When I do a valuation on a company, I'm usually very conservative. If an investor is comfortable with the potential return using conservative numbers then it provides a margin of safety. Furthermore, if things go better than expected, the annual return is pleasantly higher for the investor.
Many analysts think the long-term growth rate of SPLS is about 25%. Valueline seems to think it's 25%, yet it's latest valuation was on April 21st. Merrill Lynch, who recently downgraded SPLS, thinks that the growth rate is between 22-30%.
For my estimates, I used a growth rate of only 20%, assumed a period of 5 years and put the average P/E over those 5 years at 20.
N = 5 P/E = 20 % = 20 99 EPS = .67
.67 in 5 years is 1.66 1.66 x 20 (p/e) = $33.34 target
Discounting back to present value, at a price of $15.50 for SPLS, you can get a 16.5% annual return.
So, if things go below expectations for SPLS you're still earning a 16.5% annual return. However, if SPLS grows earnings at 25% within those 5 years and it's P/E is 25 within that period, then your return would be 26% annually at a price of $15.50. In this scenario, the target price would be $51 in 5 years.
So as an investor, I think it's realistic to assume that your annual return will run between 16-26% within those 5 years with the price target ranging from $33 to $51 depending on events. However, if SPLS is able to grow earnings above 25%, your return is even more generous.
Events that have lowered EPS this year are Staples.com losses and pricing pressures from ODP and OMX. I think these are the two key issues going forward and it will be interesting to see how it plays out. Based on these challenges, my expectations for stock appreciation are low for the next 6 months.
price and time target on SPLS?? I do not own SPLS at the moment but have in the past. It was just brought to my attention by a stockmarket service. Am thinking about buying tomorrow. You seem pretty up to date on investing and on SPLS. A reply would be appreciated. Thanks