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  • bcwood_32963 bcwood_32963 Sep 28, 2011 1:17 PM Flag

    My analysis of ACOM

    I have used BG's valuation formula for years,with some success.

    Note,however, that your conclusion is very dependent on two inputs:

    (a.)Projected EPS Growth Rate. You assume 30%, which seems pretty high going forward.Try a lower rate and see what happens.

    (b.) AAA Bond Rate. You use current rates, depressed by FRB partially for political reasons.Hard for me to see these rates as representative of a lynchpin for valuation during the next several years.A 50% rise in rates cuts PE by 33%,doesn't it?

    All the above having been said, if ACOM grows 15-20% annually for the next 4 or 5 years, the stock should do fine.

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    • my sense is similar to yours, bcwood.

      the supposed BG analysis has been almost refuted by the SP result since the post when ACOM was at $32+. Graham's margin of safety should have protected stock price from falling off a 50% cliff in three weeks.

      the assumed 30% growth rate seemed excessive and was fuel for the sell off. much too optimistic. long term rates are mostly not in control of the FED. LT interest is more about inflation expectations.

      on the other hand, 15%-20% over the next few years, by no means assured, should bring the stock back to $30, assuming no further multiple contraction. anything less will depress the ACOM multiple further and the stock price could flounder in the teens for many years.

    • a) The future growth rate is assumed, that's true, but 30% is the CAGR over the past 36 months. That's why I look at the growth rate implied by the current price. Solving Ben's formula for growth given the other inputs (some assumed) indicates that the price reflects a future growth rate of 10%. There's little to suggest that the company's growth will decelerate that much.

      b) If the economy ever gets back on its feet, the Fed will keep rates low for at least a year or two after that. Since I don't see the US being on the path to recovery for at least another 12 months, I'd say we have another 2-3 years of low interest rates. It will take a while for rates to go up 50%. The last time they were that high was 15 years ago.

      What do you think?