Patrice, I don't see the positive terms at all in the AOL Motley Fool posting. If anything, it is confirmation of what I have been saying-- namely that AVID is overvalued at $19/share. The Motley analysis reveals it is about 32% above its fair value. For those of you who haven't seen the post, here is the last part of it which deals with the numbers (the first part is mostly introductory and historical info, but I encourage everyone to read the entire post):
Motley Fool (AOL) post 8/6/96:
"...On Monday, Avid beat estimates, improved revenue and gross margin, and made a big step to a return to the "power-lunches at Spagos" set. Next quarter, according to First Call estimates, is to be the turn-around for Avid, a return to profitability. While Avid (the company, not the stock) will most probably never be considered a high-growth, high flyer again, it's not time to retire the old horse just yet. With the analyst mean estimate at $0.01 EPS, Avid can either fizzle like so many Hollywood bloated, big budget bombs or return somewhat triumphantly in what can only be called, in that wonderfully glitz-town parlance, a "comeback."
The point is that Avid is a turnaround candidate to say the least. The problem with turnaround candidates is that it is more difficult to value them than established or growing companies. Negative earnings make " earnings growth" meaningless and thus PEGing the stock difficult. Future earnings estimates are often difficult to come by or vary widely depending on the prospects each analyst attributes to the turnaround. Nevertheless, let's look at the numbers and try to PEG AVID.
The good news is the phenomenal growth AVID has enjoyed in both revenues and EPS over the last 5 years. However, the growth has been erratic with 1994 accounting for much of the growth. This is reflected in the negative EPS momentum of the company.
A valuation of the company shows a price to sales ratio of 0.99, right in line with the average mid-cap company. Its price to book is somewhat lower than the average mid-cap company, while its P/E is presently unfathomable due to recent earnings losses. As Fools, we need to take a shot at PEGing AVID.
The price is easy: $19 1/8
Trailing 12 mo. EPS. Here are the last 4 qtr. Results: -0.17; -$1.08; .07; 0.43. Boy those negative quarters are a real monkey wrench in the PEG. AVID lost so much money in the first 2 quarters of 1996 that a trailing 12 Mo. EPS is negative. But wait, there was a charge in the first quarter of 1996 of 0.96 a share for product transition and restructuring costs. What I'll do here is add that one time charge back. This way we can treat one of the bad quarters as an exception and hope a turnaround is on the way. Trailing EPS is: (0.17)+(1.08)+0.07+0.43+0.96 addback= 0.21
Year over Year forecast growth. IBES has an estimate of 0.54 for AVID for year end 1997. However, we must forecast out to the 2nd quarter of 1998. Those forecasts don't exist. Using a trend line for the next 2 quarters, I'll forecast trailing earnings of .60 for the 2nd quarter 1998. Thus the square root of .60/.21 minus 1 will give us our growth rate which is 69%.
Now, given ALL this information, what is the formula that we use to determine the PEG and what would the resulting PEG be?
PEG= [Current Price/Trailing 12 Mo. EPS] / Year over year forecast growth rate. Putting it all together we get [19.125/.21]/69=19.125/(.21*69)=1.32. We determine that AVID is 32% above its Foolish Fair value of 1.00--the point at which P/E and Growth rates are equal. We can interpret this PEG to view AVID as priced slightly ahead of its expected 2-year earnings growth rate.
Here's the Pitch, for a DOUBLE. . .
On MONDAY, AUGUST 19th, where will Avid Technology (NASDAQ:AVID, 19 1/8) close:
a) above 21, up on good news?
b) from 19 to 21, investors show an AVID interest?
c) between 17 and 19, selling on the news?
d) from 14 1/2 to 17, post-production blues?
e) below 14 1/2, coming back to Foolish fair value?
Whew...and you thought investing was easy! There you go--take a swing at it." (end)
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I vote e), coming back to Foolish fair value. That's when I'll consider buying again.
D. Kuspa |
