As you know you can determine EPS by multiplying book value times ROE. Kemet has had a very sporadic past as ROE as ranged from 2% to a an estimated 41% in 2000. As such, EPS have fluctuated wildly at times. I do believe, however, that past records may help determine future expectations. I took a look at the past book value growth of Kemet and I was quite surprised at what I found. Since 1992, the book value growth looks like this:71%, 26%, 50%, 18%, 20%, 2%, 57%, 67%The first 4 years averaged a book value growth of 41% while the last 4 years averaged 36.5%. Now book value by itself means little but when you can couple it with ROE you can get a better feel for the intrinsic value of the business. For instance, AT&T increased book value from $9.70 to $24.69 in one year (from 1998-1999). Yet its ROE fell from 20.5% to 6.4% as well. Likewise, AT&T's debt increased from $5.5 billion to $21.5 billion in that same year. So if a business can grow book value while maintaining a high ROE that means EPS is likely to please.Kemet is not capital intensive like AT&T so it typically has low debt and lots of cash. Historically, its ROE (although extremely variable) averages 20.2% (1992-2000). Now, 2000 is an aberration with an abnormally high ROE that's clearly unsustainable (41%). Likewise, 1998 was abnormally low (only 2%). So, let's be conservative and leave out the ROE for 2000 yet keep 1998's low of 2%. This brings the average down to 17.6%. So let's round that down to 15% to once again be conservative. Now as I mentioned before book value growth averaged 41% in the first 4 years and 36.5% in the latest 4 years. Let's be conservative and say that book value growth is more appropriate at 20%. So if book value is $10.50 in 2000 then it will be $26.13 in 5 years growing at 20% annually. Now all we have to do is multiply our reasonable ROE estimate of 15% to this number to get our EPS for 2005:$26.13 x .15 = $3.92 EPS for 2005Furthermore, let's award Kemet a modest 13 P/E (you can multiply any P/E that you think is appropriate).$3.92 EPS x 13 = $50.96 2005 Stock PriceNow many of you out there may be saying: "Wait a minute! You think Kemet will have EPS of only $3.92 by 2005?!". To answer your question, I'm a conservative, long-term investor so I don't get my hopes up.Regardless, if the future value of Kemet is $50.96 in 2005 and the price you're paying today is $18 (note: it's $17.76 now) then your average annual return is 23%. Not too shabby. I don't know about anyone else, but if I was able to get 15% consistently with my portfolio then I'd easily be a multi-millionaire. So even with my conservative estimations you're still left with a margin of safety to achieve that 15% per year goal.In a time when speculators are learning a lesson as old as 1637 with Holland's tulip bulb bubble, Kemet represents what appears to be a conservative, long-term investment.-TF
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