Forum Archive Index - March 2001

["Christian Mair" <product@adidas-ep.co.nz>]

Hi John & Gerry,
Its not that important but the author of this book is Jim Slater. Gordon
Slater is as far as I know a rugby player.
Just in case you want to include this book in your "Learning to Invest"
column.

Regards,
Christian

----- Original Message -----
From: "Wedde, John" <john.wedde@cit.ac.nz>
To: <sharechat@sharechat.co.nz>
Sent: Friday, March 02, 2001 12:22 PM
Subject: RE: [sharechat] Growth stocks - esp Baycorp


> "Peg ratio" is pe ratio divided by annual earnings growth
> I think this ratio was first discussed by Gordon Slater in his book "The
> Zulu Principle. Making Extraordinary  Profits From Ordinary Shares".
Slater
> suggested it was useful for identifying growth companies at an early
stage.
> Gerry --- you should add this book to your bibliography -- easy to read
and
> some wonderful tips for successful investment.
> Cheers,
> John
>
> -----Original Message-----
> From: secondstep70 [mailto:secondstep70@hotmail.com]
> Sent: Friday, 2 March 2001 09:47
> To: sharechat@sharechat.co.nz
> Subject: Re: [sharechat] Growth stocks - esp Baycorp
>
>
> A measurement for value of a 'growth' company is the PEG ratio. (sorry I
> can't tell you how it is calculated)
>
> Yahoo finance gives Baycorp a PEG ratio of 1.61.
>
> A rule of thumb is <1 indicates good value and >1 indicates poor value.
>
> http://biz.yahoo.com/z/a/b/bch.nz.html
> <http://biz.yahoo.com/z/a/b/bch.nz.html>
>
> Assuming the forecasts are accurate, Baycorp would have to see it's P/E
> drop before it could be seen as a cheap buy.
>
>
>
>
> ----- Original Message -----
> From: Peter  <mailto:pmaiden@xtra.co.nz> Maiden
> To: sharechat@sharechat.co.nz <mailto:sharechat@sharechat.co.nz>
> Sent: Thursday, March 01, 2001 7:39 PM
> Subject: [sharechat] Growth stocks - esp Baycorp
>
>
> Some talk about investing in growth stocks etc earlier today. Maybe these
> thoughts may be interesting.
>
> Firstly a disclosure - this has been extracted from a note I wrote a few
> months ago to somebody who was worried about what to do with an investment
> in Baycorp he controlled. I don't have any Baycorp shares myself but
thought
> that readers of this forum might appreciate my thoughts. Note that when I
> wrote this the price was $12.50 odd - I see that it is down below $11.00
> today.
>
> Some research I came across a while ago showed that there is no
correlation
> between a company's expected long term earnngs growth (as per the
company's
> share price earnings ratio) and the long term price change in the
company's
> share. The study was conducted on the FTSE 100 over a ten year period in
the
> nineties and concluded that the correlation between PE ratios and
subsequent
> share performance is zero - stocks with low PEs do no better or worse than
> stocks with high PEs. In other words PEs are useless as an indicator of
> future earnings growth.
>
> Isn't it a fallacy then to believe that to make money from shares you must
> invest where the growth is. High earnings growth does not necessary mean
> high long-term investment returns.
>
> However one shouldn't ignore earnings growth as over extended periods of
> time a company's share price cannot grow faster than earnings. At least in
> theory because if it did the PE and market capitalisation would approach
> infinity.
>
> What the study did show was that the market does a poor job of forecasting
> long term earnings.
>
> To put a Baycorp slant on this.
>
> Baycorp has a sensational business model and a proven record of strong
> earnings growth. The business model appears to be able to sustain strong
> earnings growth well into the future.
>
> Thinking it through anything that is anticipated should not affect stock
> prices. Is Baycorp meeting anticipated earnings growth? In spite of
> achieving consistently high earnings over many years ( a no mean feat for
a
> New Zealand company) it does appear that Baycorp are not meeting
anticipated
> returns..
>
> In 1997 EPS increased by 28%, in 1998 by 23%, in 1999 by 21%, in 2000
by12%
> and in 2001 a projected 14%. Reported 20% plus increases in actual
earnings
> have been diluted by the issue of shares to fund growth.
>
> The growth in EPS is slowing down - and the numbers do not support a PE of
> 50.
>
> Over time there has to be to be an adjustment to the Baycorp share price
to
> a lower PE which better reflects actual EPS growth. This has dire
> consequence on the Baycorp share price.
>
> One way of looking at it is to assume that the share price remains at
> $12.00. Even if 20% EPS growth is maintained into the future it will take
> into 2006 for the $12.00 to reflect a PE of just over 20. At 15% EPS
growth
> it will take until 2008 before the price reflects a PE of 20.
>
> The other way of looking at it is to assess what the current price should
be
> based on a different PE multiple. This year the EPS projection is 22.5
cents
> (with total earnings up 20% on last year). A PE of 20 then gives a share
> price of $4.56. The share price would then increase at the growth in
> earnings rate if a PE of 20 was maintained.
>
> I have used a PE of 20 because that is the growth rate I have used in
> calculations. Some might say that Baycorp should trade at a premium to
this.
> However it is the dimensions of the variance to the current price I am
> trying to demonstrate,
>
> Whatever happens this is one company that will continue to experience
strong
> earnings growth but it is very unlikely that investors will benefit from
> long term gains in Baycorp's share price. Even a possibility of a takeover
> is unlikely because of the inherent amount of goodwill that any acquirer
> would need to take on - a market cap of $1B for a company with $70M
revenues
> and $20M earnings does not make a takeover likely.
>
> And so on......to a recommendation
>
> Cheers
>
> Peter
>
>
>
>
>
>
>
>
>
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