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

To: wopr1 who wrote (22620)	4/13/2000 12:51:00 AM
From: Mike Buckley	Read Replies (2) \| Respond to of 54805

wopr, I'll repeat the paragraph you're asking about so everyone can easily reference it in the context of your questions. o $110 price target. We believe Gemstar's worldwide advertising/e-commerce business can be generating over $4 billion of advertising operating income in 5 years. We conservatively assume zero value for the e-book business, TV Games network, VCR+ (currently an estimated $70 million of EBITDA) and TV Guide's Entertainment Group and United Video group (estimated $335 million 2000E EBITDA excluding the EPG) and no interest income. The company is projected to generate after tax EPS (before goodwill amortization) of over $6 per share in 2005 growing at 100% per year. Assuming a 50 multiple and a 20-25% discount rate leads to a $100-123 price target. Taking the mid-point, our price target is $110. Now, onto your terrific (very far from stupid) questions. 1) $6 EPS: To arrive at this number, it seems that they are only counting the EPG's and advertising, or is it just advertising? Their wording about that is vague and confusing. They initially refer to "advertising/e-commerce business" and immediately describe the anticipated $4 billion as "advertising operating income," entirely ignoring the e-commerce part of the revenue stream. When you mention the EPGs, they appear to assume that the Godzilla-like advertising and e-commerce revenue streams will dwarf the EPG licensing revenue to the point that licensing revenue won't have a significant impact on projections as far out as five years from now. They excluded e-books, games, vcr+, etc. While excluding these items, they acknowledge that some of these areas earn money, ie $70 million and $335 million. Thus the estimate is very conservative, is that correct? Yes, you understand that correctly. I would clarify that they seem to be implying that the value of those revenue streams will decline in years to come, especially their impact relative to the advertising/e-commerce revenue. a) How did they arrive at the $6 figure? They did not seem to support the $6 EPS. We don't know how they arrived at it because you're right that they didn't support it. Give them the benefit of the doubt though that it would have required lots of space to walk the reader through the steps they took to arrive at the $6 estimate. 2) $6 per share in 2005 growing at 100% per year: This is a grammatical question. Does this mean at 2005 they expect GMST to still be growing at 100%, or, to arrive at the $6 figure, they are assuming 100% growth for the next 5 years? It's probably not possible to know for sure, especially considering the bad writing in the first sentence that causes confusion about the e-commerce revenue. My guess is that they are assuming 100% growth up until 2005. I come to that conclusion because to think that the company would grow 100% annually beyond that date would probably require that they assume a much, much higher multiple than their assumed multiple of 50. 3) 50 multiple: I assume that means they expect a P/E of 50 at 2005. Essentially, yes. To be a little more accurate, they are suggesting that a fair value at that time will be based on a PE of 50. Expecting a multiple of X and assuming a fair value multiple of X are not necessarily the same. 4) $100-123 price target: Even given these fancy numbers, I don't know the formula to arrive at the price target. Second, is this their 2005 price target? I'll try to talk you through that. The $6 EPS multiplied by 50 = $300 in 2005. The net present value of that using a 20% discount rate is about $123. Using a 25% discount rate it is about $100. In other words, they think the fair value of the stock is $300 in 2005 and that, discounted to today's dollars, the fair value is $110. You mentioned that you don't know the formula to arrive at the price target. To determine the net present value of a future value you need command of a financial calculator, spreadsheet formulas, or a net present value table. Hope this helps. Hopefully others will help clarify these issues that I'm absolutely certain remain cloudy at best to hoards of others. --Mike Buckley