May, 1999:One often assumes ( too often?) that the price of a stock
is some multiple, say 10,
of:
For example, by May/99, Amgen had annual sales of $2.86 billion and with
512 million outstanding shares, then one might expect the stock
to trade at 10 x 2,860,000,000/512,000,000 or about $56 per share.
At the time of this writing (May/99), AMGN trades at about $63 (see chart, below)
... so this 10 x Stock_Price versus
Annual_Sales per Outstanding_Share^{*}
(as of May 7/99)^{*}meaning the ratio:
Annual_Sales divided by Outstanding_Shares
All numbers were obtained via the profiles obtained
HERE.))The straight line is the "best fit" to the points (identifying several biotech companies; the larger dots are the larger companies). If we take as the equation of the straight line: y = 7.6 x + 25 then (since y = Stock_Price and x = Sales/Shares) we get
Try it on for size:
For example: Another interesting point: the wee companies (Alkermes:ALKS and Aviron:AVIR) had negative after-tax income, yet the magic formula gives a reasonable estimate of their current price(s).
Now, on to something else: Let's assume that, in five years, some biotech
(let's say Negus Inc.) will have annual sales of $200 million
and 20 million outstanding shares. Our magic formula would suggest that
(in five years):Stock_Price = 7.6 (200/20) + 25 = $101
If one assumes an annual gain in the stock price of, say, 25% per year,
then the ^{5} = $33
Another thing: if our hypothetical company, current Stock_Price = 7.6 (17.5/16.7) + 25 = $33
Is it an accident that both figures agree ... or divine intervention?
^{*}
As of May 7/99, where does Sugen (SUGN) lie, on the best fit chart,
above?Right on top of Aviron (AVIR)! January, 2000:Now, for the new millenium ... what with all the B
... we get a different picture:^{i}_{o}t^{e}ch Fr^{e}n_{z}yIf the chart gives some mechanism for comparing stock pricing - and that ain't certain(!) - then ... uh ... who's overpriced? |