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Strategies & Market Trends : Professional Equity Analysis - the Pursuit of True Value
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To: Winston Chang who wrote (74)2/14/1997 3:05:00 AM
From: cape radical   of 102
 
winston, you made some excellent points in your analysis and i share your concerns. i have noticed that analysts who perform company valuations generally do not recommend or purchase a stock unless the actual market value is LESS THAN HALF the projected market value. talk about side-of-the barn calculations.

i propose an easier route (if the EVA litmus test is passed). let's say that the S&P500 average PE is 19. the company you are targeting is expected to grow 30% over the next two years and the cost of capital is 15%. you think two years is a realistic time frame. after adjusting earnings for R&D, once-off expenses, i.e., calculate EBIT(1-T), you forecast a dead cat average company after the two year time frame. you should be willing to pay:

PE = 19*1.3^2/1.15^2 = 24

you should be willing to pay a PE of 24 right now. suppose you think a PE of 16 is a more realistic dead cat value, then you'd pay a PE of 20.

you can always vary the time frame. at any rate, i think you get the drift and this is much quicker than projecting nebulous cash flow and more tuned to the macroeconomic environment, i.e., interest rates go up, the target PE must be lowered. what do you think?
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