For example, the “analysts” expect $7.07 EPS for FY Feb 2024 (mostly calendar 2023), and I expect something closer to $8.50.
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Jim, I’d be fascinated to hear the process & factors you use to arrive at your own future earnings estimates for companies like this one if you’d be willing to walk through it.
Chicken entrails figured prominently.
But really, nothing particularly surprising.
To clarify a bit, it’s not that I expect that specific figure that specific year, but I expect something like that as their normalized earning power that year.
i.e., what that year would come in at if it were neither unusually good nor unusually bad.
The basic thinking starts with the notion that the revenue and revenue growth trends will mostly hold up.
Plus:
We’ll see a resumption of something closer to old net margins as the costs of ramping up their on line offerings fades,
and an unusually good tail wind from buybacks being done at low valuation multiples.
New securitizations should be profitable.
The net margin thing is likely the main reason for the divergence in outlook.
I view the current drop of about 0.6% from prior norms to be transient.
For example, if this year were historically normal on that front, the net would be at least 15% higher.
Or maybe the other analysts believe the end is nigh because of the online-only competitors.
I think that’s perhaps a big part of the reason for the price sell-off, and many analysts tend to follow prices more than business fundamentals.
Another possibility is that I am wildly wrong.
Pure extrapolation isn’t the most solid way to do your reasoning.
But in this case it’s fun, because it certainly gives a cheery view: a twofer.
The rise in earnings per share in the last decade has been a juggernaut.
Build a trend line through those real EPS figures.
(RMS error of the real EPS trend versus actual real EPS is under 5%–a very good trend fit)
Extrapolate the real earnings trend out two years from today.
Imagine that the market price on that day might at be its historical average multiple of trend earnings in the last 10 years = 18.8.
That gives a target price in today’s dollars of $186.80 versus today’s $93. Call it a doubling; we’re among friends.
If that happened, that would be a two year expected return of inflation + 41.7%/year compounded.
That’s not my forecast. But it can be the basis of how to think about things.
To get a result very much worse than that requires a big breaking of either or both of the two inputs:
A very big downward break in the trend real earnings potential and/or a big fall in the market multiples.
e.g., if the earnings trend holds up but the ending market multiple is only 12, you only get inflation + 13.3%/year.
If the two-year-out EPS figures is 2/3 the level implied by the old trend, but the market multiple is its historical usual, you make inflation + 15.7%/year.
If both things happen, you lose -7.5%/year.
Jim