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Strategies & Market Trends : Buffettology -- Ignore unavailable to you. Want to Upgrade?

To: jhg_in_kc who wrote (368)	9/25/1998 2:08:00 PM
From: Robert Douglas	Read Replies (1) \| Respond to of 4691

jhg, from your post: Valuation of the stock is at once the thorniest and easiest of questions to address. Thorny because nobody knows how to properly value a growth company Let me give you my take on Dell's valuation. Granted this is a crude approach, but given the possible variations on the inputs, precision is not possible anyway. Assume PC sales presently around $150 billion grow 15% annually for 5 years to about $300 billion. (I think this is generous.) Assume Dell will have a 25% market share in 5 years. (This too is generous in my opinion) Assume Dell's return on this $75 billion in revenue is 6%. (Lower than present, but still high for a retailer) Assume Dell's $4.50 billion in income is divided among 1.6 billion shares (5% growth due to options exercise) This gives Dell an EPS in 5 years of $2.81. Assume an above average market multiple for a company in a moderately growing industry. I estimate 30 is appropriate. Dell's stock price in 5 years = $84/share. This equates to a yearly return of 5.2%. Just about the rate of T-Bills with many times the risk. -Robert