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You do state that the market anticipates and that is very important and the key to your ongoing discussion. Earnings are past history. They only reflect what has happened and not what is going to happen. So, when you use a p/e as a measurement of a stock's value, you are simply using a number (the earnings side of the equation) that is past history and is really somewhat meaningless. Each company is unique but you should consider market share, technological position within the industry, the demand for product present and future, R&D spending, financial strength of the company and the management's ability to deliver in the past. These types of things will allow you to determine whether Seagate or any company can deliver 'normalized' earnings in the future. My feeling is that you should consider not only 'normalized' earnings but "PEAK" earnings. You can guesstimate this by applying a peak profit margin to anticipated future revenue streams and, then, extrapolating the potential earnings power of the company. Seagate is a commodity producer in a cyclical biz. Right now, you are in a down cycle. Peak margins, according to Value Line, over the past ten years have been around 16% operating and 7.5% net (after taxes). On 10 bil in revs that would mean 750 mil in earnings and over $3.00 per/share earnings. (Value Line estimates up to 16.5 bil in sales and over $6.00 in eps by '01) At an average p/e of 12x you can figure anywhere from 36 to 72. So , if you have time, money and patience....and.....if you believe in the technology, management etc., then you can make a very strong case that Seagate is quite undervalued at this juncture. |
