Chuzz, you said this in another post:
>>Assume each number represents disposable free cash flow. What is the value of the stream of future cash flows? The point that I have made is that using a static P/E (either forward or backward) is simply insufficient to capture the value inherent in the stream.<<
And In this post, you started off with:
>>First forget P/E because it is like driving a car with your view provided by the rear view mirror. The P/E concept was devised by Ben Graham as shortcut for valuation. It works well enough for stocks that aren't growing, but it is pretty dismal for growth companies.
Obivously, you HATE the P/E ratio. Or as George Bush would say...P/E ratio, baaad...DCF...good!. You don't value stocks that way, you told us. But, strangely, you then went on to USE that useless P/E ratio to help you VALUE Dell, as the following abstract demonstrates.
>>Now back to the valuation issue. DELL may earn around $1.60 next year, giving it a forward P/E of around 44. Conservatively speaking, Dell has a five year growth rate estimated at around 40%. The S&P has a forward P/E of around 24 with a long-term growth rate of around 11% (looking past the current year). What I do is calculate the YPEG for the S&P and divide that number into the YPEG of the target stock to give me a normalized PEG (so-called CNPEG). If you do this you get a CNPEG for DELL of around 0.50. The interpretation of that metric is that you can buy growth through DELL at roughly 50% of what it costs in buying the S&P. How's that for value?<<
Question Chuzz. When you valued Dell at the end of your post, why didn't you utilize the discounted free cash flow method that you claimed to work with? Curiously, you used a P/E approach that you derided earlier in your note. Since you presumably use the DCF, you must have at the ready, your estimates for Dell's future cash flows. Furthermore, since you are obviously still quite bullish, you would have already, it seems to me, MADE this calculation, so you could safely JUSTIFY your bullishness with hard evidence. It strikes me as really weird then that you would choose to value DELL with a P/E ratio method you claim is utterly useless, instead of DCF, which you champion.
I would love to hear your answer. You could also try this:
1) Give us your cash flow assumptions on Dell. 2) Tell us how you would discount those cash flows (rate, etc.) and 3) then tell us the result of this valuation exercise, the value of Dell. It should be WAY ABOVE $77, given your assumption that the S&P 500 at 26 times earnings is fair value, right Chuzz? Chuzz? |
