Archive for Sunday, January 2, 2005

The Motley Fool

January 2, 2005

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Last week's question and answer

My company name sported the word "Elf" until last year, but instead of making toys in Santa's workshop, I'd rather keep the workshop's power and heat on. France's largest company, I'm the world's fourth largest oil and gas company, operating in more than 100 countries and employing more than 110,000 people. I explore for and produce oil and natural gas, generate power, trade energy, and make chemicals and petroleum products. I run more than two dozen refineries and nearly 16,000 gas stations, mostly in Europe and Africa. I have more than 500,000 shareholders. Who am I? (Answer: Total)

Multiples demystified

What are stock "multiples"? -- T.I., Asheville, N.C.

Multiples help you evaluate whether a stock might be undervalued or overvalued. In general, multiples simply compare a stock's current price to something, dividing the price by earnings (via a "P/E" ratio), revenues (via a price-to-sales ratio), or something else. Imagine a company trading at $36 per share. It's expected to earn $3 per share this year, so its P/E on this year's earnings is 12 (36 divided by 3 equals 12). You might refer to it as trading at an earnings multiple of 12. If you read analyses of various companies, you'll see references to price-to-sales multiples, book-value multiples, cash-flow multiples and more. It's instructive to compare a company's various multiples with those of its competitors to see how each is priced relative to its peers.

I frequently see investors advised to estimate what a stock is actually worth before deciding whether to buy or sell it. But isn't it true that no one can really know what a stock is worth? -- Bob Corson, Ottawa, Ohio

You're right, Bob. A handful of smart stock analysts usually will come up with at least slightly different estimates of a given stock's true "intrinsic" value. But informed estimates are the best guides we have. If you judge a stock's intrinsic value to be $35 per share (perhaps based partly on several multiples, as discussed above), and it's trading at $29 right now, you may be looking at a promising investment.

Trex all decked out

The strongest sales for some companies come during the winter months -- around the holiday shopping season. Other firms, such as Trex (NYSE: TWP), see their best days when it's warm and sunny -- and people are building decks, docks and more.

Trex makes "Trex," a building material made from reclaimed wood and plastic. It has the appearance and workability of wood, but unlike wood, requires no sealants or maintenance. These attractive features are fueling sales.

In its third quarter, sales surged 56 percent over year-earlier levels to $64 million, while earnings rose 39 percent. Trex sports a healthy balance sheet, with cash and equivalents of $62 million and debt of $54 million. Additionally, the company has forecast sales and earnings growth for 2005 of 20 percent to 25 percent.

Fool co-founder Tom Gardner recommended Trex in 2003, and since then its shares have risen more than 44 percent. Trex stock appears to be fully valued right now, but given the infancy of its relationship with the King Kong of hardware retailers, Home Depot, and with the hundreds of thousands of new homes built in the last few years, current growth-rate estimates might be understated. At the very least, prospective investors might want to keep this company on a closely monitored watch list.

Your broker, not your friend

My dumbest investment move was to think that my full-service brokerage had "my" best interests at heart and not its wallet. I didn't even look at the fees or expenses until I realized the stock market was coming back, and I was still losing money. I'm much better off now that I'm a Fool, and the brokerage doesn't have any more of my money. It sure got me on the way out too, with transfer fees, back-end loads and early outs. -- L.B., on the Fool.com discussion boards

The Fool Responds: Full-service brokerages such as Morgan Stanley and Merrill Lynch do indeed tend to charge customers more than less-pricey brokerages such as Ameritrade and Harris Direct.

When you let brokers tell you what to buy and sell, sometimes they encourage you to trade too often, which can hurt your performance but boost theirs, through trading commissions. That's why we recommend that investors take charge of their own money.

Learn more about less expensive brokerages at www.broker.Fool.com and www. investopedia.com/university/broker. And for recommended stocks and funds, click over to www.Fool.com/shop and www.morningstar.com.

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