A Theoretical Valuation for Penny Stock SPNG

You asked for it, you got it - a reasonable valuation model for penny stock SpongeTech Delivery Systems Inc. (SPNG). We'll come up with a number (for what it's worth) in a moment, but first, two reality checks...
  1. A presumed 'value' is based on ever-changing factors
  2. Stocks don't always trade at what they're worth
OK, so what's one share of SPNG actually worth?

It's just a very rudimentary calculation (something you might do on a cocktail napkin), but it's still meaningful. Let's just for a moment say an acceptable P/E ratio is 12, and an acceptable P/S (price to sales) ratio is 3....which are actually close to the market's norms.

With SpongeTech doing $50 million worth of business in 2009, you could argue the P/S ratio of 3.0 means the company's market cap should be somewhere around $150 million. Per the last filing, the company's got 714 million shares outstanding. Dividing $150 million by 714 million translates into a 'per share' value of 21 cents. (Just for the record, I posted a target price of 20 cents a few months ago.)

Yeah, it's a simple calculation, but I ain't interested in dusting off my CAPM... it's a moving target anyway.

And what about a valuation based on earnings?

We also know the company's going to clear about $10 million worth of that $50 million in revenue. Multiplying $10 million times a P/E of 12 means the market cap should be right around $120 million. That means the 'per share' value should be somewhere around 17 cents each.... where it is right now.

With all that being said, I'll refer you to the two key points I made first, as they have bearing on my rough math.

First up, about constantly-changing inputs...

My numbers are based on history - not the future. Ideally, you're thinking along the same lines for what SpongeTech is likely to be earning twelve months from now. To do that, you need a specific growth rate. We know the company has g! rown, bu t you'd be hard pressed to pin down a meaningful number to that end. That's just something you'll have to take a blind shot on.

My 'value' of 17 to 21 cents - let's just call it 19 cents - assumes the share count will stay the same, which we know it hasn't. I can recall early on in our coverage that the total number of I&O shares was closer to 300 million. The dilution was worth it in my opinion (and the numbers confirmed it), but it was a tough pill to swallow.

Second, about the assumption that stocks actually trade at what they're worth.....

They frequently don't.

With penny stocks in particular, you can't fall into the 'Motley Fool' assumption that you're investing in a company. You only make money if a stock goes higher, regardless of the company's success. So, don't be fooled - you're investing in stock.

That's why I've encouraged investors to put on their trader's hat a few times recently, to lock in gains before they had to be given back. Welcome to reality.

As for a forward-looking value, here's what I have to offer.... make a sales and earnings projection, and do the same 'reverse' math I just did above. That's about the only meaningful valuation you need to bother making here for the time being, IMHO.

If you want more insight like this, complete with specific, actionable penny stock picks, then sign up for the free SmallCapNetwork.com newsletter today.

No comments:

Post a Comment