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John Wiley & Sons Inc. Message Board

  • leewalter2002 leewalter2002 May 14, 2003 3:50 AM Flag

    Valuation

    This is a back of the envelope calculation using Yahoo's data (data may be wrong). The reason is to counter Morningstars contention that Wiley is worth 31 dollars per share or to merit 5 star rating.

    The assumption below is that the investor wants a 12% average annualized rate of return on his investment.

    Yahoo data (per share)

    Book value--$5.71
    EPS--------$1.23
    Share Price--$24.77

    Assumptions-- Let's more than double Wiley's earnings per share to 3 dollars per share, and let's assume it can generate this level of profits for the next 30 years. The present value of these earnings (and we are assuming they are free cash flows... reality is that the free cash flows are smaller) at 12% gives us a value of $24.17 per share. To this figure lets add one half of the book value which we will consider liquidation value (things such as goodwill are of no practical value or better yet, only of value if they can generate free cash flows into the future). So half of the book value is $2.86 added to the $24.17 we get $27.03.

    What to make of this. First, we more than double the current earnings. In reality it is going to take Wiley more than 11 years to do this assuming they can grow per share earnings at 8% per year. Second, we are using earnings per share number: a) they are unreliable from the standpoint that share repurchases will exaggerate this figure (no quantified gain in value) while decreasing the book value (again value gain or loss is not being measured). b) Free cash flow would be a better number to use, but for simplicity just assume its less per share than the reported earnings (real free cash flow and not the crap that analyst would have you believe). Lastly, we assumed 30 years of uninterrupted profits. The judgment has to be made as to what is more likely. Is it more likely that Wiley will suffer adverse business conditions or is it more likely that it will find itself in a boom. By default the analyst should opt for pricing the security based upon eventual adverse years over a 30 year time frame. You decide. Good luck. I'd like to see Morningstars analysis. Other than the superficial stuff they spew. Show us your assumptions Morningstar. Of course I've done a two minute analysis, if you guys want greater detail I will provide it.

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    • If I listened to your advice I would have missed out on an almost double since your post. Good thing I didnt

    • Is it now? Well, you know the old saw. Lies, damn lies, and statistics. I like using Quicken's Instrinsic Value calculator for quick and dirty calculations, and I find that using fairly simple and reasonable assumptions, it ends up being close to Morningstar's take more often than not.

      Starting from:
      Most recent yearly earnings: 77,400,000
      Earnings Growth: Let's use your 8%.

      It's far less than their 10 year growth rate of 24%, or even their 3 year growth rate of 10.5%, and marginally above the historical industry rate of 7%, which we can reasonably expect JW.A to beat over time.

      Discount rate: At 0.49, it's beta has it historically to be less risky than the overall stock market. As to the future, who knows, but for the sake of argument, let's use an long term market rate of 10%.

      Press Recalculate Instrinsic Value/Share

      Churn churn churn. . .
      $32.72

      http://www.quicken.com/investments/seceval/?cmetric=intrinsic&cursym=&csym=JW.A&
      csym1=&csym2=&initearnec=77%2C400%2C000&egrrbtn=ec&egrdd=4&egrec=8&dcrrbtn=ec&dc
      rec=10&dcrdd=2&p=JW.A


      There's my two minute calculation.

      • 1 Reply to shroomvoom
      • Not bad, but... First of all, if you want 10% average annual then I guess you can use that discount rate. Nothing wrong with 10%.

        Next, your use of quicken and most other computer models assume the company will exist into perpetuity. Now, this is not bad given that cash flows really far out aren't worth much in present value, but you still have to contend with cash flows from years 1 to let's say 50. From this you will find that greater than 50% of the value of companies are based on cash flows (or earnings) past year 10. The ramifications of this is that very few companies can or have sustained long term uninterupted growth. You are relying too much on the trend.

        Pricing power. I would normaly grant you your growth projections, but Wiley has one thing working against it. It's pricing power. Not that they don't have it, but instead that they may not be able to price with moderate inflation. So Revenues will adjust less than expenses. Of course they may be able to leverage technology to reverse this trend, but then what does that mean for the industry and Wiley's position in it. Example: The network television business loss a lot of ground when cable became popular. A business once marked as an oligopoly now is fragmented. Networks still survive, but there definetly is a disruption in their business. Technology may be harder to control and more expensive than you think. ie. piracy.

        Don't get me wrong, I love the company, but just feel the price is two high for someone who demands at a minimum of 12% average annual with a margin of error. Also have real concerns about the pricing of the majority of books. If our current base in pricing was starting at half -- Accounting books that cost over 100 dollars --- instead if the base (current) was 50 or 60 dollars and they were still making the money they are now, I would feel more comfortable that they could adjust to inflationary invironments without affecting the volume of business. Maybe I'm wrong. Maybe people really will be paying 400 thousand to go to a private college. I don't think so.

 
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