Geoff Gannon posted a blind stock valuation contest over at Guru Focus.
In this exercise Geoff gives his readers some information on an anonymous company’s income statement and balance sheet and asks readers to submit an estimate of what the company is worth. There is no industry data etc, so this is a purely quantitative exercise.
Take a look at the details and submit your thoughts to Geoff here.
If you would like to see my thoughts, keep reading.
From the data supplied by Geoff we can extrapolate gross margin, D&A, Earnings, Net Margin, and EPS.
Additionally, by adding receivables, inventory and PP&E we can come up with invested assets, and see that return on invested assets has averaged over 15% over the last 10 years and has not meaningfully declined with growth, implying that the company achieves an acceptable return on retained assets, and therefore should likely be valued on an earnings basis. The strong growth justifies a higher multiple, but net margins have been declining as the company grows, and receivables have been growing faster than sales indicating a possible decline in the quality of their customers. Not knowing anything about the competitive environment or industry I would not pay more than 15x 2011 EPS of 2.11 or $31.65
As a down side estimate I took the mean return on invested assets of 15.5% and apply a 10% hurdle meaning I would value the company at 155% of the book value of assets plus the unknown cash per share. 155% of the assets is a share prices of $19.72 plus the cash.
I would be happy to pay somewhere in the middle of these two numbers like $26/share for this stock.