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

To: Mike Buckley who wrote (37327)	1/1/2001 6:44:10 PM
From: Mike Buckley	Read Replies (2) \| Respond to of 54805

I was looking at a few stock valuations today. Despite that SanDisk's stock is about 60% lower than when I bought it just five months ago (yikes! :), I was surprised that the relative valuation is as "low" as it is. It's PEG is only 1.05 and its PSR is only 3.7. Considering the growth oportunity and profit margin, I believe this is a classic example of market ineffeciency. But maybe that impression is rooted in the fact that I own the stock. :) --Mike Buckley

To: Mike Buckley who wrote (37327)	1/1/2001 7:39:54 PM
From: Wyätt Gwyön	Read Replies (1) \| Respond to of 54805

Dear Mike, Assume the company does $15 billion in sales in 8 years. Assume the PSR is 10 (half what it is today). Also asssume there will be 500 million outstanding shares, about 20% more than today. Using those assumptions, the stock price will be $300. It looks to me like there already are 500 million shares...actually 506,237,000 fully diluted shares per SEBL's 10/24/00 press release. I also notice that this figure is more than 11% higher than the like figure of 1999. And going back to the report from Oct 19, 1999, I notice that the diluted share count had likewise grown about 11% from the like period in 1998. So 11% compounding over those two years, and I have not bothered to check earlier. By assuming 500 million shares, are you assuming there will be a net reduction of 6.2 million shares over the next eight years, in contrast to the rapid increase over the past two? I notice that a lot of companies with high PEs like to do acquisitions. You suggest SEBL can grow their revenues by tenfold over just eight years--that is terrific growth. Do you suppose they will be doing some acquisitions along the way, and if so, might they not pay for them with some shares (increasing the sharecount further)? I will be very surprised if the company manages to grow as you suggest in such a short period without increasing the share count. I would think a safer assumption might be to assume the 11% growth will continue (perhaps that is too conservative, but at least it reflects a historical trend in the company...pick your own different number if you like). That would put the share count in eight years at 1.166 billion, and assuming your PSR of 10 on 15 billion in sales, the per-share price would be $128, for compound growth of a little better than 8%. Eight percent is better than Treasury yields, but is rather below the S&P average for the last 50 years. In this example, the company has to grow its earnings by an order of magnitude in eight years from a billion-plus base--no mean feat--in order to get this return. I would hate to think what the share price would look like if revenues only quadrupled. I should mention that this example is a bit tongue in cheek--they probably will slow down their share-count growth from an astounding 11% (but I will go out on a limb and say 11% is probably closer to what'll happen than the 0% you suggest). (On the other hand, I think one should really consider this factor before getting overly amazed at their current sales growth.) But if you look at a co. like CSCO, which is already way up there in revs, they still managed to increase their shares by 8% from a base that already exceeds the world's population of humans. Of course, it is not easy to find this information out.