Ken and Barbie Anderson are meeting with you to discuss their desire to obtain shares in the upcoming initial public offering (IPO) of BookBusiness, Inc. The Andersons are longtime users of BookBusiness’s services and are convinced that their positive personal experience with the company is a good basis for investing.
Your analysis of the company is based on the financials recently released and a discussion of how one might think about value a company like this. To calculate the growth rate in earnings of the company, let’s look at this example. Let’s assume that the earnings per share (EPS) of BookBusiness, Inc. is as follows:
Year EPS
2015: 4.60
2014: 4.25
2013: 3.90
2012: 3.46
2011: 2.83
2010: 2.10
A. First explain the company’s historical earnings growth rates. From your historical and qualitative analysis, what do you think will be the rate of growth for the company in future?
B. You have observed that the rate of growth in earnings implied by the company’s P/E is higher than what the company reported for the past two fiscal years. Can any company sustain such a high rate of earnings growth over the long term?
C. Read the attached Wall Street Journal article about investment valuation. Do you or do you not agree that the company’s valuation is a reasonable assessment of its futue earnings potential?
D. What is your recommendation to Ken and Barbie Anderson. Should they purchase the BookBusiness, Inc. IPO shares?