<Just look at other companies in the same sector as AMD (semiconductors), look at their PE ratio, and determine an average PE for those companies.>
Earnings, therefore P/E's are VERY inaccurate measures of market value. This is no theory, it is simple fact, go look at the historical returns and compare them to the capitalized earnings. The correlation would be much less than you make it out to be. Are you a experienced in this or are you making an assumption?
<And then get a consensus number of all the analysts covering AMD on the projected earnings for 1998.>
Sell side analysts consensus estimates have an absolutely atrocious track record in terms of accuracy. Even if this were not the case, they are still projecting earnings and not risk-adjusted cash - big difference in an industry which relies heavily on depreciation, capital expenditures,deferrals and reserve accounts, amortization, R&D and upfront marketing investments. Have you forgotten your GAAP rules and how they so easily distort after tax cash figures? Remember it is the promise of money that counts, not accrual accounting figures.
<Multiply the average PE ratio by the Earnings and you'll come up with a stock value. If the earnings fall short of analysts expectations the stock will fall, if they outpace analyst expectations, the stock will rise. It's as simple as that.>
Do you really think it is that easy? Why in the world do you think those sell side analyst's reports and recommendations are free? Who do you think subisdizes them and why? Why do buy side institutions hire there own analytical staff if it is as "simple as that"? Your statement is analogous to me saying "to make a AMD stule x86 chip all you have to do is press some silicon together, get someone's free opinion on its speed and ship it as is, its as simple as that."
Where have you taking into consdieration the risk and quality of cash flows and earnings? How about the oppurtunity costs of putting your money in other investments. If you have not quantified risk, how in the world can you truly quantify "real" reward.
<AMD is in no danger of going bankrupt so there is no need to determine what the assets are worth to figure out AMD's net value.>
Value = market value of assets + the present value of future cash flows adjusted for the oppurtunity cost of the capital used to generate those future cash flows (this is a fancy was of saying risk).
<A stock's value is completely based on PE ratios and on projected earnings.>
Prove it. If that is the case, everybody who has a full service brokerage account must make an absolute killing in the stock market. |
