My comments:
It's difficult to project future sales growth based on the past growth rates. One of the reasons that Coherent's earnings increased at a greater rate than its sales was that the product mix shifted toward echo cancellers from conferencing systems. The shift is still taking place, as the price competition in the audio conferencing segment minimizes its bottom line impact. In fact, if you eliminate conferencing products from the mix, Coherent's sales have increased at a greater pace than overall revenue growth implies. Even so, I think that Coherent's sales can increase by at least 30% for the next several years, with earnings growth exceeding 35%.
Historically, CCSC has had a much higher P/E than any number you quoted, and certainly higher than 41. Going forward, CCSC must begin to beat analyst estimates, in order to gain a higher multiple and more stable price momentum. I think this will happen over the next few quarters. 1998 should be very good for Coherent. I believe it's possible for EPS to reach $1.20 in 1998.
As far as price predictions, it all depends on how conservative you are in applying valuations to the stock. For example, if you believe that high-growth tech stocks should be valued on EPS in the next 4 quarters, you get a much higher value than looking at a trailing EPS.
2 perspectives:
1998 EPS: $1.20
1997-98 growth rate: 38%
38*1.20= $46 price at end of 1997.
This may work to excuse a high price in a momentum stock, but it's clearly unreasonable as a price target for CCSC. $46 would be a trailing P/E of 53.
The other way is to look at expected trailing earnings for year-end 1997. I think .87 is possible. Even though the growth rate for 1996-1998 would be 38% each year, the market has neither witnessed nor appreciated CCSC's capability for consistent earnings growth (at least not recently). As a result, a P/E of 38 is unrealistic, even for trailing earnings. Based on the current market interest in CCSC, I believe a trailing P/E of 35 is reasonable, implying a 1997 year-end price of $30. It's possible that 1998 could see the mid-40s, as long as CCSC can maintain earnings growth in the mid-high 30% range.
Also, net margins should continue to improve through the next several quarters. If CCSC doesn't break out of this price range eventually, I wouldn't be surprised to see it acquired by a large communications equipment company.
Todd |
