we can figure out in a general sense what is likely to
happen over the next 10 years, we could profit greatly if we're right.
You feel that this year's stumble looks ominous for the future...I'm not so sure.
But I'm certainly not a rampaging bull here either. I just think that IF they can
pick up the pace again within the next couple of years, this price will look very
cheap in retrospect. But I need to learn more to decide if I think that IF should
be changed to a WHEN.
As for the valuation comparison with IBM...I find IBM extremely undervalued for
a growing company. But again, I'm can't say with any confidence that they will
continue to be a growing company. But P/E ratios are a lot of smoke and mirrors. You need to see what the real E is, and figure out what assumptions
are appropriate.
The reason why I'm so interested in EK is that it's tough to find compelling
values in today's market. I guess your right - it's kind of speculative, but I'm
trying to see if I can understand what they're doing well enough to take the
speculativeness out of it. The jury is still out though...
Andrew |
