Your example begs at least two questions:
1. What were they earning on the $50,000 they spent on their stock?
I have a savings account earning 5%. If their $50,000 was earning 5%, that would be $2,500, exactly half of the profit you hypothesized. Buying back half the stock reduces their number of shares and profit both by half, so no change in EPS.
2. If doing it once was good, why not do it again?
In your example, they bought half the shares at $100 and the price doubled. Now for the same amount of money, they can buy half the remaining shares at $200 and the price should double again, right? How about a third time? If they just want to play the stock market, they should liquidate their fabs and negotiate a merger with H & Q.
> if a company had a net margin of 5%, a share price of $100, and
> 1000 shares outstanding, and was making $5,000 per year on $100K of
> sales, I'd rather they spend $50,000 buying back half the stock,
> giving earnings of $10 per share and driving the share price to $200,
> than invest the $50K in growth with 3% margin and the same sales rate
> (i.e. additional sales of $50K), which would generate only $1.50
> per share in additional earnings.
Regarding the following, won't you agree that it would be more exciting if they were investing to equip their factory and meet demand rather than buying their own shares?
> they have a lot of excess floor space to accommodate growth, but
> have not purchased equipment to fill it.
> ...
> Anyway, they can (and I'm sure they plan to) resell the shares if
> they need to buy equipment...
If they know how to buy shares and always sell them at a profit, I guess they should do the merger with H & Q! That's certainly better than most readers of this thread can claim.
Let's not forget that they only bought $187,500 worth of stock, an amount we ought to agree is "immaterial". And since it's been six months since then, no doubt they have already sold the shares to employees through option exercises or the stock purchase plan. |
