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Technology Stocks : Trimble Navigation
TRMB 80.26-3.7%Dec 12 9:30 AM EST
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To: Steven Redman who wrote (2666)8/6/1998 5:41:00 PM
From: Yin Shih  Read Replies (2) of 3506
 
As Skip and Arun have said, this model seems unrealistic. First we have the uncertainty about this year's earnings, then we have the issue of hidden assets and hidden liabilities, then we have the problem of manufactured earnings or losses (look at Sunbeam or Disney for some recent examples of earnings manipulation).

However, I fault it from a slightly different perspective. The basic approach in this model is to try to average the last 3-5 years earnings growth rate, put it into a certain P/E category as a result, adjust for inflation and bond rate, then take this year's earnings as the basis for value.

The immediate problem with this, besides gross oversimplification, is that you don't really care about what the company did in the past. A track record may make you feel more comfortable, but you're really buying future earnings and "past performance is not a guarantee of future results". There are lots of high-flyers with 30-50% growth rates that suddenly dropped to 10-15% with a corresponding collapse of stock prices. There are also lots of turn-arounds with 0% or negative earnings growth for 2-3 years that start earning again and zoom upward once they've proven they're back on track.
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