Sunday, March 02, 2014

Why Every SAP Employee Should Participate In The Employee Share Matching Plan

SAP has an employee share matching plan. There is nothing secret about it. Depending upon our basic pay, we get to buy a certain number of SAP shares at a 40 percent discount. After we keep the shares for three years we get a bonus share for every three shares. This is available for all employees with very few restrictions like interns and new hires who joined less than a year from the plan date. This is a good reward.

To my surprise, I found that some of my colleagues chose not to invest in this for some reason. So I decided to elaborate on why I decided to participate in this plan. In fact, SAP shares are the only individual company shares I own. I otherwise invest in index funds whose management expenses are less than 0.5 percent.

I started by asking myself if Warren Buffet, the greatest investor on earth, would participate in the SAP Share Matching Plan if he has a chance. After some analysis, I concluded that he would if he has a chance. Let me explain why.

Lets's say an employee has a chance to buy 60 shares. The cost of those 60 shares at today's price of $80 a share will be be about $4800. Since an employee get the shares at 40 percent discount the cost after the 40 percent discount is about $2800. After 3 years the employee will get a free match of one share for every three shares. So the employee will get an additional 20 shares. The value of those 20 shares will be about $1600. I am assuming that the price does not change much for purposes of calculation. So the real cost of the 60 shares for the employee is about $1280. This means the total discount is not 40 percent. It is about 73 percent. At a 73 percent discount the cost per share for the employee is about $21.

So we are getting a share at 73 percent discount. One might wonder if the share is so much over priced today that even a 73 percent discount may not be worth it. That is where the price to earnings ratio comes into picture. Rather than consider the estimated price to earnings ratio for 2014, let us take the more conservative approach and consider the actual price to earnings ratio of 2013. In 2013 SAP's earning per share was $ 3.8. So the price to earnings ratio based on the 2013 earnings per share and the current stock price of $80 is 20.67. However, the employee is only paying a price of $21 for the share. So the real price to earnings ratio for the employee is 5.5.

Warren Buffet, the greatest investor on earth and his mentor Benjamin Graham, the father of value investing, consider any price to earnings ratio less than 15 as reasonable. At a price to earnings ratio of 5, I think they would have participated happily in the SAP Employee Share Matching Plan, had they had a chance.

Here is my excel sheet with my analysis i discussed above. If you disagree or find a flaw in my thinking, please let me know. This year there might be another round and I would like to be prepared.

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