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 Annual_Sales/Outstanding_Shares ain't bad.
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:
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):
If one assumes an annual gain in the stock price of, say, 25% per year,
then the current price should be about
Another thing: if our hypothetical company, Negus Inc., was currently
one of those wee companies (with negative after-tax income) we could still
plug into the magic formula for an estimate:
current Stock_Price = 7.6 (17.5/16.7) + 25 = $33
Is it an accident that both figures agree ... or divine intervention?
Right on top of Aviron (AVIR)!
Now, for the new millenium ... what with all the Biotech Frenzy ... we get a different picture:
If the chart gives some mechanism for comparing stock pricing - and that ain't certain(!) - then ... uh ... who's overpriced?