Sully Corp. currently has earnings per share (EPS) of $2.53, and the benchmark PE multiple for appropriately-chosen comps is 19. Analysts expect Sully’s EPS to grow by 6 percent in the coming year.
a) What is your estimate of the current value of each share of Sully’s stock?
b) Assuming no multiple expansion (i.e., the benchmark multiple stays constant), what should the analysts’ target stock price be for one year from now?
c) Assuming that Sully does not pay a dividend, what is the rate of return on Sully’s stock that is implied by the estimates in the two questions above? What does this tell you about the relation between stock returns and EPS growth in multiples valuation models?