Re: "When did you issue the target price of $30?"
On a split adjusted basis, my target was in the $27-28 range last summer (I'm not in my office and am doing this from memory, so please forgive the lack of precision) when we instituted coverage with a Strong Buy at $16. The first downgrade was in early November, and the move from Buy to Hold was a few weeks later. However, the target price grows over time. It is based on the EPS growth rate (plus, in this case, a premium of 20%) times the base EPS, which generates a base value. For Xilinx, the growth rate is about 23% from the year just ended to an estimate for March, 2004 (revenue growth is a little higher than that, while my pretax margin and tax rate assumptions bring it down slightly). Take that growth rate times 1.2 (for the premium) and you get a base value for 3/31/99. Grow it for 27 days at a 23% annual rate to get the current value, then grow that value for a year at 23% to get the target price. Over time, the target price will grow at a 23% rate.
The hard part, which I have not figured out to my satisfaction, is what happens when the math gets screwy. Specifically, XLNX just went through a slow growth year (ask Skeeter for verification!), so the base year stayed pretty flat in $ terms. As a result, the target price actually slipped as we changed the base year from F98 to F99. It wasn't much of a change (a couple of dollars), but it is counterintuitive and reduces some of the robustness of the approach. I hope to address this in the next couple of weeks (and would appreciate any insights that any mathematically astute thread members are able to bring to bear). - Tad LaFountain
P.S. Sorry, about the target price being low. It sure didn't seem low last summer when you couldn't give the PLD stocks away (ALTR and XLNX @ $31 and LSCC under $20). But you're right, it seems low now. Two points in response (which may or may not be correct):
1) The assumed/estimated long-term growth rate of 23% is lower, I believe, than most people believe XLNX's growth rate to be. But no company larger than $100 million should ever have to apologize for a growth rate in excess of 20%, which is damned hard to attain and even harder to maintain. Over the course of a semiconductor industry cycle, 23% growth is major league impressive (and a full 6-7% above the industry's growth rate); and
2) Target prices always look low when stocks aren't cheap (and this stock's not cheap). I believe that the most on-target criticism of analysts is their propensity to move target prices up when stocks run, generally on no valid grounds other than to fail to do so would impinge upon their recommendations (Heaven forfend, a downgrade!) - TL |
