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This analysis is based on real revenue and real earnings growth, not analyst estimates.

The second quarter of 2012 has been a horrible earnings season for large companies.

This study includes all of the 1427 stocks reported through Tuesday, excluding the top and bottom percentage revenue gainers and losers. In this article a snapshot result of this study paints a telling picture about valuation levels for the Dow Jones Industrial average.

GDP growth from Q2 2011 - Q2 2012 has been about 2.2%, but have companies been keeping up with GDP? The answer, for companies that earned more than $10 Billion in revenue last quarter, is no!

From the 42 companies that met these criteria, many that are also in the Dow Jones Industrial Average, real earnings growth for this segment was 1.50%, while real net revenue growth was only 1.19%, failing to keep up with GDP. Find a sample below:

Company

Symbol

Actual

1 Year Ago

Rev Act

Rev Y/Y

Rev Change

Citigroup

(C)

0.95

1.09

18642

-9.60%

-1979

DowChemical

(DOW)

0.55

0.85

14513

-9.60%

-1541

United Tech

(UTX)

1.58

1.45

13807

-4.60%

-665

Coca-Cola

(KO)

1.22

1.17

13085

2.70%

344

Microsoft

(MSFT)

0.73

0.69

18059

4.00%

694

Amazon.com

(AMZN)

0.01

0.41

12830

29.50%

2922

Now valuation questions are surfacing. Historically the market has used 2.5 x EPS growth as a metric for projecting fair current value. The question now is what will continued growth look like or should we use past growth rate trends as our guide?

If large company growth trends like it has in the past fair value for these companies is not 13x, the current multiple for the Dow ETF (DIA), but it is more like 3.5x. Reasonably, no one expects multiples to fall that much, but the difference is eye opening. Using these metrics, PEG = 866%, and there is nothing cheap about a market with a PEG ratio of 866%. Stay away from the temptation to buy these ultra large companies because they are not keeping pace with GDP.

Source: Valuation: Not That Cheap