Dear Steve:
With respect to DCF analysis and stock price,
I would like to point out that Vogel is in fact
inviting the questions by saying that he has a
$97 ''target price,'' instead of a $97 DCF
value.
Why is the market value so different from
the DCF values predicted by the models of Vogel,
Grubman and Governali? Here is my take. The
DCF model is subject to large random fluctuations,
such as P-MP timing, interest rates for junk
bond financing, and the state of the economy.
Vogel attempts to deal with this uncertainty by
applying a very large discount factor to future
cash flow. However, I think a more realistic
approach would be to construct several scenarios
(optimistic, pessimistic) reflecting future
business conditions for Winstar. Then, the standard
deviation for such scenarios (which is probably large)
provides a useful metric on figuring how the
market values Winstar. Specifically, I would take
the values of Vogel, Grubman etc.. and reduce
them by at least one standard deviation to get
a reasonable stock price target.
Keep in mind that as WCII executes its business
plan, the uncertainty and standard deviation
will go down, and ultimately the stock price
will match the DCF model values. However, right
now, the DCF model probably fails to properly
capture the normal risk aversion of investors.
Best regards,
Bernard Levy |
