Franklin Resources' Rally May Come To End
Ivan Kitov | Nov 25, 2012 03:56AM ET
In this article, we revise our tentative pricing model for Franklin Resources (BEN) presented model also includes a linear time trend and an intercept in order to remove mean and trend components from all involved time series. The intuition behind our pricing model is obvious – we link a given share to those goods and services which are produced/provided by the company. In order to provide a dynamic reference we also introduce in the model some relative and independent level of prices (also expressed by CPIs). Hence, one needs two different CPIs to define the model. These CPIs we select from a big set of 92 CPIs by minimizing the residual model error.
In March 2012, the tentative model was driven by the consumer price index of food at home, FH, leading the price by five months and the index of other goods and services, O, which led by nine months. In the revised model, the former index is replaced by the index of food without beverages, FB, which leads the share price by four months. Both food related indices are very close, as Figure 1 shows. The tentative and revised pricing models are as follows:
BEN(t) = -5.47FH(t-5) – 1.81O(t-9) – 59.55(t-2000) + 1327.36, February 2012
BEN(t) = -7.33FB(t-4) – 1.52O(t-9) – 69.58(t-2000) + 1536.22, October 2012
where t is calendar time. The standard error between July 2003 and October 2012 is $7.36 ($7.55 in March).
Figure 2 depicts the observed and predicted monthly closing prices since 2003 and also provides the high/low monthly prices, which may serve as the estimates of uncertainty in the monthly price. (One can model the monthly high or low price instead of the closing one.) At a four month horizon, the price is expected to grow to the final level of $134. Figure 3 shows that BEN’s price is currently very close to the predicted one.
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