Pondering the Preferred Procedure

  

 

The SSG’s Preferred Procedure is one method to estimate future EPS growth for the next 5 years.  Cy Lynch, a NAIC/BI and Manifest Infesting guru, has written a series of articles in Better Investing magazine that explain the PP using Oracle Corp as an illustration.  Since Oracle has no Preferred Dividends, only four estimates are needed to calculate its PP: Sales Growth, (less) Pre-Tax Profit Margin, (less) Tax Rate, (divided by) Shares Outstanding (equals) Earnings Per Share. 

 

I have long held that the Preferred Procedure involves too many estimates and way too much guesswork.  My earlier assessment is at:  Considering Kohl’s (KSS) and Reconsidering NAIC’s Preferred Procedure, September 14, 2006.  Oracle (ORCL) is yet another illustration that the PP is full of weak speculation.

 

(1) Final PP Result for Oracle: 11.30% Estimated EPS

 

Cy’s PP resulted in an estimated 11.30% EPS growth rate which, he says in the 3-09 issue of BI magazine, is reasonable compared to Value Line’s 11.60% estimate and the 13.40% estimate from Yahoo Finance.

 

(A) VL’s EPS estimate was 17.00% (not 11.60%) and is now 15.00% as of 2-20-09, VL’s latest report on ORCL.  By comparison, Cy’s 11.30% EPS estimate is way low.

 

(B) Cy did not compare his 11.30% against other EPS estimates: 15.00% @ FactSet CallStreet via CNNMoney; 15.00% @ S&P via BI.org; 13.82% @ Zacks.com; and 13.73% @ Reuters.com.  Again, Cy’s 11.30% estimate is low by comparison.

 

Note that these EPS estimates are from six different data sources, not just different websites, and I ALWAYS check all six for every SSG I do.  Here’s a link to how I estimate EPS; see: Estimating EPS.  Checking only two sources, as Cy did, is not sufficient to learn which are in the ball park and which may be out-of-whack.

 

(C) My method would be to stop here and use one of the following: the lowest of the six EPS estimates (13.43% currently by Thomson Reuters via YahooFinance), or the average of all six (14.33%), or the average less 1 Standard Deviation (13.65% and easily calculated by Excel).

 

I think these three choices are reasonably conservative and each of them “wrings-out” what many consider to be analyst over-optimism.  If you were still worried, the average less 2 Standard Deviations is 12.97% which I consider a useful benchmark as anything less (like Cy’s 11.3% estimate) seems unreasonably conservative to me.

 

We need some criteria to tell us what’s too high as well as what’s too low!!

 

(2) The First PP Element: 12.00% Estimated Sales Growth for ORCL

 

We can see why Cy got such a low EPS estimate by examining the separate parts of his Preferred Procedure.  The first element of Cy’s PP began with a 12.00% estimate of Sales growth for the next 5 years.

 

(A) Cy used Value Line data for his SSG and found that ORCL’s Sales growth was 9.4% over the past 10 years which, he says, was flat for the first five and increased to 22% over the following four years due to mergers.  

 

(B) Using S&P data from BetterInvesting.org, I see that ORCL’s sales have grown 9.2% over the last 10 years, 16.0% during the last 7, 22.2% during the last 5, and 24.9% over the last 3.  Mergers in 2005 and 2006 complicate using ORCL’s recent historical record to project future growth. 

 

One approach might be to use its 16.00% sales growth over the last 7 years which is the same with S&P or VL data.  Estimating 16.00% instead of Cy’s 12.00% sales growth, with no other changes in the PP, results in an estimated EPS of 15.40% instead of 11.30%.  That difference is no “small potatoes.”

 

(C) Another approach would be to check what sales growth the analysts were estimating.  Cy says his 12.00% sales estimate is supported by Morningstar’s 13.00% estimate and Value Line’s 11.5% estimate.

 

** However, Cy did not check the only other analyst that makes a Sales estimate for the next 5 years, Zacks.com which was estimating 21.92% on 11-1-08.  Three months later, on 3-18-09, its Sales estimate was down slightly to 22.19%.

 

** Morningstar’s Sales estimate for the next 5 years was way down from 13.00% to 8.00% on 3-18.

 

** Value Line does not make an explicit estimate of Sales growth and Cy implied VL’s 11.5% from its 8-22-08 dollar estimate which has dropped in VL’s next two quarterly reports to, using Cy’s method, 9.9% and 6.9%. 

 

** So, should the Sales estimate for the next 5 years be 22% (from Zacks), 16% (ORCL’s 7 year history), 12% (by Cy), 11.5% or 9.9% or 6.9% (all implied from VL), or 8% (from Morningstar)?  As you might guess, there is no “right” or “preferred” answer and your guess is as good as mine.

 

(3) The Second PP Element: 40.8% estimated PTPM for ORCL

 

The second element of the Preferred Procedure is estimating the Pre-Tax Profit Margin (PTPM) for the next 5 years.  Cy estimated 40.8% PTPM which was ORCL’s average for the past 5 years based on VL data.

 

However, S&P data shows a much different PTPM: 36.6% average for the last 5 years and 35.2% for the last 3 years.  Hemscott data from StockCentral.com shows 36.2% which is similar to S&P but again much different than VL.

 

Sooooooo, what is the best PTPM to use: a three year (35.2%) or five year average (36.6%) from S&P data, or 36.2% from Hemscott data, or 40.8% from VL data?  Again, your guess is as good as mine as there is no “right” or “preferred” answer.

 

(4) The Third PP Element: 29.00% estimated Tax Rate for Oracle

 

Here, Cy estimated 29.00% as ORCL’s Tax Rate for the next 5 years which again was based on VL’s estimate.  Cy says this seems reasonable, but does not explain that no other data source makes such an estimate and that we are pretty much stuck with relying on VL.

 

However, Value Line only makes estimates for 1500 stocks while over 7000 are included in the S&P data files and 7700 in the Hemscott data files.  Still another problem with the PP is that, for the thousands of companies not covered by VL, there is no reality check to test the reasonableness of our estimates, no benchmarks to compare against.

 

(5) The Fourth PP Element: 5,230.8 estimated Shares Outstanding

 

For the fourth and last component of the Preferred Procedure, Cy makes a big deal of not relying on VL’s estimate of 4500 M shares and instead uses 5230.8 M estimated shares outstanding in the next 5 years.  VL’s estimate is for basic shares while Cy’s estimate is for diluted shares which, he says, are what we should use for our SSGs.

 

Cy first converts VL’s basic shares to diluted and finds that to be unreasonable given ORCL’s share history and stated intent.  He appears to suggest that VL doesn’t adequately know or appreciate those factors.  Cy then decides to rely on 5230.8 M shares, some 18% more than VL, without telling us how he derived his final estimate.

 

Conclusions:

 

- By working through Oracle as an example, I’ve tried to demonstrate how the Preferred Procedure involves too many estimates and too much guesswork;

 

- The PP’s weakest link is its first component, an estimate of Sales growth for the next 5 years.  Start low and you are almost certain to wind up low;

 

- Instead of making separate estimates of the PP’s four components to derive one EPS estimate, I prefer to more directly check long-term EPS estimates from six different data sources. 

 

** I can determine what is out-of-whack and which are in the ball park.

 

** I don’t have to wonder about which of several possible Sales estimates to use, or weigh how best to estimate future PTPM and Taxes, or wrestle with converting basic shares to diluted shares, or worry about the differences between VL and S&P data.

 

- Even if you continue to use the Preferred Procedure, it’s still a good idea to make some comparisons to check the reasonableness of your estimates and, most importantly, your final result.

 

Armin

 

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Studying Stryker (SYK), Part 2

 

In response to the first part of my Studying Stryker post, Michael Healy asked:  << Wondering if you have any insight you could share about how this [a Federal grand jury investigation] will affect what otherwise seems to be a great investment. >>

Last week, on the Better Investing Discussion List (old I-Club-List), Timothy Tsai asked a similar question: << Stryker is the target of a Fed probe. Is this something significant? or is it already factored into the price? >>

 

These questions may seem daunting, but they are not difficult to answer.  Here’s my approach:

 

Full disclosure: I like Stryker a lot, have no special knowledge or insight about its legal problems, and am much more scared about our recessionary market.

 

What I learned about the SYK investigation:

 

- A federal grand jury wants to know if Stryker Biotech, a subsidiary in Mass, illegally promoted and sold two, misbranded bone growth products, and submitted false reports to the FDA.

 

- This info came from a 3-10-09 Reuters.com news item and 3-11-09 S&P Stock Report.  It was almost word-for-word from SYK’s latest 8K report.  S&P added: << We view this news as a troubling expansion of existing investigation, raising corporate governance/oversight concerns. >> 

 

- S&P did not change its 4 star rating or Buy opinion on SYK, but did reduce its target price by $10 to $38 (with SYK selling at $32.12).

 

- Reuters also reported that former employees of Stryker Biotech have pled guilty to charges related to the investigation which began last year.  This was also in SYK’s 8K.  [Maybe the feds think: where there’s smoke, there may be fire?]

 

- Earlier federal probes were noted by S&P: 9-07, SYK agreed to federal oversight of consulting agreements with doctors for 18 months with no financial penalties; 10-07, SEC informal inquiry if SYK illegally sold products in certain foreign countries.

 

- SYK’s latest 10K annual report filed 2-20 with the SEC mentions these legal proceedings, but adds nothing more that I thought was noteworthy.

 

- Value Line has not issued any supplementary report about the investigation or downgraded SYK; Morningstar’s company report pre-dated the 3-10 news; and, although I don’t use them much, there are a bunch of other ratings to check in a week or so (if you’re still worried) to see what, if anything, has changed:

 

** CAPS rating by Motley Fool (5 stars with SYK at $33.81 on 3-13)

** StockScouter rating by MSN Money (9 out of 10 on 3-15)

** Yahoo Finance CGQ ratings (35.1% and 86% as of 3-1)

** Morningstar’s Stewardship Grade (C as of 1-28)

 

- Legal problems, especially lawsuits involving big bucks (like the class actions about cigarette smoking and Rx drugs), can cloud a stock’s price appreciation for an unknown amount of time.  While SYK may be fined, this federal investigation does not involve malfunctioning products or harm to patients.

 

- SYK is a medical device maker and will always be at high risk if and whenever its products don’t work.  Risk-adverse investors should avoid such segments of the stock market.

 

- Investors who do their own SSGs and research should have the confidence to investigate these issues on their own as they involve legal news, not legal questions.  I mean this as positive, encouraging advice.

 

- My sources were: Google Finance (got lots of news on the federal investigation); S&P, VL and Morningstar (free from my local libraries); and the company website (to check what legal stuff was mentioned in the latest 10K and 8K).

 

- Can anyone suggest other, readily available sources to check?

 

 

Armin [revised 3-17-09]

 

Boning-up on Buckle (BKE)

 

The Buckle (BKE) was this month’s Online Stock Study at the Better Investing website. 

 

Company Background:

 

BKE is a chain of 391 retail clothing stores that sells casual clothing to “trendy” young men and women who shop at malls.  Stores are located in 40 states, none of which are in the northeast, and 70% of sales in its FY 2007 were brand name goods. 

 

Like many retailers, Buckle had a tough year, but may be on the road to recovery: Google Finance reports that BKE’s share price fell 19% in the last 12 months and 38% in the last 6.  However, it fell only 2.6% in the last 3 and actually rose 3.5% last month after the company had a surprisingly good 4^th quarter and FY 2008.

 

The company reported that its Sales rose 21.5% in Q4 and 27.8% in FY 2008 which ended 1-31-09.  Comparable store sales increased 14.3% for the Q and 20.6% for the FY.  Nineteen new stores were added during the FY. 

 

The company has no debt and Value Line was favorable impreseed overall: << The Buckle has much going for it, including high margins and top-notch finances that allow for share buybacks and husky dividend increases. >> (2-6-09 VL report on BKE)

BKE’s  direct competitors, according to Hoovers.com and YahooFinance, are Abercrombie & Fitch (ANF), American Eagle Outfitters (AEO), and The Gap (GPS).

Buckle’s average Pre-Tax Profit Margin for the last 5 years is much better than its industry average (Apparel, Retail), but slightly below ANF’s and AEO’s.  Its Return on Equity for the same period is almost the same as its industry average, but much worse than ANF’s and AEO’s.

 

The BI Online Stock Study:

 

The March 2009 Online Stock Study was led by Diane Amendt, a member of the BI Volunteer Advisory Board, who did what she called a top-down study.  Diane picked BKE for this study after she first did a SSG to learn if the company warranted further research.

 

The Online Stock Study produces a Consensus SSG where the judgment calls are made by consensus voting.  The recorded session (about 1 hour), the SSG, Diane’s presentation slides, and the Value Line report on BKE are now available for downloading by BI members.

 

What follows is a comparison of the Consensus SSG with two SSGs of mine and with Take Stock.  My analysis and conclusions follow this table.

 

Buckle (BKE)	Consensus SSG	Armin-1	Armin-2	Take Stock
Date	2-20-09	2-21-09	3-8-09	2-20-09
Data	S&P	same	same	Hemscott
Price	$23.79	same	not changed	$23.79
52 week High & Low Price	$44.57 & $13.57	same	not changed	n/a
Project Growth From End of	Last Quarter	same	same	Last Annual
Sales Growth	10.00%	8.00%	same	5.90%
EPS Growth	15.00%	8.00%	10.00%	5.90% initial 1.89% final
High PE	15.0	17.8 (last 5 yr ave)	same	15.0
High EPS	$4.21	$2.38	$2.61	$1. 78
High Price	$63.20 ~$8.00/sh or 15% > VL	$42.40	$46.50	$26.76 ~$13/sh  or 33% < VL
Value Line Estimated High Price = $40-55 at $20.92 as of 2-6-09
Low PE	10.0	11.7 (last 5 yr ave)	same	8.4
Low EPS	$2.09 (ttm)	$2.09 (ttm)	same	$1.70
Low Price	$13.10 (ave low price last 5 years)	$16.70 (70% x curr price	same	$23.79 Yield Supported Low Price that overrode $14.28
Upside/Down	3.7	2.6	3.2	impossible to calculate
Total Return	24.7%	14.9%	17.0%	4.9%
SSG Buy Under	n/a	$23.09	$24.11	$14.94
RV/PRV (no outs)	77.6/67.3	77.6/71.7	same/70.4	n/a
Quality	n/a	B+	same	2.6
PTPM – 5 yr ave	15.8% trend up	same	same	15.8% trend n/a
ROE – 5 yr ave End Equity	16.1% trend up	same	same	n/a
ROE – 5 yr ave Start Equity	n/a	17.2% trend up	same	17.1% trend n/a
Debt to Equity – 5 yr ave	n/a	-0- trend even	same	n/a

 

The Consensus SSG:

 

- Diane used SSG software rather than the BI Online SSG which meant that she had the option to project future growth from the last quarter (which she did) and had more than one option for the Forecast Low Price (which she used).  The Online SSG does not offer those features.  Neither does Take Stock.

 

- The SSG involves making five estimates for the next 5 years, but I’m only going to discuss three of these Consensus judgment calls.

 

- Participants were givem four choices to estimate future EPS growth: 22.8%, the 5 year average EPS; 15.0%, Diane’s initial estimate (not explained); 10.0%, same as estimated Sales growth; and 17.0%, Diane’s maximum (not explained).  

 

** VL’s 15.5% EPS estimate was not considered, which I found surprising especially since VL’s Sales (actually Sales per share) estimate was considered when future Sales growth was voted on.

 

** The Consensus (52%) chose 15.0%, Diane’s initial estimate, while second place with 34% of the vote was for 10.0%, same as the Sales growth decision.

 

- To estimate the projected Average High PE, participants were given two, maybe three choices: 17.8, the 5 year average; 15.0, Diane’s initial estimate (not explained); and 15.0, the same as future EPS growth.

 

** The Alt-M option was not considered which averages the five lowest values in the last 10 years and is usually the most conservative option. Here, 15.6 was Alt-M’s average high PE.

 

** The Consensus (73%) chose 15.0, Diane’s initial estimate.

  

- The Forecast High Price is not a judgment call as it is simply the product of Projected High PE x High EPS which equaled $63.20.  I ALWAYS like to compare the Forecast High Price to VL’s estimate which was $40 to 55 in the next 3-5 years and meant that the Consensus was $8.00 per share or 15% greater than VL.

 

- For the last judgment call, Diane offered four choices to decide the Forecast Low Price: $20.90, the Low PE x Low EPS; $13.10, the average low price for the last 5 years; $13.60, the recent severe low price; and $6.90, the price BKE’s dividend will support.

 

** The Consensus (38%) chose $13.10, the average low price.

 

Armin’s SSG-1 and SSG-2

 

- When I did SSG-1 on 2-21, S&P had no Long-term EPS estimate and the five other analysts I always check were estimating an average of 11.50% with VL high at 15.50% and FirstCall via YahooFinance low at 8.38%.  Reuters.com consensus estimate was 10.70% (with 13.00% high and 5.00% low); FactSet CallStreet via CNNMoney was 11.00%; and Zacks.com was 11.14%.

 

** My 8.00% estimate was based on FirstCall, the lowest of the five estimates, as I thought that the 5.00% low estimate at Reuters was too low.

 

- I updated my SSG on 3-8 and found that S&P still had no EPS estimate while the average of the five other analysts had dropped slightly from 11.50% to 11.34%.  VL and FactSet were unchanged, FirstCall was 10.00% (up from 8.38%), Reuters was 10.50% (down slightly from 10.70%), and Zacks was 10.50% (down from 11.14%).

 

** I changed my EPS estimate to 10.00%, now the lowest estimate, just to see how that would affect my SSG’s outcome.  I did not change BKE’s price.

 

- It’s no surprise that my $42.40 Forecast High Price in SSG-1 and $46.50 in SSG-2 were well within the range of VL’s $40-55 estimated High Price.  If I substantially fall above or below VL’s estimate, I consider that a red-flag warning sign to revisit my judgments.

 

- I was surprised that SSG-2 satisfied the BUY Criteria, while SSG-1 did not, because all I changed was my EPS growth estimate from 8.00 to 10.00%.

 

- With SSG-1 and SSG-2, I used 70% of BKE’s current price ($16.70) as my Forecast Low Price because I didn’t like the standard choices offered by my SSG software.  The method most appropriate for growth companies (low PE x low EPS) was $24.50 and too high; the Average Low Price ($13.10) and the Recent Severe Low Price ($13.60) were too low.

 

** The Consensus chose the Average Low Price ($13.10) and was not offered the option I chose.

 

Take Stock

 

- Take Stock is a computerized program at the StockCentral.com website that produces an almost-SSG with one click that involves no judgment by the user.  It is programmed to produce a conservative analysis, ultra-conservative in my judgment, which is solely based on historical results.

 

- Take Stock initially estimated 5.90% EPS growth that was overridden by 1.89% from its so-called Business Model (another name for the NAIC/BI Preferred Procedure).

 

** The 1.89% final EPS estimate was way, way unreasonably low compared to the six analysts I checked for my SSGs.  The lowest analyst estimate was 8.00% on 2-21 and 10.00% on 3-8.

 

- Its no surprise that Take Stock’s $26.76 Forecast High Price was $13 per share or 33% BELOW VL’s estimated High Price of $40-55.  When you start with a low EPS estimate, for sure you will end up with a low High Price estimate.

 

- Take Stock’s Forecast Low Price is weirdly programmed: unlike the SSG, its Low Price is allowed to exceed the stock’s current price (a SSG NO-NO according to BI’s SSG Handbook).  Moreover, a special feature kicked in here where the Yield Supported Low Price of $23.79 was allowed to override $14.28 AND made it impossible to compare Upside-Downside Ratios. 

 

Conclusions:

 

- The 15% EPS growth selected by the Consensus SSG was much higher than what the analysts were estimating.  By starting high, its resulting Forecast High Price was 15% higher than VL’s estimate.

 

** To learn whether our EPS estimates are out-of-line or whacky, too high or too low, I have explained my approach at: Estimating EPS

 

- Small changes on the SSG can have a big effect.  My SSG-1 did not satisfy the Buy Criteria while my SSG-2 did and the only change I made was to increase EPS growth from 8% to 10%.

 

** When I come close to satisfying the Buy Criteria (a 3.0 Upside-Downside Ratio and the 15.0% Total Return), I’m going to complete different “what-if” SSGs to learn what happens when I change 1 or 2 key judgments.  Our SSG software makes this easy to do.

 

- Armin

 

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Estimating EPS

 

[updated 11-4-09] By far, the most important judgment on the SSG is our estimate of the company’s EPS growth rate for the next five years.  This estimated rate directly determines the High and Low EPS in dollars which are then used (in part) to determine the Forecast High and Low Prices.  No other SSG judgment has such a major impact on the final result.

 

Our estimate of future Sales growth is only used as part of the Better Investing/NAIC Preferred Procedure which is one method for estimating EPS.  I use another method and here’s how I estimate EPS for all my SSGs:

 

(1) I always check seven [up from six] long-term EPS estimates for every SSG I do, from:

 

- FactSet CallStreet via CNNMoney

- Thomson Reuters via Yahoo Finance

- Zacks.com

- Reuters.com

- FactSet via Morningstar.com [added 11-4-09]

- S&P (the only one I pay for which comes with SSG data)

- Value Line (from my library)

 

(2) These are all long-term EPS estimates.  Reuters doesn’t say how long, VL is for 3-5 years, and the remaining five are for the next 5 years.

 

If anyone knows of other free estimates from different data sources (not simply different web sites), please let me know.

 

(3) Note that these estimates are from seven different data providers, not just seven different websites.  It’s not always easy to tell, but I believe the following is accurate:

 

- Thomson Reuters (old Thomson/First Call and Thomson FN still to some) provides EPS estimates to CNBC, AOL, NASDAQ, and Yahoo Finance;

 

- Zacks Investment Research furnishes EPS estimates to SmartMoney.com, MSN MoneyCentral, StockSelector.com, ClearStation.com, and Zacks.com.

 

Thus, it’s not very helpful to check several websites when the EPS estimate is provided by the same source.  It is very helpful, I think, to check different data sources for their EPS estimates.

 

(4) Morningstar used to get its EPS estimates from Reuters.com, but recently switched to FactSet which makes different estimates than FactStreet CallStreet and the other analysts. [added 11-4-09]

 

(5) Two of the seven estimates, from FactSet CallStreet via CNNMoney and Reuters.com, provide more info than the other estimates which only provide the consensus estimate.  In addition to the consensus, the two also provide the number of contributing analysts and the high and low estimate.  The extra info provides helpful context and I put less weight on estimates that are made by only a few analysts.  The high and low estimates are also useful to indicate whether those analysts are in close agreement or far apart.

 

(6) FactSet CallStreet via CNNMoney, Reuters.com and Zacks via ClearStation.com are the only free EPS estimates I know of that also provide the number of analysts as well as the high and low estimates.

 

(7) Hemscott/Morningstar, the provider of SSG data at StockCentral.com, makes no EPS estimate.  On the other hand, Better Investing.org provides SSG data from S&P which does include an EPS estimate for the next 5 years.

 

Both StockCentral and BetterInvesting are subscription sites, and you can find a link to them, their rates, and free trials on my “Favorite Links” page which is at the top of this Blog.

 

(8) We don’t know the names of the analysts that make these EPS estimates and therefore can’t determine the extent of overlap among the seven that I routinely check.  However, we DO know that the these estimates are far from identical: 

 - For example, VL’s estimate for Cognizant Technology on 2-20-09 was 28.50%, S&P was 25.00%, Zacks.com was 23.50%, Reuters.com was 21.43%, FactSet CallStreet via CNNMoney was 20.00%, and Thomson Reuters via YahooFinance was 18.40%.  Here VL was the highest estimate and the spread was a whopping 10%;

- Cardinal Health (CAH) is another example, but where VL was low: VL was currently 8.50% on 2-24, Thomson Reuters via Yahoo Finance was 11.08%, Zacks.com was 11.25%, Reuters.com was 12.11%, and S&P as well as FactSet CallStreet via CNN Money were 14.00%;

- EMC is still another example where VL was neither low nor high: on 1-5, Thompson Reuters via YahooFinance was low at 11.20%, S&P and VL were 12.50%, Reuters.com was 12.60%, Zacks.com was 12.90%, and FactSet CallStreet was high as 14.00%.

(9) After collecting all seven estimates, there are several ways to utilize the data:  

-  Excel can easily calculate the average and the average less one Standard Deviation.  That, in my judgment, results in a reasonably conservative estimate and adequately “wrings-out” over-optimism.  If you want to be tougher, you could reduce the average by two Standard Deviations although I think that is usually too tough as this is not rocket science;

- Also, any odd-ball estimate could be treated as an outlier and eliminated from the average.  And, the lowest estimate of the five (or six) could turn out to be more reasonable than the average less one (or two) SDs;

- You could also compare the average and the lowest estimate to your own EPS estimate, especially one from BI/NAIC’s Preferred Procedure which involves making four other estimates for the next 5 years: Sales growth, Pre-Tax Profit Margin, Tax Rate, and Shares Outstanding.  I stopped using the PP because, for me, it involves too many uniformed estimates and too much guesswork.  See:

Determining What’s Reasonable and What’s Not: An Update (probing the PP of CTSH)

Considering Kohl’s (KSS) and Reconsidering NAIC’s Preferred Procedure

 
(10) There are several reasons why I check all seven EPS estimates:
 
- I learn which are out-of-whack and which are in the ball park;
 
- I learn what is conservative and what is optimistic; and

 

- I have some rational basis for what seems reasonable and what’s not.

 

Moreover, when I do my SSGs, I don’t have to rely on my gut feelings or some ambiguous sense of sleeping well.  I sleep better knowing that I have tried to be reasonable by doing my homework.
 
Armin