EPS Forecasting Requires NI and average # of common shares outstanding. Requires NI and average # of common shares outstanding. Forecasted stock issuance/repurchase implies a change in the # shares. Forecasted stock issuance/repurchase implies a change in the # shares. Assume they are issue at end of year, at estimated price P t+1. Assume they are issue at end of year, at estimated price P t+1. find P t+1 in find P t+1 in issue/repurchase dollar amount of new equity at P t+1 to get additional # of shares issue/repurchase dollar amount of new equity at P t+1 to get additional # of shares

getting the right # of shares when should you adjust your valuation for a stock split? when should you adjust your valuation for a stock split? ans: only when it is after fiscal year end but before valuation date. ans: only when it is after fiscal year end but before valuation date. fiscal year endvaluation date stock split

Intel’s Earnings Torpedo P/E = 53, P/B = 13

Intel Revenue Warning Date seasonal growth (yoy) sequential growth seasonal growth (yoy) sequential growth 2000 Q1 revenue 12.5%6%12.5%6% 2000 Q2 revenue 23%12%23%12% 2000 Q3 revenue 20-27%6-12%17-19%3-5% LT growth (First Call) 22.6%20.6% 2000 Q3 GM% 63-64%62% pre warning post warning

The ROE model profitabilitygrowth

constant ROE and growth example if ROE and growth are constant, then g P0P0 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, 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.

What happened at Intel?

what happened? Sales growth 14.8%-21.3% 0.8% 0.8%12.6% gross margin 62.5% 50.8% 50.8%49.8%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 stocks quantitative screening is common in portfolio analysis quantitative screening is common in portfolio analysis most of the screening variables are backed up by academic evidence most of the screening variables are backed up by academic evidence need to control for risk need to control for risk or, at least, exposure to factors that will make you look dumb. or, at least, exposure to factors that will make you look dumb.

project companies

Price approx. $61/share Price approx. $61/share annual sales growth=21.7% trending to 5% terminal growth over 20 years. annual sales growth=21.7% trending to 5% terminal growth over 20 years. EPS = $1.72/share and Price = $61/share EPS = $1.72/share and Price = $61/share set SGA and RD margins at best level from 5 year history, then lowered CGS to 35.4%, left the rest unchanged. set SGA and RD margins at best level from 5 year history, then lowered CGS to 35.4%, left the rest unchanged. now lower sales growth to 19.4% in 2001 and smooth to 5% over 20 years. now lower sales growth to 19.4% in 2001 and smooth to 5% over 20 years. implies $3,758,833 stock repurchase. implies $3,758,833 stock repurchase. Price approx. $48/share Price approx. $48/share annual sales growth = 18.3% trending to 5% terminal growth over 20 years. annual sales growth = 18.3% trending to 5% terminal growth over 20 years. Price = $48 and EPS = $1.65 Price = $48 and EPS = $1.65 set margins as in report, zero for depreciation, -.6% for Xord, gets NI of 11.5B. set margins as in report, zero for depreciation, -.6% for Xord, gets 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 outstanding). Can adjust BS to require more assets, or do a 10% stk dividend (set dilution factor to 2.1). BUT too many shares repurchased, so EPS still off. (MS has 7000 outstanding). Can adjust BS to require more assets, or do a 10% stk dividend (set dilution factor to 2.1). My Intel Inputs