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> This is the one thing that has bother me on stock evaluation, Mohit. I
> follow your evluation and have no problem with the arithmetic. But, to
> me, the fly in the ointment is the future PE. Yahoo shows the forward
> PE to be 13.65 and the trailing PE to be 17.38. If we assume the 12.3%
> growth to be accurate, the rule of thumb for PE multiple that Mr
> Graham used would be about 15.2 (approx 9 + growth/2). If we used the
> latter figure for future PE multiple, the 10 year value would be
> approx $ 132 and the Present Value would be approx $ 33. It seems that
> a miss on the assumned P/E multiple can make quite a difference.


You're right - this is a bit of a debatable inference. Two factors drove
my decision to choose a P/E of 20.
(1) If the growth is 12.3%, then a P/E of anything less than 15 looks
very conservative.
(2) If you look at the historical P/E charge over the past 10 years,
it seems that 20 is a good pick - it was hit around 2005.
Overall the P/E has been declining since 2002 - today the P/E is
around 16.5 and seems to be at its historical low - even though the
EPS growth and Equity growth are consistent. As often happens with
price fluctuations, price often doesn't come to a reasonable value
- it overshoots it. Similarly, in this case it might have overshot
a reasonable P/E.

But there's nothing wrong with being even more conservative and choosing
a lower P/E. That'll make WMT look more unattractive at current prices.
But who cares - you can find other stocks that will be attractive. In
fact, I routinely choose very conservative P/Es when buying high growth
stocks. Also, for high growth stocks, I do the Rule#1 computation for
only 5 years and not 10 years (a typical company is unlikely to have sustained high growth for the next 10 years).

The higher the P/E you choose, you have to understand that
there's greater risk involved - you can do the trade if you're
comfortable with it.


- Mohit
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