Patrick: I see that I read your post too hastily, perhaps because you agreed with Skeptic (who, despite "always reasonable" posts, is prone to mistakes, superficial analyses, and facile textbook valuation methods). I now see that you are trying to take into account the windfall y2k earnings in the base business, which is a good idea.
So that we (including Skeptic) can see that according a PE of 1 to one-time earnings windfalls can be a bad error, perform the following thought experiment. Go back in time, say to 1985, and ask yourself: If Warren Buffet had infused Microsoft with a lump sum of 100 million dollars at that time, what would have been the market reaction? Would it simply have judged the market cap of MSFT to now be its previous market cap + 100 million? No way. The market would make an attempt to judge what Gates, in that particular environment of feverish PC-industry expansion, could do with that money. In other words: What was the present value (then) of 100 million dollars in Gates's hands at that particular time?
Now, the market wouldn't have given Gates his current PE on that lump sum either, for it usually takes time to set plans in motion. But if MSFT had been growing at 60% per year, this lump sum could surely have been grown at 30% per year (minimum) for the foreseeable future--say 10 years. Discount for inflation or T-bill rate of 5% per year. You get a real growth rate of 25 % per year. In 10 years, you multiply your initial investment over 9 fold, in present dollars. That equates to a PE on the windfall of 9, and all of these estimates are very conservative (and things don't stop after 10 years as we all know with MSFT).
Furthermore, everyone seems enamored of the formula growth rate = PE (ask the Gardners, hah!), so the market is likely to value Gates's lump sum at 30x100 million or greater.
Now, TAVA is not MSFT and Jenkins is not Gates. Yet we know TAVA is in the process of rapid expansion in a very fragmented industry. Can Jenkins put the y2k windfall to work to great advantage here? You bet. So what PE should be accorded this windfall? I'm still not sure. If TAVA can grow this part of its capital at 20%, then a PE of 20 on that sum is not farfetched.
Wade
PS: Those who are saying a PE of 50 should apply to y2k earnings are, ahem, being a little extravagant. However, the market is known for being wildly extravagant at times. And "embedded chip fever" has still not caught on. |
