My math and accounting skills are suspect, but my instincts tell me that KO's p/e ratio is
suspect too. Are you saying that p/e ratios don't matter at all? Or that if KO keeps growing at
15% for the forseeable future that it's ok to ignore its p/e ratio? Seems to me that given markets
tend to have a given p/e ratio that provides a ceiling or yardstick for investors. We're at
historically high p/e ratios, and I don't see IBM trading at a p/e of 24 (absent revolutionary new
products) if the market p/e reverts to the mean, which a lot of people see happening. Do you
think there's a margin of safety with IBM at a p/e of 24?
If you have a minute, I'm curious to see what your spreadsheet would give as a fair market price
for KO.
TIA.
----
OK, let's try again. I'm not saying PEs don't matter. They do very
much matter, but simple rules like PEG are useless in determining a
fair PE. You have to crunch the numbers, based on your projections.
Now as to Coke, I don't follow it, but to follow your growth
assumptions (which I neither agree nor disagree with, since I don't
follow the company): Assume 15% growth for 10 years, 5% thereafter,
9% discount rate: "fair" value PE is 40 (cash earnings, not reported
earnings). Now Buffet likes to buy stocks at a 30% discount, so if
you ASSUME KO will grow cash earnings at 15% for 10 years, and can buy
it for 28 times their current cash earnings, then it would be a buy,
following Buffett's methods. You can't assume growth of 15% forever,
because then the value of the stock is indeterminate (i.e. infinite).
In other words, if you really, really believe KO will grow cash
earnings at 15% per year, FOREVER, then, no, the PE doesn't matter,
just back up the truck and keep buying shares. Personally, when
I do my own evaluations/projections, I never assume a high growth rate
(i.e. greater than 5%) for more than 10 years, after which I assume
5%.
Regarding comparing PEs of stocks (you mention IBM) relative to the
market. I don't buy the market, so I don't care about the market's
PE. I buy stocks, so I only care about the stock's PE. Markets
fluctuate, and if you plan on holding a stock for a while, you are
essentially making assumptions about the company's long-term growth
prospects, and in that time, the market could go through many cycles,
none of which I feel capable of predicting. Remember what Buffett
says regarding stocks: "Short term, the market is a voting machine,
but long term, it's a weighing machine". What he means is, short term
there are hundreds of factors that can affect a stock, but long term,
it's the growth of the earnings that matters! So find excellent,
well-run companies that have good management and great products, which
have a good track record of growing profits, and then wait for the
market to price them stupidly (low). It will happen eventually. And
when it does, load up.
Regarding a fair market price for KO, I don't follow it, so I couldn't
say. The main 3 things it depends on are: Current cash earnings,
growth assumptions, and discount rate chosen. I know what your growth
assumptions are (15%/yr), and 9% I feel is a reasonable discount rate
to use, but I don't know what KOs current cash earnings are.
I'll see if I can find out before I leave.
Bob |
