It really feels very strange to be giving the bullish argument. Almost as strange as having UF defend me.
re: "Traditional rules of thumb say that investors should expect to pay 15 times earnings for a share over the long term" What shares, and when? If you mean shares of a S&P 500 index-tracker, then 15 is the midpoint of the (very LT) 10-20 PE range. 15 would be a reasonable PE to pay, when interest rates are at the mid-point in their range (currently, LT and ST interest rates are low and going lower). Saying "anything over a PE of 15 is overvalued" without specifying growth rates, debt levels, reliability of future earnings, barriers to entry, interest rates, etc., etc.........well, that's oversimplifying things to the point of uselessness.
re: "NTAP with a current P/E of 53.10, you probably paid 4 times too much.......it could be argued that 10 times earnings is a better bet" Of course it would be a better bet, if you could get it. Companies have a hard time predicting how much hi tech gear they are going to need. Inevitably, they will periodically guess wrong (in both directions), leading to episodic oversupply and undersupply. So, NTAP's business is cyclical. They wish it wasn't, but it is, and this provides opportunity to buy the stock when it is out of favor. Since the only future the stock market cares about is the next 12 months, I can buy when that future looks the bleakest (now, I'm guessing). Then, all I have to do it wait.
For cyclicals, PE is not a good way to value them, or to try and time purchases. During downturns, they will make little or no profits; the PE will look very high, just as the stocks bottom. When profits are still high, but there are clear signs of a coming downturn (so the stocks are going down), that's when the PE will be the lowest.....and that's precisely the wrong time to buy them. So, PE is not a good way to assign value to a company whose profitability is likely to vary widely, depending on external economic factors over which they have little control.
NTAP's EPS will be lower in the coming 12 months, (possibly they may make only 0.05-0.10). So, you are even less likely to find their stock "reasonable", in the near future. You will wait for a PE of 10, on a EPS of 0.05, and you will wait forever, because you are using the wrong yardstick to measure the company.
P/S is a better way to value NTAP (this applies to most techs at the moment). NTAP's P/S = 11 stock price/(969M TTM sales/354M shares) = 4.0 The 5-year range of P/S is 2.4-49, so we are closer to the bottom than the top of the range. I own't argue with you if you say the P/S could get cut in half, from today's levels. If that happens , I will buy more, in increments, down to a stock price of 5. I also won't argue if you say it is unlikely to ever get back to a P/S of 49.
For a company with gross margins of 56% (during horrible industry conditions), lots of cash, no debt, high barriers to entry, proven management and proven markets (this ain't no dotcom with a teenage CEO), and estimated analyst LT EPS growth rate of 30%-35%, a P/S of 4 is not unreasonable.
If the market drops another 50%, and you buy then, you will do very well. The market may do that. NTAP may do that. Place your bets. |
