Price to Cash Flow and Comparables.
As a technology analyst, you have been asked to compare the valuation of Compaq Computer Corporation (NYSE: CPQ) with Gateway, Inc. (NYSE: GTW).56~One valuation metric you are considering is P/CF. information on PICF, PIFCFE, and selected fundamentals as of 16 April 2001.
|
A Comparison Between Two Companies (all amounts per share) |
|||||||
|
Current Price |
Trailing CF per share |
P/CF |
Trailing FCFE per share |
P/FCFE |
Consensus Five Year Growth Forecast |
Beta |
|
|
CPQ |
$17.98 |
$1.84 |
9.8 |
$0.29 |
62 |
13.4% |
1 S O |
|
GTW |
$15.65 |
$1.37 |
11.4 |
$1.99 |
NM |
10.6% |
1.45 |
Using the information in Table 4 16, compare the valuations of CPQ and GTW using the PICF multiple, assuming that the two stocks have approximately equal risk.
CPQ is selling at a PICF (9.8) approximately 14 percent smaller than the PICF of GTW (1 1.4). We would expect on that basis that, all else equal, investors anticipate a higher growth rate for GTW. In fact, the consensus five year earnings growth forecast for CPQ is 280 basis points higher than for GTW. As of the date of the comparison, CPQ appears to be relatively undervalued compared with GTW, as judged by PICF. The information in Table 4 16 on FCFE supports the proposition that CPQ may be relatively undervalued. Positive FCFE for CPQ suggests that growth was funded internally; negative FCFE for GTW suggests the need for external funding of growth.