Mems: Part 2

I was reading yesterday Chetan Parikh’s editorial piece, Macrofactors and microfactors in value investing.

The concept of earning power has a definite and important place in in­vestment theory. It combines a history of actual earnings performance over a period of years with a reasonable expectation that the past level or trend will be approximated unless extraordinary conditions supervene. This performance may be measured in terms of either (1) the earnings per share of common stock or (2) the rate of return earned on the common stock equity (Security Analysis, Principles and Technique, 1962, p. 468).

Ahhh..I was just looking at Mems quoted price….which prompted me to mumble this out loud…:D

Yeah, I wrote about it earlier. See: S&P Coverage on Mems.. S&P opened coverage on 30th Sept 2005 on Mems when it was trading at 64 sen with a HOLD target price of 73 sen.

Anywayyyy…. Mems is now traded at a price of 37 sen.

Fiyoooo….die standing lah…just imagine if I had follow S&P word for word in their recommendation…kena paku lah!

See the unreal dangers of blindly following these recommendations?

Are the foreign based research reports any better?

An analyst report is an analyst report is an analyst report is an report.

Are these reports partial or impartial?

Ok… back to the concept of earning power.

Let me quote again…

It combines a history of actual earnings performance over a period of years with a reasonable expectation that the past level or trend will be approximated unless extraordinary conditions supervene.

The key point for me is REASONABLE EXPECTATION.

Now look at how S&P expectation. As mentioned earlier..

As can seen from the table posted by S&P, Mems did managed to post a net earnings of 13.7 million for its fiscal year 2005. What i see next is S&P projecting a net earnings of 17.9 million for Mems fiscal year 2006. Oh, this works out to be a growth rate of 31%. And the next fiscal 2007, Mems is projected to earn a net earnings of 47.6 million.

Wow!from 13.7 -> 17.9 -> 47.6!!!!

Sayyyyyy ... isn't S&P is projecting a compounded annual growth rate of 86.4% for Mems next two fiscal years??

I keep asking me-self this….a 86.4% compounded annual growth rate for the next two fiscal year?

Does Mems earnings power deserve such highly optimistic expectation?

Isn’t it just wayyyyyyyyyyyyy too lebih?

Consider this other issue olso: Does the current/trailing earnings matter?

At 64 sen, based on current/trailing net profit of 13.7 million, Mems earnings per share is only 2.1 sen which equates to an earnings multiple of 30.4x. Yes, no doubt that Mems has a great track record and has a very solid looking balance sheet… BUT… based on such pricing and the moneytary size of Mems earnings (13.7 million is rather smallish isn’t it?), isn’t one an paying an overly optimistic price for the stock? Remember the issue of pay less, get more and pay more, get less? Does Mems even deserves a 30.x times earnings multiple?

At 37 sen… Mems is trading at a current earnings multiple of 17x earnings.

How? 37 sen wor. A bargain? A steel? Or no I see?

:P