I think you are using PE incorrectly. PE is just the ratio of the stock's price to its earnings (hence PE: price/earnings). That will vary depending on its price movement and its earnings growth (or lack thereof), but the actual PE has very little to do with predicting future price growth or determining a stock's intrinsic value. You can calculate a new PE every day by dividing the current price/share by the current earnings/share number, but the new number doesn't tell you anything you didn't already know (i.e. that the share price has gone up or down, changing the ratio).
I have seen calculations that assume a reasonable PE at a certain level to determine future price appreciation, but the reasonable PE may be very different from the actual PE. (Look at the recent posts on the yahoo CADE thread to see what I mean). What is a reasonable PE for a given company depends on a lot of factors (industry sector and where a company is in its history (new startup in an old sector, new startup in a hot newer sector such as telecom or internet, etc. are just two of many that may come into play). When people talk about a company being overvalued, it is often with reference to other leading companies in the sector (i.e. this company has a higher PE than most within its industry group). The next part of the discussion is, then, whether there is something about a particular company and the way it does business that might justify that high PE continuing. Of course a hot sector can become overvalued as a group, or the market in general can be overvalued, which is what Ol' Doc Greenspan keeps popping off about, but neither of those things tells you much of anything about a given company's prospects beyond the immediate market climate within which it is operating.
Getting back to your original question, the reason the math doesn't work out is that the projections of price growth that you a referring to don't assume PE will remain constant. I haven't myself tried to confirm the projections or how they have been calculated but I suspect that the calculation either ignores PE ratios entirely or assumes an increase in the PE. Remember, TLAB's earnings came out just recently and they showed an increase, so that, right before the earnings announcement the PE calculation would have been based on a lower earnings figure, resulting in a higher PE number. Also, if you researched this I think you would find that, although TLAB's PE seems high compared to what the pundits say is an acceptable PE (like below 20, for instance), compared to other telecom-related companies its current PE is actually rather low (I know that CSCO and LU currently show PE rations over 100). In other words, even if you factor PE into the calculation of its future share price or value, a reasonable PE ratio for TLAB may be quite a bit higher than 49.
I know I sound like I think I'm some kind of expert here, which I most definitely am not. These are just some things I've absorbed from reading various things as I have tried to educate myself as an investor. One thing that seems constant in everything I've read, and that includes some pretty heavy material, is that current PE ratios, while referred to a lot in the media, are not something to rely heavily on in making investment decisions.
Sorry this is so long-winded and good luck in your investing. For what little it is worth, IMMVHO (in my most very humble opinion) it looks like TLAB is at or near the bottom of a minor reversal and this is probably a good buying opportunity for a very strong growth stock. Good luck! #8-}> |
