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Technology Stocks : How high will Microsoft fly? -- Ignore unavailable to you. Want to Upgrade?

To: Wizard who wrote (8564)	6/22/1998 4:49:00 PM
From: Reginald Middleton	Read Replies (1) \| Respond to of 74651

<True but valuation based on EPS is usually in the context of the growth of the EPS and any change in expectations what the reported EPS number does to expectations of future EPS. Never have I seen anybody say "Company X reported EPS of $.16 (or whatever) and that means the stock is worth $22 (or whatever)."> If it is true then you must agree that conventional wisdom relies on the EPS number. As for actual valution, that succumbs to the same malady under a different pigmentation. I have already run the correlation study of the relationship between the 12 month consensus estimate and market value. There was no significant improvement in correlation. Unfortunately I cannot openly publish the info for our friends at Zack's and First Call may not like it (using thier copyrighted material to show that thier copyrighted material does not work:-). Another problem with anticipated growth in EPS is that it is nearly impossible to quantify without a standard measure. EPS for INTC can be, and probably is, very different than EPS for AMD although they are very similar companies. Let's assume that INTC acquires many high growth, high profile, capital intensive companies (such as those that build fabs) with cash. This generates significant goodwill which eats up earnigns yet does not affect the amount of money in the bank or INTC cash flow. It also forces INTC to contend with multiple deprecriation schedules which are not necessarily the same as AMD's. Assuming that INTC is more conservative than AMD in tis accounting (a very valid assumption), AMD would have a significantly different amortization schedule than INTC, not to mention much less good will. This automatically suppresses INTC's earnings in comparison to AMD's. Now when you say that "valuation based on EPS is usually in the context of the growth of the EPS and any change in expectations what the reported EPS number does to expectations of future EPS," do you mean EPS as normalized for disparate depreciation schedules, or EPS as reconciled for goodwill, or is it EPS as standardized for the effects of share buybacks. You see, there are plenty of very valid reasons why a well informed market would choose not to rely on EPS, growth in EPS, or analyst's estimates of EPS to actually value a corporation, especially in comparison to its peers. I am going put together a sarcastic article and a template from my software that allows the individual investor to reconcile earnings to net operating profit in order to show how unreliable and ambigous the earnings and EPS numbers actually are. The template will be available from my site for download by the end of the week. RCM rcmfinancial.com