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Investment Analysis Clubs / The BMW Method


Subject:  Re: Rule#1 method vs BMW method Date:  7/21/2007  2:20 PM
Author:  mohitaron Number:  25826 of 42393

> I don't think a decade is nearly enough time to evaluate P/E movement.

That might be true. But generally speaking, a company's avg P/E doesn't rise over time - it either stays the same or declines if growth is declining. Thus, looking at just the last 10 years is likely going to give me a conservative P/E estimate - which is primarily what I'm interested in. A conservative P/E would result in a conservative future stock price computation, and a conservative computation of current sticker price as per Rule#1 method.

That said, it is certainly good to look at more data. But given that I don't know of any free Internet sites that provide P/E ratios for longer than a decade, and I'm not particularly enthusiastic about paying extra for this information, I'll just stick to what the free sites provide.

> Therefore, you can calculate that P/E, estimate EPS based on
> historical EPS CAGR, and come up with a future target price. But buy
> the stock or not based on whether you'd be willing to hold the stock x
> years from now if it continues to trade on its current EPS CAGR.

Agreed. Rule#1 achieves this in a slightly different way. It advises to
estimate future EPS growth as the minimum of the equity growth and analyst projected growth. I think if the current EPS CAGR is low, it'll possibly be reflected in the equity growth, and so you'll only estimate future stock prices based on this conservative equity growth.

- Mohit
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