Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Teflon who wrote (3077)	6/24/1999 11:10:00 PM
From: Mike Buckley	Respond to of 54805

Teflon, My continued sympathies about the Knicks. :) I like to value small- to medium size growth companies using a traditional PE-to-growth metric. My favorite PEG is the one established by the Motley Fool. It uses trailing earnings (excluding one-time charges and gains) as the PE. Its growth rate is the annualized growth from trailing earnings to the farthest consensus estimate, in this case FY00. Using that PEG ratio, Siebel's PEG is 2.5. To put the 2.5 ratio into perspective, I use a very rough (meaning not at all precise) way of applying the ratios to determine fair value for a gorilla or a leading potential gorilla. I consider a ratio of 1.0 as being undervalued, 1.5 as fairly valued, and anything at 2.0 or above is being over valued. I don't have a running history of Siebel's PEG ratio, but to the best of my lousy memory I don't remember it being higher than 2.5 in the last couple of years. It rarely gets close to 1.0 and is usually in the range of 1.5 to 2.0. Does all that mean that the stock is truly over valued using those assumptions? For the moment, let's try to establish a case for it being fairly valued. The best way to do that is to assume the analysts' estimates are on the low side, making the PEG ratio appear greater than it really should be. In fact, you're probably aware that each of the most recent four earnings periods came in well above analysts' consensus estimates. Earnings per share were better than estimates by 20%, 6%, 33% and 33%, respectively from the most distant to the most recent quarters. Not bad, making a very real possibility that analysts consistently underestimate Siebel's earnings. Having made the case that the valuation might be "fair" at these levels, I really do think the price is on the high side even for Siebel. Does that mean I think you'll be able to buy Siebel at a lower price at some time in the future? I suspect so, but I obviously don't know for sure. Do I think you'll be able to buy the stock at a lower PEG ratio in the future? Yep. I'm much more sure of that. But it might be at a higher price. If you buy the stock at a higher price and a lower PEG ratio, it might be a better risk/reward ratio depending on your point of view. The price-to-sales ratio is 12, a little high for a company with only 12% net margins. The enterprise value-to-sales ratio (which I like better because it takes into account cash and debt) is 11, still on the high side for margins in the low, double digits. In summary, if management continues to execute as it has has in the past I think today's price will look like a steal two or three years from now. On the other hand, though the stock is as high as it is because the company has executed so well, it will fall very, very far in the short term if there is any faltering news whatsoever. There simply has been no bad news for at least two years, maybe longer. That's why the stock continues to do so well and that's why it will tank big-time if and when the bad news does surface. If you notice, I've not made any recommendations. :) Instead, I've tried to present a balanced view of the valuations using traditional valuations modified by the premium I believe should be added for its leading role as a front-office gorilla candidate. Hope this helps. --Mike Buckley P. S. I don't know when earnings are expected to be released. I don't follow that information closely.