Gary, this is one of my hot buttons. Concluding that a stock is either over or under valued implies a reasonable valuation model. Presumably, such a model takes into account three variables: the projected stream of future cash flows, the riskiness of that stream of cash flows generally measured by the standard deviation of the estimated stream, and the long term risk-free interest rate. Perhaps you would be kind enough to share your model of Dell's valuation with us.
The alternative approach is to estimate the companies stock price based on growth of earnings, but that method suffers from the flaw of not relating the value to a suitable discount rate.
I have come up with a metric called CNPEG, which normalizes the price of growth against the S&P500. Using that metric, and using a 45% long-term growth rate (which many on this thread would claim is too low) I show Dell as a screaming buy. Using the estimate of the next four quarters earnings as roughly $2.60, we have a forward p/e of 46. But the p/e of the S&P is roughly 26 and sports only a 7% growth rate. So normalizing for the market price of growth we have a CNPEG of roughly 0.28. Put another way, if Dell were priced the way the S&P500 is priced today, DELL would be selling for roughly $434 per share.
So, it seems to me that either there is considerable risk included in Dell's current price, or there is considerable euphoria in the S&P500 which is not shared by Dell.
TTFN,
CTC |
