William, your comments are well taken, but I think for some of the people on this thread it would help to put some numbers to the concepts. Dell is currently trading at about $84. According to Zacks, the concensus earnings estimate for the next four quarters commencing 1/98 (since this quarter is virtually history) is $3.00, which yields a forward looking P/E of 28. The concensus five year growth rate is 29.2%, so Dell is not a high P/E stock when compared to its prospective growth. If Dell can exhibit substantially higher growth than the forecasts we will indeed see higher P/E's. Conversely, if Dell's numbers disappoint we will see P/E contraction. This observation is true for every growth stock.
Exactly what the relationship between growth and P/E is unclear for a variety of reasons. First, long-term interest rates exert a huge effect on valuations. Historically, when that rate was about 9% the P/E on the DJIA was around 6x, but when the rates were around 6% the P/E shot up to approxiamtely 17x. Second, the perceived risk of the business segment plays an important role. DD manufacturers have typically demonstrated P/E's well below other component manufacturers - probably because the investment community views these as commodities prone to severe price competition. On the other hand, software houses usually command a premium because their products are proprietary. Other factors, such as the liquidity and financial strength of the company also play an important role.
For these reasons, I find it a waste of time to try to calculate the "value" of a growth company. Instead, I am content to assume that it is properly valued and will appreciate at the same approximate rate as its perceived future growth. That's why I have cautioned people on this thread about their unbridled enthusiasm for Dell, while at the same time questioned other people about their conclusion that Dell was "over-priced". If I can look forward to an average appreciation of 29.2% over the next five years (which implies a stock price of $302) I will be very satisfied.
Regards,
Paul |
