Company owners and managers usually have 5-year goals for Cumulative EPS. For example, if the compound annual EPS is projected to grow at 15% and therefore be twice current EPS at the end of the period, then the current 5-year P/E would be half of the current P/E, provided the market price remains constant.
However, it is likely there would be an increase in the market price of the shares reflecting investor expectations for continuing EPS growth. Therefore, would it not be constructive for both companies and investors if companies were allowed to publish their 5-year EPS objective, without any implied assurance of achievement and/or legal liability for projection-making?
It does not seem extreme to me for many companies to make known their objective of at least doubling their current EPS in the next 5-years. Indeed, such an objective would in many cases be the bare minimum objective found acceptable by those controlling the companies.
The publication of company 5-year EPS projections would be most useful for investors engaged in portfolio management decisions based on comparative judgements.
The reality is that prediction of future EPS is difficult, and in most cases unlikely to be accurate. Nevertheless, it is a useful analytical exercise for company managers, and the making known of the objectives should be understood as being hoped for objectives and not predictions or projections, and therefore not create liability in the case of performance disappointment. Company managers should be able to express, if they wish, their hopes and objectives for future events, without incurring liability. All such statements are likely to be positive, and many will be intended to induce investment. Company guidelines and policies will evolve since corporate and individual reputations will have a bearing on investor valuations.
However, in private company acquisitions, when the valuation advantage of the “greater fool” P/E multiplier of EPS is absent, the measure of value for the buyer is based on the number of years it will require tor the buyer’s cost plus any additional investment to be earned by the acquired company. In most cases the recapture of investment will be in less than 10 years, and frequently much less. Therefore, if publicly traded stock investors lose confidence in the future the P/E’s applied to current EPS will likely shrink to private company transaction levels, where the buyers are spending their own money.
Of course, there is nothing magic about 5-year periods, and the concept of publishing future EPS expectations and objectives is not limited as to any specific number of years or magnitude of EPS growth.
Just an idea. What do you think about such a possible added data feature?
When structuring revenue royalties our rex-basic.com calculator requires the user to provide a projection of revenues and royalty rates to be applied in selected annual periods, as well other basic data. The REX calculator then indicates the anticipated annual and cumulative royalty payments and basic value of the company if suggested comparable company P/E’s are applied.
Arthur Lipper, Chairman arthurlipper@gmail.com
British Far East Holdings Ltd.