Re: Target price
The growth rate of 23% is used as a multiple on the base year's EPS (the most recently-reported fiscal year, which in this case is F99), so it would be 23 x 1.2(the premium) x $0.84, or $23.50 according to my spreadsheet. This base value is then brought forward from 3/31/99 to today at a 23% growth rate to reach a current value of just under $24 (doing it this way allows me to compare valuations for companies with different fiscal years). The 12-month target is generated by growing the current value at 23% for one year (in this case, $29.50).
A couple of comments are in order. A common objection is the use of the most recent fiscal year as the base, which pulls down the calculation when applying the multiple. This is true, but it also expands the growth rate (since it's calculated from a smaller base). To a certain extent, this is an offset.
Secondly, and this is the point I was trying to make earlier, when a company's in that part of the cycle that makes its long term growth front-end loaded (e.g., XLNX going from $0.84 to $1.20 in the first of the five years), investors will tend to apply the long-term growth rate to the forward year. In so doing, they overlook the problem that to do so is to significantly bump up the starting point of the growth calculation, which would, in fact, lower the subsequent growth rate.
The point is, one can't (or at least shouldn't) have one's growth rate and hype it, too. Of course, psychology plays a big part, because in a bear market, all the implicit calcuations become very skewed toward conservative measures, but when it's a bull market - the sky's the limit.
Hope this helps - Tad LaFountain |
