While that's not a bad total return projection for a high quality business, DLR's current
valuation multiples give me pause.
Not exact matches
Given its current
valuation, comparable
valuation multiples and the very high bar for revenue growth required, it looks like Dropbox is overvalued.
Though it's impossible to say where the
multiple will be at any
given time —
valuations are more volatile than trend earnings — 16.5 is an ordinary market
multiple (i.e. roughly fair value for the S&P 500).
As usual, I don't place too much emphasis on this sort of forecast, but to the extent that I make any comments at all about the outlook for 2006, the bottom line is this: 1) we can't rule out modest potential for stock appreciation, which would require the maintenance or expansion of already high price / peak earnings
multiples; 2) we also should recognize an uncomfortably large potential for market losses, particularly
given that the current bull market has now outlived the median and average bull, yet at higher
valuations than most bulls have achieved, a flat yield curve with rising interest rate pressures, an extended period of internal divergence as measured by breadth and other market action, and complacency at best and excessive bullishness at worst, as measured by various sentiment indicators; 3) there is a moderate but still not compelling risk of an oncoming recession, which would become more of a factor if we observe a substantial widening of credit spreads and weakness in the ISM Purchasing Managers Index in the months ahead, and; 4) there remains substantial potential for U.S. dollar weakness coupled with «unexpectedly» persistent inflation pressures, particularly if we do observe economic weakness.
You can't make sense of the numbers if the higher
multiples are
giving lower
valuations.
Given that the lower of these
valuation multiples is almost 25 times more expensive than the average Euclidean holding, it is no surprise that we have missed these recent gains.
Given Visteon's
multiple internal and external catalyst's, highly attractive absolute
valuation and the outsized spread between the company's «when issued» shares and the already depressed
valuation's of its global competitors, we think that the stars are aligning for bargain hunting investors to generate spectacular returns of 30 % + in a short period of time with relatively low risk.
I found this projection interesting and set out to examine how realistic it is,
given what we know at this point in time, by decomposing total stock returns to its components, namely dividend yield, inflation, real earnings growth and change in the
valuation multiple.
This quarter did not show any significant causes for concern, and the
valuation remains reasonable
given its growth rates and peer
multiples.
Given the company's diverse business lines, projected better environment for financials over the next twelve months and low
valuations the market
multiple could easily improve to a conservative 12 times forward earnings.