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Technology Stocks : Ascend Communications (ASND) -- Ignore unavailable to you. Want to Upgrade?

To: Xpiderman who wrote (46394)	5/9/1998 12:09:00 PM
From: Greg Jung	Read Replies (2) \| Respond to of 61433

What PEG premium do you need, and what will the dilution rate be in future? These are the key aspects, aside from overall growth rate, for the pricing. Under recent history of a 9.5% stock dilution rate, Ascend will need to maintain a 45% income growth rate in order to justify a) current price and b) $55 target. Here it is worked out: Ascend Communications: Earnings dilution worksheet Assume: 45% Total earnings yearly growth Assume: 9.5% dilution/year ==> 32.4 Forward PE Multiplier --- EPS --- (x) see notes, below. Qtr end #SHARES $ /share 3/31/97 185.6 36.1 0.19 6/30/97 189.8 39.7 0.21 PEG=1 $$ Cash 9/30/97 194.2 43.5 0.22 Value (2) per share 12/31/97 198.6 47.8 0.24 39.2 1.00 (3) 3/31/98 203.2 52.40 0.26 42.9 (1) 1.25 6/30/98 207.9 63.74 0.31 46.1 1.54 9/30/98 212.6 69.94 0.33 49.4 1.85 12/31/98 217.5 76.75 0.35 53.0 2.17 3/31/99 222.5 84.22 0.38 56.8 2.52 6/30/99 227.6 92.42 0.41 61.0 2.90 9/30/99 232.8 101.41 0.44 65.4 3.30 12/31/99 238.2 111.28 0.47 70.2 3.72 3/31/00 243.6 122.12 0.50 75.3 4.18 6/30/00 249.2 134.00 0.54 80.8 4.66 Notes: 1. Due to higher earnings in QE 12/96 the actual trailing eps as of 3/31/98 are $1. So earnings subsequent to QE 3/31/98 are adjusted. (10% in favor of stock) 2. "full value" is calculated as (Forward PE factor) X (forward earnings) / (anticipated #shares). "Forward PE" is defined as the next four quarter's income, divided by the number of shares anticipated in the fourth. 3. Cash is accrued from earnings, with 4% annual after tax interest. Xy, for reference here is your table. My 0.38/share after QE 3/31/99 is 10% above the number below. To achieve that they need 45% revenue growth at constant net margin. Current margin is at best 20%. ASND 93 94 95 96 97 98 99 Mar $0.00 $0.02 $0.04 $0.15 $0.31 $0.26 $0.35e Jun $0.00 $0.02 $0.05 $0.23 $0.31 $0.28e $0.36e Sep $0.01 $0.03 $0.07 $0.29 $0.20 $0.30e $0.38e Dec $0.01 $0.03 $0.12 $0.32 $0.24 $0.34e $0.39e Year $0.02 $0.10 $0.28 $0.99 $1.06 $1.18e $1.48e Yr./Yr. 400.0% 180.0% 253.6% 7.1% 11.3%e 25.4%e Any comments? I can model other scenarios. All critiques are welcome this is a simple model. I don't want to post the results for a more realistic growth rate because of the exhuberance it would stir up. <G> Conclusion To arrive at today's market value of $44 under dilution such as occured since QE 3/31/97, A sustained earnings growth rate of 45% is required. This leads to a forward PE value of 32.4 and a $55 valuation on Jan 1, 1999 (For market PEG=1). Recent earnings growth rate has been substantially less - about 29%, "pro forma" which discards substantial charges of $111 million. In order to retain the talent required to sustain competitiveness, under conditions of a prohibitive real estate market (although somewhat ameliorated in Alameda/Oakland) management has little choice but to maintain the stock giveaway and even to reprice existing options under adverse market conditions. Greg