More fair value calculations based on Op Cash flows
A few weeks ago I put out a message calculating the fair value of NTWK based on operational cash flow. I have seen that post reposted several times by Netsollong so I am assuming people enjoyed it. I try to add value to these boards, but I am never quite sure if what I am posting is considered to be of value or spam. But I think fair value calculations are of value, so here are some more thoughts.
First, I don’t feel earnings are important as far as the absolute number is concerned. What is important is that earnings are increasing and the company is beating estimates. NTWK passes both tests. I calculate fair value thru operational cash flow. Fidelity states stocks are now trading at a median of just under 8X op cash flow. Stocks with long term debt levels under 1 year of OCF, and have accelerating OCF, trade at a higher multiple and stocks with 3+ years of long term debt to OCF usually trade lower. NTWK has interest expense of 2.75% of it’s OCF. Clearly debt is not a problem with this stock. I’d say it’s worth 10X OCF, but I’ll use 8 and 10 times OCF to calculate fair value.
Here are the numbers.
Q3 0.03 0.16
Q4 0.25 0.35
Q1 0.12 0.36
Q2 0.28 0.81
Totals for last 4 quarters (trailing numbers)
EPS = $0.68
OCF = $1.68
Fair value = [[[[[ $13.44 to $16.80 ]]]]] (As of Dec 31, 2012)
Estimates for next 2 quarters
Q3 0.21 0.60
Q4 0.35 1.00
After Q3 (March 31)
EPS = 0.86
OCF = 2.12
Fair Value = [[[[ $17 - $21 ]]]]
After Q4 (June 30)
EPS = 0.95
OCF = 2.77
Fair Value = [[[[ $22 - $27 ]]]]
EPS estimates are 21% higher for the 4 quarters next year, making $3.50 - $4.00 of OCF very likely for the year ending June 30, 2014. A fair value of $35 - $40 is pretty easy to see (in 14 months). And don't forget the stock market looks 2 quarters ahead.
I welcome feedback, but please no personal attacks.
I think you have added great value to this board and please feel free to give your input on the discussion in between me and KScott on the other valuation ratios. I know you may not like using those ratios but sometimes they can underpin your own valuation based on OCF.........it's nice when NONE of the ratios look out of place.....peace of mind
My only goal is to make money. I have never been able to use price/book or price/sales or any other ratios to pick winners. It always seems to come back to the EPS trend (growing higher than the market and beating expectations and cash flows - OCF and FCF rule in the land of the money makers. If you have a tried and true method for other ratios, I'd enjoy reading about it.