<<it will take about 2 to 3 quarters before the stock will show a decent PE (about 50)>>
Mike, I don't look at PE's when evaluating growth stocks. Rather I primarily look at the P/S ratio relative to the EGR. If you assume ORFR can continue to conservatively wrap up sales and earnings growth of at least 40% going forward (that's the big if, but the last five years have been above that rate, so that's not so outrageous an assumption), then you can value the current price ($18.75 ask) as follows -
Based on sales growth of 40%, sales for the next 12 mos would be around $30 mil. With 6,298,000 shares, that gives you next year's sales per share at $4.71. Based on my valuation model, any P/S ratio at 10 times the growth rate is attractive, and 7-8 times very attractive. At 40% EGR X 10, you get a P/S ratio of 4 . This means 4 X $4.71, or $18.96 per share. Therefore, I would rate ORFR as "Attractive" and buy shares up to that point, and I would sell if 20 X EGR (or 8X sales) is reached, which would be $37.68.
Of course, you know stocks can reach valuation extremes past either of these limits, and you would not use this alone as a measure, but for me it is the most important guage to value growth. I try to find compnaies at 7X the growth multiple, but I am more lenient if a solid track record (like ORFR) of earnings growth is established.
My guess is ORFR can beat 40% EGR and SGR, and I would use 50%, which means that today's stock price is extremely undervalued relative to the company's growth rate. You must adjust any long term model somewhat for the fact that no compnay can grow at accelerated rates forever, but for short term traders like myself, it works fine.
Comments anyone on this analysis? Fire away...
regards,
Louis |
