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Technology Stocks : Dell Technologies Inc. -- Ignore unavailable to you. Want to Upgrade?

To: Chuzzlewit who wrote (60608)	8/24/1998 6:45:00 PM
From: Reginald Middleton	Respond to of 176387

<Concluding that a stock is either over or under valued implies a reasonable valuation model. Presumably, such a model takes into account three variables: the projected stream of future cash flows, the riskiness of that stream of cash flows generally measured by the standard deviation of the estimated stream, and the long term risk-free interest rate.> This is true, but,,, <The alternative approach is to estimate the companies stock price based on growth of earnings, but that method suffers from the flaw of not relating the value to a suitable discount rate.> This is not entirely accurate, which illuminates flaws in any valuation method based on it. If I may explain - contrary to popular belief, the market does not capitalize accounting earnings, hence any valuation based on accounting earnings will not correlate well with the market's actual valuation (assuming you projected the earnings stream accurately). So, aside from lacking the risk portion of the risk/reward equation, it is not properly calculating reward. (see the Just Say No to Earnings page at rcmfinancial.com , the Market Correlation Analysis by Industry & Sector at rcmfinancial.com and the Case Against Earnings Article metnioned earlier rcmfinancial.com . <Using that metric, and using a 45% long-term growth rate (which many on this thread would claim is too low) I show Dell as a screaming buy.> A 45% long term growth rate is, (in my humble opinion of course) extremely and unrealistically aggressive. By long term, I assume you are talking a 10 to 30 year horizon. While it is certainly possible, I don;'t think it is probably, given the maturity of the PC market (not that it is a mature market, but it is far from a nascent niche market) and the amount of competition that Dell enjoys. A price appreciation rate of 20% - 30% is still quite aggressive (still much too rich for my tastes in terms of modeling), but more probable than 45%. <Using the estimate of the next four quarters earnings as roughly $2.60, we have a forward p/e of 46. But the p/e of the S&P is roughly 26 and sports only a 7% growth rate.> Again, the "E" portion fo the P/E equation is ambiguous, therefore a reltively inaccurate indicator of valuation. The E for Dell may not be the same metric as the "E" for IBM, Gateway or HP.