To: Sector Investor who wrote (8226 ) 4/17/1998 9:03:00 PM From: michael modeme Read Replies (2) | Respond to
On Growth: These are mearly two different ways of estimating growth. If we want the best estimate of current growth, then actually we should actually use a third approach (which although technical, is appropriate): 1) calculate the sequential growth for revenues and earnings over the past period of time (let's say a year) those are 14.84%, 10.96%, 6.33%, 15.24% for revenues and 12.23%, 18.97%, 10.42%, 9.74% for earnings. 2) normalize these values according to the equation: (1/T){[(1+i)^T}-1}, where i is the interest, and T is the total time of the study, the normalized values are 18.48%, 12.90%, 6.96%, 19.09% for revenues and 14.66%, 25.08%, 12.16%, 11.26% for earnings. 3) then take a regression of these values with respect to time (for simplicity, I'll use a linear regression), the equation for the least-squares linear regression through the revenue growth is: annualized revenue growth = 15.385 - 0.4112*t , and for earnings growth: annualized earnings growth = 21.575 - 2.313*t . 4) the final step is to
evaluate these equations at the current time (in other words, take the limit of the function as t -> present time) and multiply this by the total time; this yields an estimate for the CURRENT annualized revenue growth of 54.96%, and for earnings: 49.29%. If one actually does a more sophisticated regression model, the numbers come out slightly below this around 47% for revenues and 43% for earnings. I hope this helps. I should note that these are huge growth figures, and under most valuation models one would expect MRVC to be trading considerably higher than it is. Oh, one more thing, using this method, one can do a pretty good job predicting future revenues, revenue growth, earnings, and earnings growth. For example, one year from now, based on the past data, revenues should be around 69 million for that quarter and earnings of around 35 cents -- to get these numbers you have to integrate under the functions. So, I still think that 40% growth is a very good estimate, and perhaps more importantly, we
should note that the variance in these estimates is quite large. Good luck Sector. Do you agree with the analysis? The reason why these numbers come out lower than yours are due to the fact that the growth has been slowing over time and your estimate is slightly biased (in the statistical sense). Cheers
