No. of Recommendations: 17
11.14 @ 13%pa x 10 years=37.82 eps. x 20 times earnings = 756.4 @ 10% discount rate equates to an intrinsic value of $291 a share and a current share price of $520.
What am I missing?
I think 10% is a laudable goal but not very useful as a discount rate.
A different angle of attack.
Earnings per share have risen at inflation + 10.5%/year in the last 13 years.
Let's pencil that in as a starting point for our projections...a bit optimistic, but it's a start.
Let's say they're coining it at the rate of about $13.80/share/year at the moment, eyeballing forward and backward numbers.
That gives earnings 5 years out at $22.75 and 10 years out at $37.45, in today's money.
The average 5-10 years out is $29.60 in today's money.
My usual rule of thumb is that you do nicely (average or better) if you pay less than 12 times the average EPS 5-10 years later, which would be $355.
And you generally do very well if you pay no more than 10 times that number, which would be $296.
These rules work for high-growth firms, low-growth firms, and currently profitless firms.
The built in assumption is that growth further out than a decade can not safely be assumed to be high, so neither can the terminal multiple be.
My rather offhand comment further up the thread was that I'd at least like to get it at under 30 times earnings.
30 times $13.80 is $414, which isn't in that rule of thumb range, so not good enough.
Or:
Another rule of thumb is that I'm rarely willing to consider any currently profitable firm to be worth more than 21 times cyclically adjusted earnings.
(the often are, but I never assume so).
Even the targets from the <12 and <10 rule of thumb above would be 21.5 to 25.7 times current earnings, past my usual upper bound.
High because of the optimistic assumption of continued growth at recent rates.
So...fab firm, but if you're unwilling to make the assumption of a brilliant (rather than just very good future) you don't want to pay more than $290ish these days, being a multiple of 21.
(rising with the earnings trajectory)
Surprisingly close to your number!
But not an opportunity which seems likely given the current price of $517.
Great firm.
But it's clear why I've never bought...it always seems to expensive for me.
Paying a rich price makes sense if the future comes out as bright as current shareholders seem to expect. Which it might.
Or not.
Jim
