Earnings vs Market Cap

I don’t usually get MSN messages at 8am in a public holiday morning.

But I did get 1 today from my good friend ET.

ET has read my report on Hyflux last night and he was eager to share with me what he thought first thing in the morning.

I really appreciate his enthusiasm.

Something new that I have learnt from him is that he uses:

EARNINGS/MARKET CAP x 100%

as the yield of stock.

Hyflux’s market cap is $3 billion. Earnings in 2007 is $32,949,000. Based on this formula: Yield of Hyflux stock is therefore 1.1%.

The following is an excerpt on what ‘discussed’ online:

ET:

i just read the report

ET:

was good in general, though conclusion is not firm

DW:

thanks

DW:

cos at this point, I want to wait for the market to be more clear before I can firm up a plan, so conclusion is to keep a close eye on Hyflux

ET:

anyway, good try, though if i were writing, definitely, the conclusion is: don’t buy @ current price

ET:

i would be uncomfortable owning something with PB > 2+ without strong reason

DW:

but the thing I don’t know what price is good.

DW:

cos some people like O’Neal, he cares more about growth than PB or PE

ET:

even growth has been inconsistent in the net profit

DW:

agree

ET:

revenue growth is one thing, but if it’s achieved @ net profit expense, growth is useless

DW:

net profit was not consistent because of 2006 figures

DW:

I think we can wait for 1 to 2 more years to see if the net profits are consistent, need more data to support

ET:

and u mentioned she bought sino….

DW:

yes, SinoSpring

DW:

she put in more stakes

ET:

well, i hope this is not just to drive up the revenue

DW:

was only 50% then 80%

DW:

no, in fact the year she bought SinoSpring, SinoSpring had a revenue decrease…that’s something I don’t understand!??

ET:

when growth slows down, companies tend to go M&A way

ET:

ic

ET:

is Sino spring @ public listed company?

DW:

Err…don’t think so…need to check

DW:

but SinoSpring owns a lot of desalination plants

ET:

Hyflux in general has a good future, but seems it’s priced in the share

DW:

i agree

DW:

PB and PE are ridiculously high. BUT BUT…again I want to find out if this is also equally high for other companies in the same industry in the world.

ET:

that’s a good idea

DW:

and also…..

DW:

1 thing I am not good at mastering is to come out a price objective.

ET:

well, I would do that with 2 measures

DW:

tell me more man.

ET:

1. p/e (if it has stabilized)

ET:

2. book value

ET:

if pe= 15, and PB = 2, I guess in general it seems to indicate fair value (with average growth rate)

ET:

however if pe < 15, or PB < 1, maybe worth buying, especially if the PE < 10, probably a bargain

ET:

that’s my standard

DW:

but how did you come out these benchmark numbers?

ET:

to make it simple

ET:

think of yield of bond

DW:

ok…i am familiar with bond..

ET:

earning/ market cap * 100% is stock yield

DW:

oh…

DW:

if earnings/market cap of Hyflux..say…10% then consider not bad?

DW:

this is interesting…

ET:

if earning has been stable, yes

DW:

did you come out this concept yourself..or you read it from somewhere?

ET:

I definitely read it from somewhere long ago

ET:

which i could not recall

ET:

i guess even intelligent investor has some section in it

DW:

very good..you remember the important concepts

DW:

okay…i’ll try to re-read.

ET:

it discusses valuation model -> by net asset, earning, and dividend

ET:

I tend to remember if I practise it

ET:

hence, i seldom write it

ET:

writing is a chore to me

DW:

haha…

DW:

Don’t need to write…just draw some mind map…

ET:

now, gtg

ET:

have a few hundreds pages to go

ET:

about john kenneth galbraith life

DW:

who is he?

ET:

great economist born in canada, who is influenced by  keynes

ET:

he has served in us govt during war time

DW:

interesting….

DW:

btw, is there anything more you want to add about Hyflux?

ET:

conclusion is “future is bright as people will need water forever, however, to expect the company to deliver as good investment is doubtful given the current valuation”

DW:

very good punch line!

ET:

remember, good company does not constitute as good investment if it’s bought @ a high price

DW:

thanks…what you write today is very valuable to me.

ET:

u should read another interesting book

ET:

four pillar of investing by william bernstein

DW:

cool cool….i will check it out at bookstore