Let’s pick up some MOT
The Cramer Portfolio has an empty slot for a technology company. We sold iRobot (IRBT) perhaps a little too soon but for tax loss reasons. Should we buy some Motorola (MOT) at this level? Earnings per share: $1.81. Estimated growth rate: 12%, average PE: 17 works out to a sticker price of $23.62. The closing price was $21.81. I’ll watch it tomorrow and if it hasn’t rocketed up by 10:30 we’ll add some to the portfolio. Or if it looks like it is headed straight down for awhile, then we’ll wait for it to settle. But we will try to pick up about $9500 worth or so tomorrrow.
MOT shows up in the magicforumulainvesting.com site. It gets a StockScouter rating of 9 out of 10.
Last one to fill is the speculative play. Any ideas?
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Could you please explain how you found or calculated the numbers you used above? Thanks.
I’ll try. I also explained a similar calculation in show MMM-016. I’m using the methodology from Rule #1 by Phil Town.
The $1.81 per share for MOT is found from http://moneycentral.msn.com/detail/stock_quote?Symbol=MOT.
Estimated growth rate is from http://moneycentral.msn.com/investor/invsub/analyst/earnest.asp?Page=EarningsGrowthRates&Symbol=MOT
Average PE ratio is from http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=TenYearSummary&Symbol=MOT
Multiply 1.81 by 1.12 ten times (Big Dummy’s way of doing compunded growth 🙂 to get $5.62 per share in earnings ten years from now.
Then multiply the PE of 17 by the $5.62 earnings to get the stock price ten years from now. That’s $95.54.
Then divide that by 4 (Because something that grows at 15% for ten years basically goes up 4 times.) to get the sticker price of $23.89 (close enough).
Then divide by 2 for our 50% margin of safety of $11.95.
You can tell I’m not an accountant!
And let me summarize what that $11.95 means. It is the price at which we believe we would be buying a dollar’s worth of stock for fifty cents. We think the stock is worth $23.89 today because we estimate it will grow its earnings 12% per year for ten years and it has averaged a PE ratio of 17. In order for us to obtain 15% growth per year, we would have to buy it at $23.89. On top of that we want the margin of safety.
Great if you can find one! Good luck!
Thanks for the reply. Okay, I apologize if I’m missing something obvious, BUT…
For the estimated growth, you’re taking your number from the Next 5 Years column, yah?
And for the average PE, where on that page are you getting the 17 from?
I got the rest, though. Thanks again!
Looks like you caught me with an incomplete explanation. Thanks for keeping me honest. Figuring out a PE for MOT in the future is complicated and fuzzy. The average of the PEs on that page is actually 38.8. The current PE of MOT is 12.7. So what number should we choose?
In Rule #1, Phil Town says to look at the Return on Investment Capital to serve as a guide to help you guess the PE.
http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=InvestmentReturns&Symbol=MOT
The last 5 years ROIC was 1%. The last year was 22%. Phil says don’t go larger than the ROIC. So here’s the fudge factor I forgot to add:
I took the last ROIC and averaged it with the current PE: 22 and 12 to come up with 17. This is my estimate of the average annual PE ratio of MOT for the next ten years. Better to err on the conservative side when placing these bets.
Make sense or seem too hokey?
Nonetheless, this is always going to be the kind of guessing we have to do when estimating future numbers. Thus, the need for the margin of safety when our money is on the line.
I suppose here we have margins of safeties within margins of safeties. Better safety than sorry. 😉