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EPS Forecasting
◼Requires NI and average # of common shares
outstanding.
◼Forecasted stock issuance/repurchase implies a
change in the # shares.
◼Assume they are issue at end of year, at estimated
price Pt+1.
◼issue/repurchase dollar amount of new equity at Pt+1
to get additional # of shares
1
11 −
+
=++
t
tt
DP
r
getting the right # of shares
◼when should you adjust your valuation for a
stock split?
◼ans: only when it is after fiscal year end but
before valuation date.
http://finance.yahoo.com/q/bc?s=INTC
fiscal year end valuation date
stock
split
stock
split
stock
split
0
10
20
30
40
50
60
70
80
-10
-8
-6
-4
-2
0
2
4
6
8
10
days relative to announcement
price
2000Q3 rls
Intel’s Earnings Torpedo
P/E = 53, P/B = 13
Intel Revenue Warning
Date seasonal
growth (yoy)
sequential
growth
seasonal
growth (yoy)
sequential
growth
2000 Q1
12.5% 6% 12.5% 6%
revenue
LT growth
(First Call)
22.6% 20.6%
2000 Q3
GM%
63-64% 62%
pre warning post warning
( )
−
=
−
−
−
−−
+==
−
+=
−=−=
1
1
1
0
1
0
1
00
11
)1(growth cumulative
1
)(
t
t
t
t
t
et
tettett
g
CE
CE
rROE
CEP
soCErROECErNIRI
The ROE model
constant ROE and growth example
−
−
+= gr
rROE
CEP
e
e
1
00
if ROE and growth are constant, then
g
P0
high ROE
low ROE
Skinner and Sloan “Don’t let an earnings torpedo sink your portfolio”
communications and server sectors. The company now expects
revenue for the first quarter to be down approximately 25 percent
from fourth quarter revenue of $8.7 billion, lower than the previous
outlook that first quarter revenue would be down 15 percent, plus or
minus several points.
