EMC How high can it go? Message Board

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Technology Stocks : EMC How high can it go?

EMC 29.05

0.0%

Sep 15 5:00 PM EST

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To: JDN who wrote (4972)	3/18/1999 7:47:00 PM
From: Erwin Sanders	of 17183

Is EMC's price too high? Answer: not likely - Part 1 ===================================================== As EMC is hitting new highs everyday, it is natural to wonder whether one should hold or sell. I am not concerned here with short-term trading for those who follow Traders' Astrology (incidentally, for many TA = Technical Analysis). I am more concerned with the concept of owning a business and therefore with projections of future cash flow and earnings per share. The following are my thoughts. Part 1 lays out a methodology for evaluating the price of a stock. Part 2 applies this to EMC's share price Ignoring market and sector trends, the price of a share should equal the present value of the future cash flows that this share generates. Cash flows are harder to predict than earnings ( hard enough as they are), and the price can be estimated as the present value of the future earnings that this share generates. To calculate this, the three parameters needed are: 1. number of years to project 2. earnings growth rate 3. interest rate for discounting Number of years to project ------------------------------- Classical formulas often imply perpetuity. I do not agree with this – companies do not last forever. Besides, even if they last a very long time, who can predict earnings, say 20 years away? I often use 15 years. By not using more years, one is adding a reasonable dose of conservatism. Earnings growth rate ------------------------- This is the trickiest. We can get some idea from analysts, company statements and market trends for the next five years but not beyond. I would therefore like to look at the first five years separately from the years thereafter. Interest rate -------------- One should use a long-term treasury interest rate – say 6%. Some would argue that a higher interest rate should be used to reflect the greater uncertainty with corporate profits than with the Government's ability to repay debt. I would argue that any such uncertainty should be factored into the projected growth rates (i.e. use risk-adjusted earnings projections) I have applied this methodology to historical values for the S&P 500 index (with the hindsight of knowing the future earnings per share) and have found that the price projected by this model matches closely with the S&P index. Regards, Erwin

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