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Technology Stocks : Lucent Technologies (LU) -- Ignore unavailable to you. Want to Upgrade?

To: Chuzzlewit who wrote (9110)	8/11/1999 3:33:00 PM
From: John Malloy	Read Replies (1) \| Respond to of 21876

"You said I have developed a simple way to translate that [equity] growth rate forecast into the equivalent forecast of equity per share. But you have provided no details nor the theoretical underpinnings for the key assumption that a stock's value is related to the growth in equity per share. Do you have empirical evidence that it is correct?" Start with the fact that the stock's price is equal to equity/share multiplied by the price/book ratio. Then recognize that when you forecast the growth rate of equity/share, you are also implicitly forecasting future values of equity/share. I worked out an easy way to develop the forecast of equity/share that corresponds to the forecast of the equity/share growth rate. Multiply the forecast of equity/share when you eventually sell by your forecast of the price/book ratio at that time, and you have a forecast of the stock's price when you sell. The theoretical underpinnings are in my book, which you can inspect at analyticalbooks.com. "True (except that the model uses cost of equity as the discount rate)" Don't confuse me with a firm. If I were a firm, I would discount at the cost of equity. But I am not a firm. I am an individual investor. I do not have a cost of equity. I have an opportunity cost instead. I discount at my opportunity cost, plus a premium to allow for risk. In effect, I discount at the minimum rate of return I will accept for any particular stock. That tells me what the stock is worth to me, not to some "average" investor. "I suspect that this is the FCF concept I've been driving at. But if this is your focus, why do you consider equity per share as important? Think about MSFT for a moment. Dividends are nil, but the company is sitting on a huge amount of cash -- $42BB which has been built up over the years from FCF. It is the projected rate of that build-up derived from operations which IMO should be the basis for valuation. Everything else is rrelevant." I don't care about cash flow or free cash flow because neither one rolls into my pocket. Dividends roll into my pocket, so does the net proceeds when I finally sell the stock. I care about equity/share because it is easy to build a model that ties dividends and the price of the stock into equity/share. Why worry about some complicated relationship between FCF and growth when it's much easier to look at the historical record and measure the growth rate of equity/share directly? If the growth rate I measure is well above the GDP growth rate, I know growth cannot stay that high forever. But I can allow for the eventual slowing of growth when I draw my free-hand growth forecast curve. Are we coming closer together? John Malloy