Forum Archive Index - September 2000

["Ben Dutton" <bendutton@sharechat.co.nz>]

Peter,

I'd venture to say that you went wrong by using the past as a benchmark for
valuing Baycorp.  This is a simplistic statement on my part - there are
other reasons for Baycorp's rise, but I do believe that many people are not
making as much money as they could be in today's market by using
"old-school" valuation methods.

I'd like to quote here from James J Cramer from TheStreet.com.  A frequently
controversial and unashamedly upfront Wall Street commentator, I really like
Cramer - even though I don't always agree with him, he does get one
thinking.

Extract from one of Cramer's columns on TheStreet.com (he's talking about
the high P/E ratio of Cisco):

"But let's say that I decided, arbitrarily, that Cisco should never trade
above a 30 multiple because, well, that's what it hasn't traded above in the
past. Why is the past a good guide? In the past, our parents owned utility
stocks. Were they wiser than us? In the past, we liked to buy companies with
cheap multiples to earnings and hope they got dear. Now we like to buy
companies that have high multiples to earnings and hope they get dear...

...Should the P/E multiple come down because it has historically come down
before? Why? Why is the previous benchmark so right? Where is it written
that P/E multiples have to contract as a company gets bigger? That's not a
way to make money. That's a meaningless statement."


I think Cramer has a good point here.  Look at Baycorp's business.  Is there
a past benchmark to compare it with?  I'd say "no".  You said Peter "Maybe
what I am missing is that the true value of the company is not it future
earnings stream but the value of its intellectual property".  I'd say you
are probably right.

Baycorp's intellectual property isn't a commodity - its proprietary.  And
people will always pay more money for a company that has a proprietary
product, that is, information that only they own, as opposed to companies
that produce commodities (like paper or trees).

Baycorp has also shown an incredible adaptability into the new economy.
They have been able to innovate and develop technological solutions to
enhance and streamline their proprietary assets.

This rapid growth of the business and expansion into other countries mean
that investors will always be willing to pay a premium for what is regarded
as a premium business.

Institutions (who own the majority of Baycorp's stock) view the company as a
value tech play.  Indeed, the Asian Wall Street Journal called it "Asia's
Best Value Creator" in January 2000.

So, to conclude, I think it is fair to say that only looking at P/E ratios
in today's sharemarket is a mistake.  Times have changed, and valuations
have changed too.

In saying that Peter, I too haven't bought Baycorp in the past because I
thought that surely the share price couldn't go higher.  I learnt my lesson,
and it seems that you have too.

Comments welcome :)

Best Regards

Benjamin Dutton
(Disc. do not hold shares in BCH)


----- Original Message -----
From: "Peter Maiden" <pmaiden@today.com.au>
To: <sharechat@sharechat.co.nz>
Sent: Tuesday, September 12, 2000 12:22 PM
Subject: [sharechat] BCH - where have I gone wrong?


> I am looking for somebody (maybe a rich converted Baycorper) to tell me
where my thinking has gone wrong when I have decided on several occasions
not to buy into BCH. My rationale for making such decisions has been -
>
> Baycorp is a company I admire. Especially how it embraces technology to
extract immense value out the information it has built up over many years. I
also admire the approach it is taking in transporting a tested business
model to other parts of the world. I also  admire the recent growth in
earnings the company has achieved.
>
> Several times in the past I have considered adding BCH to my portfolio.
Each time I have been tempted I have decided not to purchase because of the
high PE ratio that prevailed at the time.
>
> However the price continues to climb, as does the PE
>
> If I had been a 'momentum' buyer  I too could have been taken along for a
profitable ride as many have done. Things like PE ratios don't come into the
decision making rationale.
>
> Again I have been tempted and again decided not to invest in BCH - because
of the high current PE.
>
> Last reported earnings  of $15.7M and 20.3 cents/share  (on revenues of
$58.5M)  gives a current PE of 65.  Prospects are reported to be "expected
20 per cent annual profit growth over the next three to five years". On
these future prospects one would expect earnings to reach $27M and 35
cents/share in three years.  At today's price that is sill a PE of  38. If
the price moves up  10% a year to say 1770 the PE would be 50.
>
> Whatever PE I use in making my decision whether to buy or not I am
uncomfortable with - especially when the current price already has built in
the future growth prospects.  In other words I consider the shares to be
overvalued with not much prospects of growth (in the share price that is.
There is a real chance of a falling share price if the market decides that
these shares should trade a a more respectable PE ratio.
>
> Maybe what I am missing is that the true value of the company is not it
future earnings stream but the value of its intellectual property, But then
would anybody pay more than a $1B ( BCH market cap) for the records and
processes they have.
>
> Look forward to hearing from anybody who could me right. After this
decision making process has caused lost opportunities
>
> Peter
>
>
>
>
> --- Move to a better address ---
>        + today freemail +
>     http://www.today.com.au
>
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