EPS ForecastingEPS Forecasting

Requires NI and average # of common Requires NI and average # of common shares outstanding.shares outstanding.

Forecasted stock issuance/repurchase Forecasted stock issuance/repurchase implies a change in the # shares. implies a change in the # shares. Assume they are issue at end of year, at Assume they are issue at end of year, at

estimatedestimated price P price Pt+1.t+1.

find Pfind Pt+1t+1 in in

issue/repurchase dollar amount of new equity issue/repurchase dollar amount of new equity at Pat Pt+1t+1 to get additional # of shares to get additional # of shares

111

t

tte P

DPr

getting the right # of sharesgetting the right # of shares

when should you adjust your valuation for when should you adjust your valuation for a stock split?a stock split?

ans: only when it is after fiscal year end ans: only when it is after fiscal year end but before valuation date.but before valuation date.

http://finance.yahoo.com/q/bc?s=INTC

fiscal year end

valuation date

stock split

stock split

stock split

0

10

20

30

40

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80

-10 -8 -6 -4 -2 0 2 4 6 8 10

days relative to announcement

pri

ce

2000Q3 rls

Intel’s Earnings Torpedo

P/E = 53, P/B = 13

Intel Revenue WarningIntel Revenue Warning

DateDate seasonal seasonal growth growth (yoy)(yoy)

sequential sequential growthgrowth

seasonal seasonal growth growth (yoy)(yoy)

sequential sequential growthgrowth

2000 Q1 2000 Q1 revenuerevenue

12.5%12.5% 6%6% 12.5%12.5% 6%6%

2000 Q2 2000 Q2 revenuerevenue

23%23% 12%12% 23%23% 12%12%

2000 Q3 2000 Q3 revenuerevenue

20-27%20-27% 6-12%6-12% 17-19%17-19% 3-5%3-5%

LT growth LT growth (First Call)(First Call)

22.6%22.6% 20.6%20.6%

2000 Q3 2000 Q3 GM%GM%

63-64%63-64% 62%62%

pre warning post warning

1

11

0

1

1

0

1

00

11

)1(growth cumulative

)1(1

)(

t

tt

tt

e

tet

tettett

gCE

CE

where

r

CECE

rROE

CEP

soCErROECErNIRI

The ROE modelThe ROE model

profitability growth

constant ROE and growth constant ROE and growth exampleexample

gr

rROECEP

e

e100if ROE and growth are constant, then

g

P0

high ROE

low ROE

Skinner and Sloan “Don’t let an earnings torpedo sink your portfolio”

Intel First Quarter (2001) Revenue to be Below Expectation

SANTA CLARA, Calif., Mar. 8, 2001 - Intel Corporation today announced that first quarter revenue is anticipated to be below the company's previous expectation. The economic slowdown affecting PC demand has continued and spread to the networking, communications and server sectors. The company now expects revenue for the first quarter to be down approximately 25 percent from fourth quarter revenue of $8.7 billion, lower than the previous outlook that first quarter revenue would be down 15 percent, plus or minus several points.

INTC earnings warnings

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-10 -8 -6 -4 -2 0 2 4 6 8 10

days relative to announcement

pri

ce 2001Q1 rls

2000Q3 rls

What happened at Intel?What happened at Intel?

what happened?what happened?20002000 20012001 20022002 20032003

Sales Sales growthgrowth

14.8%14.8% -21.3%-21.3% 0.8%0.8% 12.6%12.6%

gross gross marginmargin

62.5%62.5% 50.8%50.8% 49.8%49.8% 56.7%56.7%

forecasted real growth for next 10 years is 3% (CBO)

Why is the terminal sales growth 5% in eVal?

Forecasted inflation is 2% for next 10 years (CBO).

5% terminal growth = 3% real GDP + 2% inflation!

Screening for mis-priced Screening for mis-priced stocksstocks

quantitative screening is common in quantitative screening is common in portfolio analysisportfolio analysis

most of the screening variables are most of the screening variables are backed up by academic evidencebacked up by academic evidence

need to control for riskneed to control for risk or, at least, exposure to factors that will or, at least, exposure to factors that will

make you look dumb.make you look dumb.

www.valuedog.com

project companiesproject companiesCompany NAICSSymbol Company Name IndIIIN Insteel Industries Inc. Spring & Wire Product ManufacturingPRLS Peerless Systems Corp. Software PublishersMWRK Mothers Work Inc. Women's Clothing StoresPROS ProCentury Corp. Direct Insurance (except Life, Health, & Medical) CarriersEZPW Ezcorp Inc. Other Nondepository Credit IntermediationTWTR Tweeter Home Entertainment Group Inc. Appliance, Television, & Other Electronics StoresPORK Premium Standard Farms Inc. Animal Slaughtering & ProcessingBLD Baldwin Technology Co. Inc. Industrial MachinerySVL Silverleaf Resorts Inc. Hotels Resorts & Cruise LinesBAMM Books-A-Million Inc. Specialty RetailGMR General Maritime Corp. Deep Sea, Coastal, & Great Lakes Water Transportation

JBLU JetBlue Airways Corp. AirlinesRMBS Rambus Inc. Consumer FinanceGCA Global Cash Access Holdings Inc. Commercial Services & SuppliesXMSR XM Satellite Radio Holdings Inc. MediaKFX KFX Inc. Oil Gas & Consumable FuelsMATK Martek Biosciences Corp. BiotechnologyTXRH Texas Roadhouse Inc. (Cl A) Hotels Restaurants & LeisureSWB Smith & Wesson Holding Corp. All Other Fabricated Metal Product ManufacturingCYBX Cyberonics Inc. Navigational, Meas, Electromedical, & Control Instruments ManufacturingHRB H&R Block Inc. Accounting, Tax Preparation, Bookkeeping, & Payroll ServicesNLS Nautilus Inc. Sporting & Athletic Goods Manufacturing

Price approx. $61/sharePrice approx. $61/share annual sales growth=21.7% trending to 5% terminal growth over annual sales growth=21.7% trending to 5% terminal growth over

20 years.20 years.

EPS = $1.72/share and Price = $61/shareEPS = $1.72/share and Price = $61/share set SGA and RD margins at best level from 5 year history, then set SGA and RD margins at best level from 5 year history, then

lowered CGS to 35.4%, left the rest unchanged.lowered CGS to 35.4%, left the rest unchanged. now lower sales growth to 19.4% in 2001 and smooth to 5% over now lower sales growth to 19.4% in 2001 and smooth to 5% over

20 years.20 years. implies $3,758,833 stock repurchase.implies $3,758,833 stock repurchase.

Price approx. $48/sharePrice approx. $48/share annual sales growth = 18.3% trending to 5% terminal growth annual sales growth = 18.3% trending to 5% terminal growth

over 20 years.over 20 years.

Price = $48 and EPS = $1.65Price = $48 and EPS = $1.65 set margins as in report, zero for depreciation, -.6% for Xord, gets set margins as in report, zero for depreciation, -.6% for Xord, gets

NI of 11.5B.NI of 11.5B. sales growth = 16.2% in 2001 then trend to 5% over 20 years.sales growth = 16.2% in 2001 then trend to 5% over 20 years. BUT too many shares repurchased, so EPS still off. (MS has 7000 BUT too many shares repurchased, so EPS still off. (MS has 7000

outstanding). Can adjust BS to require more assets, or do a 10% outstanding). Can adjust BS to require more assets, or do a 10% stk dividend (set dilution factor to 2.1).stk dividend (set dilution factor to 2.1).

My Intel Inputs