Lender Processing Services, Inc.(LPS) Initial Price/Value Analysis
Lender Processing Services, Inc.(LPS) had trailing twelve month(ttm) per share earnings for 2Q 2010 to 2Q 2011 at $2.50 a share. Dividing $2.50 by the pre-tax corporate A bond yield for 28 Oct. 2011, approximately 5.23%, you get a relative value of $47.80 a share.
For 2011 year-to-date you could have bought a share of LPS for as low as $12.91 and as high as $34.88. Since ttm per share earnings were $2.50, paying between $12.91 and $34.88 a share your initial rate of return would be between 7.16% and 19.36%. At today’s price of 17.73 you get an initial rate of return of 14.10%
A review of LPS’s per share earnings growth rate for the past three years indicates that it has been growing at an annual compounding rate of 6%. So you can ask yourself: What would I rather own - government or corporate bonds with a static interest yield of 2.32% or 3.40%, respectively, versus a LPS equity/bond with an initial earning/interest yield of 14.16% that increase at an annual rate of 6%?
Utilizing Kelly Criterion for this initial analysis, I find an initial allocation of 3.55% to be appropriate with a full Kelly allocation of 21.32%. With an upside profit differential of 30.07 and a downside permanent capital loss differential of $9.72, my risk/reward profile stands at 3.09 to 1. The downside is based on $5.51 book value plus an estimated $2.50 for next year’s earnings which I would presume not to be at risk for based on the company’s business model. I hold an initial confidence level of 90% based on LPS falling in tier 1 grouping of my list and find that my ability to pick stocks that outperform the market to be correct roughly 45% of the time.
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