No. of Recommendations: 3
7 eps base cade, 10% growth x 5 years x 18 PE = $202. 12% discount rate = $114 IV now. 20% overvalued imo, thoughts?
My thoughts are that this is just another way of saying you can't get 12% returns from a stock that grows its earnings at 10%, if the ratio stays the same as it is now (18).
I think a more straightforward way of presenting these numbers is to say that, if the earnings grow 10% a year, you will get a 10% return, as long as the price to earnings ratio stays at 18. If in 5 years the ratio has gone back to its historical average of about 24, then you'll get a return about 6 points higher than that.
That is all trivial math, the hard part is to figure out future growth rates and what multiple Mr. Market will most likely assign. Is margin expansion and 10% growth in earnings really sustainable? I kinda doubt that you can increase margins forever. It's just ancedotal but I observed that friends bought Botanist, Roku, Sapphire, Tanqueray or whatever premium Gin was on sale. I'd like to buy at 15x earnings, no heroic assumptions needed for a decent return.
I couldn't resist and wrote a bunch of April $120 and a couple of $125 puts.
