Hi EKS...About Revenues and Earnings Estimates
As I said before, I don't make my own estimates. All what I do is:
take what the company and analysts are saying and put it all together.
From these two sources I estimate revenues and earnings. FWIW, here is
the whole story:
From the Conference call on 11/26/96:
1. With sequential revenue growth going forward, the Novell financial
model will generate cash and earnings as a successful software company
should.
2. We don't anticipate spikes in this revenue flow. We'll build back
one quarter at a time. But we are well positioned to achieve
year-over-year growth in revenue and significant earnings improvement
in 1997.
3. Our outlook for the first fiscal quarter of 1997 is for sequential
growth in both revenue and earnings.
novell.com
Further, during the Q&A period they indicated that:
1. They are comfortable with the analysts consensus estimate between
$.80 and $.90. Here are Zacks estimates:
MEAN HIGH LOW NUMBER
FISC YR END 9610 0.35 0.51 0.31 21
FISC YR END 9710 0.85 1.00 0.65 23
QUARTER END 9610 0.17 0.21 0.15 14
QUARTER END 9701 0.18 0.19 0.17 11
2. Earnings growth will be higher than revenue growth because expenses
will not increase at the same rate as revenues.
Based on the above information, I assumed the following:
1. Revenues and EPS growth will be gradual (i.e.; no spikes).
2. In order to meet the analysts consensus estimate of $.85, revenues
should grow sequentially by about 5% (20% annually), and about half of
the revenue growth should go to the bottom line.
Using Q4-96 financial results for guidance and considering the following:
Tax Rate = 33%
Average Number of Shares = 348M,
revenues and earnings are estimated.
Taking Q1-97 as an example, here are the calculations:
Q4-96 Revenues = 384M
Annual Revenue Growth = .2 x 384 = 76M
Quarterly Revenue Growth = 76/4 = 19M
Estimated Q1-97 Revenues = 284 + 19 = 403M
Q4-96 Expenses = 316M
**Considering Q4-96 expenses included at least an additional 10M for
products introduction (ManageWise, IntranetWare, and GroupWise), it is
expected Q1-97 expenses will increase slightly, say 5M. However,
subsequent quarters expenses are assumed to increase by 10M.**
Estimated Q1-97 Expenses = 316 + 5 = 321M
Operating Income = 403 - 321 = 82M
Investment Income = 15M (Income form 1.0B)
**Note that they make about 15M pretax income quarterly on the 1.0B
which amount to about 10M aftertax (about $.03 per share). I am
mentioning this fact because several people are saying they are not
making any use of it. They are just investing it conservatively.**
Pretax Income = 82 + 15 = 97M
Tax Rate = 33%
Taxes = .33 x 97 = 32M
Net Income = 97 - 32 = 65M
Average Number of Shares = 348M
EPS = 65/348 = .19M
Here are the estimates for FY97 in comparison with Q4-96:
96A 1997E
Q4 Q1 Q2 Q3 Q4 FY97
Revenues 384 403 422 441 460 1726
Total Expenses 316 321 331 341 351 1344
Operating Income 68 82 91 100 109 382
Investment Income 15 15 15 15 15 60
Pretax Income 83 97 106 115 124 442
Taxes 23 32 35 38 41 146
Net income from ops 59 65 71 77 83 296
Avg Shrs. (mil.) 346 348 348 348 348 348
EPS-Operating .17 .19 .20 .22 .24 .85
Comparison of Q4-97 with Q4-96 provides growth rates as follows:
Revenues growth Rate = (460-384)/384 = 20%
Earnings Growth Rate = (83-59)/59 = 41%
What PE multiple would you give this stock?. I would say the average
of these two growth rates, say 30. Should the company deliver the
above results, the stock would be trading around $25 (30x$.85=$25.5)
in 6-12 months from now. Note that the above estimates agree with what
the company said and the analysts projections. IMO, these are
achievable results. What puzzles me is that the analysts didn't raise
their rating on the stock after Q4-96 results. Also, I think they have
very little confidence in their own numbers and they are taking the
wait-see approach.
Clearly, I am disappointed with the recent stock price action since I
expected an up trend after the latest quarterly results. My best guess
is that three factors are weighing on the stock:
1. Unwinding of positions taken because of takeover rumors
2. Individual tax selling
3. The wait-see approach of analysts
Regardless of the stock price action, my approach is to evaluate the
quarterly results and determine what to do. According to the above
estimates and Q4-96 results, this stock is a screaming buy. I will
watch the quarterly revenues and earnings closely, if they meet the
above estimates (more or less), I am in, If not, I am out. There is no
reason for excuses or screw-ups anymore.
Just for the purpose of comparison, a summary of Morgan Stanley
estimates are provided below. The analyst wrote a very positive report
after visiting with the management, but his estimates are very low (I
guess he is taking the wait-see approach). His FY97 estimated
quarterly revenues and EPS are lower than Q4-96. Should his estimates
be accurate, there is no reason to hold the stock. By the way, his
estimates for Q4-96 were 367M in revenues and $.15 for EPS.
Morgan Stanley Estimates
96A 1997E
Q4 Q1 Q2 Q3 Q4 FY97
Revenues 384 349 350 356 374 1429
Total Expenses 316 290 297 298 311 1196
Operating Income 68 59 53 58 63 233
Investment Income 15 15 15 15 15 60
Interest Expense - 1 1 1 1 4
Pretax Income 83 75 69 74 79 297
Taxes 23 24 22 24 25 95
Net income from ops 59 51 47 50 54 202
Avg Shrs. (mil.) 346 335 330 330 330 331
EPS-Operating .17 .15 .14 .15 .16 .60
I would appreciate any comments you (or anyone else) might have.
Regards
Salah |
