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Strategies & Market Trends : Value Investing
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To: Paul Senior who wrote (58233)10/20/2016 7:01:26 PM
From: staring1 Recommendation

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E_K_S

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Here's the approach I usually use:
Normalized EPS (based on average ROE) = average ROE over the sample period * BVPS (latest)
P/E ratio based on the normalized EPS = Current stock price / Normalized EPS (based on average ROE)
cfaglossary.blogspot.pt

The problem with this approach is that companies with high ROE barely need equity to operate. Therefore, the book value of equity in a given year affects the year's measure with no relation with operational performance. Therefore, I use an approach based on Net Income Margin:

Normalized EPS (based on average NIM) = average NIM over the sample period * Sales (latest)
P/E ratio based on the normalized EPS = Current stock price / Normalized EPS (based on average NIM)

One limitation of this approach is that does not account for potential unsustainable levels of Sales (Sales normalization would be recommendable, for instance through a regression). Nonetheless, I does not seem SYNT is having sales levels particularly abnormal compared with recent years, so I passed that adjustment.

2006-12 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-12 2014-12 2015-12 TTM
Revenue 270 338 410 419 532 642 724 825 911 969 996
Net Inco 51 63 87 118 114 123 186 220 250 253 264
Margin 18.89% 18.64% 21.22% 28.16% 21.43% 19.16% 25.69% 26.67% 27.44% 26.11% 26.51%

The Normalized EPS for SYNT = 23.6% * 996 / 84 = 2.8
Normalized PE = 22.63 / 2.8 = 8.08

Even in a scenario that the company does not grow this multiple is very attractive. If it maintains a fraction of its growth in the last decade, then the company is a great value opportunity.
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