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Technology Stocks : Novell (NOVL) dirt cheap, good buy?
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To: Salah Mohamed who wrote (5111)11/23/1996 9:21:00 AM
From: doug doan   of 42771
 
How Might Ben Graham look at Novell?

Salah I took your numbers for projected earnings and rates of growth and then brought out Graham's often cited but seldom read book "Security Analysis" written in 1934. Grahman, of course is the patron saint of value investing and he developed a formula for helping to understand the intrinsic value of a company.

I used that formula and the numbers you supplied to calculate the intrinsic value of Novell. First here is the formula:

Intrinsic Value = E(2r+8.5) x 4.4/ Y
E= earnings per share
r= expected earnings growth rate
Y=current yield on AAA coporate bonds

Applying the formula to the 1997 expected earnings and growth I calculated that the mean intrinsic value for NOVL was $22 per share. The low was $7.18 and the high $44.

I think Ben Graham would also note that the large cash position of NOVL ($1 billion) would provide an added security. Of course, he would IMHO also point out that management is out of focus since the $1 billion is not earning anything for shareholders. he would argue that management needs to get that money working for long term value or get it back to shareholders if management can't realize at least a 15% return on those funds.

Anyway, not to make too much of it, but Graham's methodology I find to be persuasive and clearly indicitive that NOVL is a strong value play. I for one do expect $22 per share in 1997.
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