<Reg, I'm not asking for a course from you on anything, just an understandable explanation of your methodology>
Gerry, I included a link to a primer on DCF valuation. I don't want to seem like I'm not cooperating, but my posts tend to get very long and require quite a bit of my limited brainpower, hence I am reluctant to repeat info that is easily available through a hyperlink (hear that Bill!) or that I have already written. The spreadsheet that you are talking about has close to a thousand lines and was developed by myself along with three other "bulge bracket" analysts. It is actually a lot of work for me to explain how it functions when one can simply read up on basic DCF analysis through the link I provided. To answer your question, the interest rate inputs are Long-Term Tax Exempt Bond Rate, the benchmark treasury (30yr.), and Interest Rate on Cash Balance (t-bill, money market, or LIBOR depending on the scenario in question). The rate that you are referring to is the benchmark (30yr.).
<And does that mean that every time interest rates go up, Microsoft's stock should crash?>
The sheet provided cannot tell you if or when the stock will crash. That is the purview of technical analysis (if you believe in it). This sheet simply gives you a fundamental valuation of the stock in question. Many times a security trades at a premium or discount to it's theoretical or fair value (ex. NSCP).
<I could not find any price earnings multiples clearly labeled as such in your spread sheets. If I couldn't find them, how many other people who visit this site and click on your link do you think could not find them?>
Well Gerry, there is a column on the left which contains titles in bold for the columns to the right. I know there is a lot of information there, but it is clearly labeled. As for the average person understanding the spreadsheet, I can agree with you, but the actual fundamental analysis was directed more towards the Wall Street type crowd. I included an oversimplified analysis written in plain english for those who do not understand the the spreadsheets, for they can get complex. The premise of the entire E'zine was institutional analysis for FREE. It is quite possibly more in depth and accurate than most people pay several thousand dollars for.
<I understand perfectly what you are saying. But market cap is price per share times number of shares outstanding. If number of shares stays the same and price goes up, market cap will rise. >
You do not understand what I am saying. Let's assume we have a company that has issued $90 million in junk rated debt and $10 million in dividend paying stock. The stock goes ex divended @ $.01 per share, and the price adjusts accordingly, simultaneoulsy the company's debt is rated investment grade (lifted out of junk status) and the bonds now carry a premium of $100 above par. What is the market cap of this company? The company's shares have declined, has the market cap risen? If so, then this invalidates your statement. Your are thinking of market cap only in terms of equity, and this can lead to errors, especially if you attempt to link it directly to earnigns in some form or fashion. Imagins if you used your valuation methodology on GM or GE or any company whose market cap consisted of considerable debt. NSCP even has (or had) some vague debt on its books.
<I am not "strictly a PE man;" all I said was that for a mature growth company like Microsoft, I would not want to pay a PE that exceeds the growth rate.
BTW, what is my "lawyer side"?>
MSFT is in no way a mature company, with so many emerging markets and technologies in which it is exploiting. It is still very much in its growth stages. It is more mature than a one year start up like NSCP but don't mistake relative comparisons to absolutes. Oh yeah, remeber when I said lawyers were bad with numbers? Don't get mad, just playing with you. Hey, I'm bad at math as well.
<The problem is, you attack every argument with the counter-argument that Netscape is going to fail becaue of big, bad Microsoft. Then you say you have yet to see an argument that justiifes, etc. It is only natural that, since you believe Netscape is going to fail, you fail to see any argument that justiifes its current PE.>
None of the arguments you made come close to justifying NSCPs PE. The bit about me saying NSCP is goin gto fail is proof of one of the main reasons NSCP is able to keep such a high valution. Many retail NSCP investors are investing out of emotion and not reality (the traders are having a ball). I never said NSCP would fail (and have confirmed this over 9 times) and have repeatedely said that they will do very well in a niche market. What I did say was that they are overvalued inthe stock market and that they are outgunned by MSFT. Yet, no matter what i say, the NSCP euphoria translates my posts into what you just posted. I have noting against NSCP, as a matter of fact I am an entrepeneur sho would like to topple Merrill Lynch just like NSCP would like to topple MSFT, so I can relate, but I can also look at things objectively as well.
<When I buy Netscape, I am paying for a significantly higher growth rate than I will get when I buy Microsoft.>
There are many that say you should be paying for earnings and cash flow, and not necesarilly growth rate. What "grwoth are you paying for?" What I beleive you are paying for is the "call option on the industry effect" that Bill outlined. You are speculating n the fact that you have the next industry monopoly, which is understandable and plausible.
<On top of that, at 40 times earnings, Microsoft is trading at nearly twice its historical average PE (per Value Line). It's EXPENSIVE and RISKY because everyone loves it so much.>
Twice its historical average - BIG DEAL. History applies much less to MSFT now than it did before. Thier business and growth potential is changing radically. Where there markets seemed to be reaching saturation and maturity, they are now in their nascence. The internet has grown at 10 times its historical average, MSFT's enterprise revenue (the highest margins they ever had) has grown at 5 times its historical average (I'm guestimating these numbers). In the throes of the MAJOR technolgoy paradigm shift since the advent of the PC and entrance into new, high growth, high margin markets, one cannot look back into the past in an attempt to extrapolate into the future, for the revenue/growth potentials are much too disparate and the playing field is heretofore unchartered. IF one wnats the best way to value a stituation such as this, measure the rate at which the company is benefitting from this change in environment (how much more money is it making?) through DCF, and if you feel it is necessary, strap a premium on to the valuation. To be honest, this is the best argument I can come up with to defend NSCP's outrageous valuation.
<Now things are a little more bullish, which means Netscape is a bit more risky. But there is nowhere near the love-fest there is with Microsoft.>
Gerry, you must be out of your mind to make a statement like that. I don't care how bad you are with numbers, that one is ridiculous. Let's take a look at this,
MSFT
EPS = 3.60
volatility = 21.24
PE = 43.29
NSCP
EPS = .26
volatility =86
PE = 304
From what you see above, which stock proffers more of th "love fest" characteristics? Which one is more risky? |
