2005, a pivotal year for Axis-Shield, with strong growth and profitability

Thank you for all the kind words, it is much appreciated as some elements take up a lot of my time.

There appears to be two schools of thought -

Camp 1 - Those that think the shares got ahead of fundamentals and that the sp and subsequently the pe ratio will command a more moderate rating and be the determining feature going forwards.

Camp 2 - Those that think Axis-shield is a growth stock and should command a racier rating for at least the next few years as profits accelerate exponentially.

Importantly both schools see sustained profits, so currently is (was) the rating too racy for the fundamentalists, or is it now too slow for the growth investors? Or are we in a Goldilocks scenario, being neither too hot and neither too cold? I am in Camp 2 and believe that the rating is currently too mean because, sustained profits are one thing, and a cumulative/snowballing of profits another.

Like The Count, I just cannot see the rationale of camp 1, in either waiting for products and profits to mature or the subsequent ‘near’ pe ratio as forming the justification or determining factor for buying into a share where profits are set for such rapid acceleration. Put another way -

If we take the current sp of circa 300p, a 2 year time frame (we are a patient lot) and a projected (and conservative) estimate for 2008 earnings per share range of 20p-31p (£10m-15m) and then apply the racier but far from too demanding ‘prospective’ pe rating of 25 (given that growth will still be a feature going forwards from 2008). That equates to a sp range of 500-775 and a return of circa 66%-158% not too bad for a relatively low risk play, especially compared to the rates on offer in the bank/bs ;-)

So if you play or adhere to the near term pe rationale, then you probably see the current sp as either in the ‘Goldilocks scenario’ or 'too racy a rating' and prefer the bank option. However, if you are prepared to look a bit further out and apply a sensible pe ratio, then value starts to become the emerging element. However, using a PE ratio is perhaps more appropriate where profits growth is either 'absent or slow' and only then would you start basing decisions on applying a low PE multiple.

Confused? Then we need to take a different approach, which surely brings us onto a ratio known as the PEG factor. The PEG factor is a mixture of prospective PE ratio and forecast earnings growth. The formula is, prospective PE ratio divided by the forecast earnings growth in % terms, and is specifically used to value/compare only ‘growth’ companies. A value of less than 1 is deemed as a share being cheap, and the lower the number, the cheaper it is.

The issue here will be predicting the profits and earnings growth between this year and 2006, so let keep it relatively conservative and pencil in circa £1m for 2005 and a £3m - £5m range for 2006?

£3m = eps of 6p and a PE of 50, divide that by the % growth , profits growth would be 200% i.e 50/200 = 0.25

£5m = eps of 10p and e PE of 30, divided by the % growth, profits growth would be 400% i.e 30/400 = 0.075

Based on my assumptions of a reasonable? profits range, the first example rates ASD as cheap, and example two as very cheap! Its cheap even if you apply a mere £2m profit for 2006 (0.75), and gets a whole lot cheaper if you are a touch more adventurous ;-)


This is why I guess the likes of The Count and myself see value, the difference of course is that The Count has ammunition to take advantage (very well done, and proof that it does pay to be patient) where as ‘currently’ all I can do is suggest that, if I could I would.

May I take this opportunuity to wish all a very happy, healthy and properous 2006.

Regards, wan