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Technology Stocks : TLAB info? -- Ignore unavailable to you. Want to Upgrade?

To: Vted who wrote (2797)	7/25/1998 11:44:00 PM
From: Mir	Read Replies (1) \| Respond to of 7342

May I interject in this discussion ... Any 2+2 = 5 type of math in TLAB's case can be attributed to couple of strategies. First by nailing up a very strong competitor, CSCC (in Echo Cancellation business), they have added a solid (profitable) revenue stream for next 5 years. Secondly, CIEN buy provides the muscle for near and long term growth (although revenue stream is not as strong yet). TLAB's bread and butter business has been another phenomenal growth story. So, sum of TLAB, CSCC and CIEN is given a valuation more than what actually it should be. I don't have any problem with that as TLAB management seems to know what it is doing and where the company is heading. Mir

To: Vted who wrote (2797)	7/27/1998 12:10:00 PM
From: The ChrisMeister	Read Replies (1) \| Respond to of 7342

"I am trying to decide if projected growth is to be more than 49%. Since the current price is at a PE of 49..." I gather you're trying to use a "P/E equal to the percentage growth rate" rule of thumb. I don't do this for a number of reasons. For one, it only really works for a narrow interest rate range, near 6 1/2% if I recall correctly. For another, the market average P/E=22 (or is it 25 this week?) stock is not growing earnings at 20% or 25%. The average S&P 500 stock is only growing earnings at about 8%, I think. So, what I'm driving at is that extraordinary growth is worth a large premium, IMO. If you're growing three times as fast as the S&P 500, a P/E three times higher (66 - 75) is not hugely beyond reason. Somewhere in all the stuff I get there's an Equity Valuation Model from an economist at Paine Webber, in the form of a graph relating growth rates, interest rates, and P/E's. You can get P/E's of 100 or 125 for 25% growers looking fair in the model if the long term interest rate is about 5% (as I recall). The power of compounding figures into this: It takes 13 years to double your money at 5.5%, versus 3.1 years at 25%. Hence the roughly 4x premium in model P/E's. This is why the MSFT's and CSCO's of the world continue to go higher even though at first glance you'd think one would have to be insane buying 'em at these levels. (The Yahoo's and amazon.coms are another matter...) Many, many companies would love to have a growth rate of "only 27%". Especially when it looks secure for the coming quarters (and years, even) it's a valuable thing. So I can make an argument for TLAB commanding higher P/E's so long as interest rates stay about where they are and/or continue to drift slightly lower (which slowing growth favors). Of course all this is contingent on the company continuing to perform well, too, so there is some risk involved (which is why an earnings disappointment causes these things to tank) versus the virtually risk-free 30-year bond interest rate used in the model. These are back-of-the-envelope sorts of calculations, not precise rocket science stuff. So if TLAB isn't up 50% or 100% in several months or a year... ChrisMeister

To: Vted who wrote (2797)	7/27/1998 12:58:00 PM
From: Chuzzlewit	Read Replies (1) \| Respond to of 7342

You are obviously using PEG to decide on stock valuations. This method is flawed because it fails to take into account such niceties as long-term interest rates and the perceived riskiness of growth. In addition, the assumed long-term growth rate is quite iffy. To obviate this problem I have come up with a variant of PEG called CNPEG (Chuzzlewit's Normalized PEG) which obviates the long-term interest rate problem by normalizing the result relative to the S&P 500. All you need to do is to calculate the PEG value of the S&P 500 and divide the PEG for TLAB by this number. The PEG for the S&P was around 3 when I last checked it (about a month ago). Let's assume that the growth rate of TLAB is 35%, and that it is trading at a P/E of 49. That would yield a PEG of 1.4. But normalizing using the S&P PEG of 3.0 yields a CNPEG of 0.47. Thus, relative to the market growth is cheaper with TLAB. In other words, TLAB would be a buy. TTFN, CTC

To: Vted who wrote (2797)	7/27/1998 1:51:00 PM
From: Bob Martin	Read Replies (2) \| Respond to of 7342

Well, the basic problem here is that the old rule of thumb "P/E ratio should equal next year's growth rate (PEG)" is so far off as to be a joke. Using a discounted cash flow model, and assuming a 9% discount rate (read "The Warren Buffett Way"), a PE of 49 can be supported by assuming: a - 7% earnings growth forever b - 20% earnings growth for 5 years, then 5% growth thereafter c - 13% earnings growth for 10 years, then 5% growth thereafter Now of course, this requires guessing what you think future years growth rates will be. Analysts estimates are usually only available one or two years out, so you have to figure this out yourself. I guess what it comes down to is, there are many ways to value a company, and sometimes different models give widely divergent answers.