Juback has another article at MSFT Investor site.
Says the following ref PFE
Comparison with a company's own history. Pfizer currently trades at a price-to-earnings ratio of 57 on trailing earnings and a P/E of 47 on projected 1998 earnings. Going back to 1981, I couldn't find a year when the stock traded at an average annual P/E ratio above 33. And that was last year. For most of the past 15 years, this stock has traded at multiples averaging 15. The run-up from those levels began in 1995, when the average multiple was 19.6, continued in 1996 when it hit 24.5, and climbed above 30 last year.
Now, I grant you that Pfizer is going to grow earnings faster in 1998 and 1999 and for the next five years than it has in the past. Analysts project earnings growth of 18.8% in 1998, 19.3% in 1999, and 17.10 on average for the next five years.
But Pfizer's earnings growth rate over the last 10 years was a very respectable 11%. Over the last five it was 16%. So the market has decided that a projected increase of 1.1 percentage points of earnings growth over the next five years is worth a multiple almost four times greater than anything in Pfizer's past prior to 1995.
If Pfizer delivers the $2.02 a share projected by analysts for 1998, I calculate a target price of $115. That's a $20-a-share gain, or a 20% gain, if the stock maintains its current price-to-earnings ratio of 57. At a multiple of, say, 30 -- about twice the stock's long-term
average price-to-earnings ratio -- the target price is $61, a $34-a-share loss. A 36% tumble.
To complete this analysis, you'd have to project Pfizer's earnings growth out beyond the one or two years that marks the work of most analysts. Pfizer stock can sustain a P/E ratio at current levels as long as earnings growth is accelerating. But look at those numbers
again -- 18.8% earnings growth in 1998, 19.3% in 1999, but a five-year (1998-2003) average of just 17.1%. If that's correct, investors are looking at decelerating growth rates beyond 1999. No way that will sustain a 56 price-to-earnings ratio.
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Keep in mind that target prices and valuations are moving bars to guide sell decisions. If Pfizer, say, runs up to your 12-month, $115 target price in just three months, that's not an automatic "sell" signal. Rather, it's time to sit down and re-do your calculations. Maybe something has changed -- earnings growth has accelerated, for example -- that justifies a hike in the target price. Maybe that new program of cost-cutting is boosting margins. Only when you re-do the calculations and it seems that all the good news you can see -- and
more -- is already reflected in the current price does a stock that has hit the target become a sell. |
