Yes, it is interesting. If you take the estimated PE of 12.84 times
the FY 98 est. EPS of .34, you get $4.37 share price. But I forgot,
PE doesn't matter.
BTW, for those of you who didn't know, analysts sometimes use a PE
equal to anticipated growth rates because of a formula for
calculating share price. That formula is
EPS
Price = --------
r - g
EPS = next year's estimated EPS
r = opportunity cost of capital
g = anticipated growth rate
formula also assumes that company will exist in perpetuity.
So applying the formula we get:
EPS = current estimates are about $.20
r = let's use 15% to give IOM the benfit of the doubt (usually it's
a lot higher
g = since this is a perpetuity growth rate, let's use 8% (once again
giving them the benefit of the doubt)
so we get:
Price = current fair value = .2/(.15-.08) = $2.85 per share
let's be even more optimistic:
EPS = $.35
r = 15%
g = 10%
Price = .35/(.15-.10) = $7 (which is what it's priced at now,
coincidentally)
Anyway, to sum up, analysts oftentimes use growth rates for PE,
because they are thinking this approximates 1/(r-g). In the above
case, 1/(r-g)= 20. So using 20, we could get anywhere from $2.85 to
$7 depending on what the consensus of all investors is.
I hope this helps some of you, when you think about how to derive
fair value for a stock. Good luck investing! |
