The company's swear word mug was a hit in the U.S. It had $1 a share in earnings last quarter. Then, in a 5-week period, it released the mug in multiple languages in 36 countries, where it was also a huge hit. That next quarter, it had $3 in earnings. So some genius analyst on Wall Street wrote a report claiming, "At this rate of growth, the company could produce $5 then $7 in earnings this year, then $9 and $11 and $13 and $15 next year, to then earn $48 a share next year. At 25x that number with some discounting, it could trade for $1,000 a share."
Ok, so clearly the big growth rate was just a blip. It was not sustainable as a growth rate. In fact, the company would have been happy to just not shrink in subsequent quarters for a while, until it came up with new swear words and new languages to put on their internationally distributed mugs. So maybe $3 a share was sustainable; $15 was not.
Next year: Klingon.
Related or Semi-related Video
Finance: What are trailing earnings?11 Views
finance a la shmoop what are trailing earnings here are the trailing earnings
for whatever dot-com 23 cents 32 cents 41 and 52 cents and a quarter quarter [Trailing earnings figures appear]
quarter quarter yeah here's where we are on the timeline today we just finished
the first quarter of the new year to print that lovely 52 cents a share in [Shares printing]
earnings well the stock of whatever.com is trading at a hundred bucks a share
and tons of nervous Nellie investors are pulling out their hair over the very [Hair falls on floor]
high multiple that this stock is trading at so the trailing earnings of whatever
dot-com were well let's just add him up here in 23 32 41 52 totals a buck 48 [Share prices appear]
that's a dollar forty eight in trailing earnings so the years trailing earnings
of the company were a buck 48 and that means that at $100 a share with no cash
and no net debt to worry about here the company is trading at a hundred divided
by a dollar forty eight or about sixty seven times earnings there's nothing
funky going on in the balance sheet here whatever dot-com has a little bit of [Man holding a balance sheet]
cold cash and no debt so 67 times trailing earnings here is a huge
multiple it's a multiple of trailing earnings but look at the trend in
earnings growth the company has stated that it thinks it'll keep growing at [Growth percentage bar chart appears]
quote about this pace for the foreseeable future
unquote so if we do a little estimating then forward earnings might see them
print something like go I don't know 64 cents then 80 cents and 95 cents and a
buck 12 or something like that well if we add up those subsequent forward [Quarterly earnings appear]
quarterly earnings numbers we get $3 and 51 cents a share in earnings so wait a
minute we just came to the conclusion with the nervous Nellie's that this [Stop sign appears]
stock was so expensive when they were thinking about it as a hundred times
earning stock but on the projected forward earnings of 3.51 a share not a
hundred bucks it's trading at 100 divided by three point five one or about
twenty eight times earnings just a tad more than while say Bank of America or [Logos appear]
caterpillar Tractor or coca-cola but whatever dot-com is growing earnings at
like ten times faster pace than those old stalwart
companies they're a lot more risk that whatever dot-com misses its earnings
numbers yes absolutely but if it hits the 3.51 and then goes on to earn oh no
six bucks and then ten bucks a share in the subsequent years well the hundred [Whatever.com share price on graph]
dollars a share price here will look like a bargain in the rearview mirror so
that's what trailing earnings are all about you pick a spot in time and look [Calendar appears]
at the previous and I'll say four quarters earnings and then you think
about what multiple of that number of the stock is trading at and then map
that to future prognostications if the company is really growing this fast well [Whatever.com tree appears]
then even though it's multiple on trailing earnings might be high while on
forward earnings it might be low may be a bargain
just ask Amazon about this one they wrote the book on the trailing earnings [Amazon graph of stock price]
and guess where you can buy that book
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Normalized earnings are, more or less, the average of what you typically earn. Picture a bell curve. Zoom in on the middle of it. There you go.