PSFT is selling at quite a high price. For Nov 7, Yahoo is showing
P/B of 22.91, P/E of 117.78, and P/S of 11.73:
biz.yahoo.com
I suppose that some of the people buying this company don't
understand the implications of these numbers. P/S is the Price
to Sales ratio. Apparently the company has sold about $5.56
per share over the last year. It must be really, really hard to
find someone willing to pay $65 or so for a stock with such
small sales. Unlike Microsoft, which has a much higher
profit margin on sales, PeopleSoft only makes about 10%.
The reason is that they don't have a lock on their market.
PeopleSoft has competitors that will keep their margins down
in the present and probably decrease them in the future,
after the high growth begins to slow down. This always
happens to software, especially as customers begin to
have their needs fully met.
Their earnings right now are only about 55 cents per share.
In other words, there is an incredible amount of room to the
down-side available for these shares to slide.
Why are investors paying such a high price? The more
rational investors will tell you that the expected growth is
high enough to make this a good buy and hold. Bad
news for 1998 pretty much ruins that growth. It might
be useful to scan the growth the company has had so
far in terms of sales per share:
1993/92: 66%
1994/93: 87%
1995/94: 96%
1996/95: 81%
1997/96: 75% (Value Line estimate, September 5, 1997)
1998/97: 40% (same)
If revenue growth does decrease to 40%, then the stock
shouldn't have a P/E much larger than about 40. With
97 earnings of .80 or 98 earnings of $1.15, we're talking
about a $32 to $46 stock. But that's without any bad news...
If revenues don't increase enough to keep that P/E in
triple digits, the only other way is for earnings to grow
as a percent of sales. Looking at the Value Line
estimates, it is clear that the company historically ends
up with earnings of less than 12% of sales, and that
Value Line expects this percentage to decrease to
11% for 1998. Consequently I am pretty safe from
their earnings exploding upwards.
PSFT has just announced a 2 for 1 stock split. It might be
a good thing to look at what happened to their stock the
last time they split it. It was 4Q96, and the stock was
trading in the mid to high 40s. The split was followed
by a decline in April 97 to the low 30s. The last company
I bought puts on that announced a stock split was TXN,
and I made some good coin on that deal. In fact, TXN's
previous stock split had also resulted in a share plunge.
What's going on, is that investors are buying high-flying
stocks and selling them on the news of the expected
split. After the split news is out was a great time to sell
this stock last time, and also TXN on the last two times.
We will find out if this is a good time to sell PSFT over
the next 3 months. By the way, here is a URL for PSFT's
chart. The hump in the middle is when they did their most
recent 2 for 1 split:
tscn.com
Here is a URL for a TXN chart. The hump in the center
is their last split. The hump on the right is when they
announced their current split:
tscn.com
TXN and PSFT are both great companies, they are going
to be here forever, only right now their stock prices have
gotten out of line. I don't mean to compare PSFT to TXN
in any way other than their histories upon stock splits.
Before I go short a stock, (and puts are a safe form of short,)
I like to check how many other players have already shorted.
I don't like to get in too late in the game, cause then you can
have a short squeeze. The October 97 short interest was
5,067,744 shares. This seems like a lot, but it is only 3.39
times their average daily volume. This is small enough for
me to be sure that no short squeeze is going on. In addition,
they have something like 110,000,000 shares outstanding (all
numbers before the split), so the short interest is still quite
small. Here is a URL for short interest in Nasdaq stocks,
which you may find useful:
viwes.com
Another thing I like to check is that the stock has recently
been much cheaper. Investors have a tendency to sell
their winners because they hate to leave money on the
table. But they don't like to do that until they are pretty
sure all the gains are through. Now PSFT traded in the
low 30s this year. It might be nice to lock in some gains,
especially with volatility now so high in the stock market
in general. Instead of doing this by selling, an investor
can protect himself by purchasing puts. This avoids
having to pay taxes for 1997, I believe. But the effect
of put purchases is to drive the stock down same as a
short sale.
I don't have to buy puts expiring in mid 98 in order to
take advantage of bad news scheduled that far out.
The reason is because the stock market takes them
into account long before they occur. If the stock is
still up in early January, I'll consider putting it again
at that time. But right now, I'm hoping to clock some
coin between now and then. :) Of course, puts are
pretty hard to make money with. But I've been quite
lucky with them.
-- Carl |
