jmmx

Earnings Power vs. Investor Sentiment

David - on the last recession scare, Apple bumped down almost exactly to its 100 day EMA (low 150.63 EMA aprox 150). If it were to repeat that in the next couple of days, the current EMA (100) is about 168.)

This is quite a ways from your 130 - but it we hit a real recession...

Best of luck - and see you in December. :)

jmmx - in Portland Orygun (where it is raining)

Earnings Power vs. Investor Sentiment

As for Apple...

if you look at the yahoo chart of competitors (sorry but formating does not seem to work here, but you can see:
finance.yahoo.com/q/co...)

Here you can see that Apple is at the top of most of the measures of value - especially forward growth. So little wonder if it is at the top of the P/E valuation.

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Apple DIRECT COMPETITOR COMPARISON (from Yahoo)
AAPL DELL HPQ MSFT Industry
Market Cap: 157.64B 49.50B 120.64B 321.64B 49.50B
Employ_ees: 21,600 83,300 172,000 79,000 21.60K
Qtrly Rev Growth (yoy): 28.50% 8.50% 15.20% 27.30% 2.70%
Revenue (ttm): 24.01B 59.61B 104.29B 54.07B 24.01B
Gross Margin (ttm): 33.97% 18.75% 24.36% 78.41% 33.97%
EBITDA (ttm): 4.73B 4.11B 11.48B 22.07B 4.11B
Oper Margins (ttm): 18.37% 5.97% 8.42% 37.87% 5.62%
Net Income (ttm): 3.50B 2.99B 7.26B 14.88B 2.99B
EPS (ttm): 3.931 1.325 2.677 1.524 1.33
P/E (ttm): 45.80 16.67 17.51 22.56 36.67
PEG (5 yr expected): 1.61 1.24 0.98 1.52 1.61
P/S (ttm): 7.11 0.89 1.23 6.12 0.83
-------------

With something like 7% Mac usage, there is lots of room for growth. Since a major factor in the growth is the word-of-mouth recommendations, and Mac has by far the highest scores here, I think the growth could continue at 40+% for the next two or three years - barring a recession of course.

I think people have not really comprehended the extent of the Mac revolution that is underway. As the basis for this point of view, I take not only the recent accounts of the growth in Mac market share, but also this very informative article:

Is Tech Support Getting Worse?
ARTICLE DATE: 09.13.07
By Eric Griffith
.
www.pcmag.com/print_ar...
.
Ostensibly on tech support, the article gives other info from their survey.
.
Let me give a couple of findings reported:

* "Of course, no Windows machine comes close to Apple's 9.1 overall score... the 93 percent score for new desktops working right out of the box."

* "What's left to say? If you buy a Mac, not only will you in all likelihood love it, but you're also going to recommend it to your friends while enjoying all the time you can spend not fixing it."

* "And readers scored Mac notebooks a full 100 percent for ease of setup. Simply amazing."

* "And the numbers show that people already using Macs almost always recommend Macs. The score of 9.4 out of 10 for Apple is the highest ever seen in any of our surveys."

This last quote is the most important of all - for here lies the crux of my argument. If 94% of Mac users are recommending them then they will have some effect on their friends and fellow workers. Let us suppose that ON THE AVERAGE each of these users convinces just 2 other people to buy a Mac. This does not have to mean that they become impassioned advocates - just adding in the final "I love mine" into a discussion might be enough. The two keys: 1- Ease of use, 2- Reliability..
This is exponential growth! I can see Apple having 40% of all new sales in 5 years (perhaps even in 4). Sounds ridiculous - but remember - they OWN the Mac OS, if you choose Mac OS then you must buy a Mac. That is a lot of computers.
.
In my humble opinion. -- jmmx

Earnings Power vs. Investor Sentiment

Well – there is a lot to say about this article!

First off – the points are well taken: it is common for stocks to run up too far for their intrinsic value, to “get ahead of themselves.” Also – it is not possible for any company to maintain 20% or higher growth rate indefinitely.

That said, however, there are several points to be made. First, what the author has described (and charted) is simply the commonly known relationship the P/E ratio.

One real problem with the article, is that the charts are not normalized – they do not illustrate a common P/E ratio. The implied ratios for the charts (very roughly calculated) are:

Stock P/E
Starbucks 25
Citigroup 8
BoA 12
Circuit City 20
Best Buy 10
Apple 25
Sunpower 25
Home Depot 11
LJ International 24



And so the charts show that the prices for BoA and CC both track earnings almost exactly. One, however, has a P/E of 12, the other of 20. The graph for BBY also tracks the EPS closely (if you smooth). It is, however, constantly above the EPS line implying that it is overpriced. Yet, today its P/E is only 15.5. If we look at Starbucks graph, we see that the price recently crossed under the EPS line. From the article one would guess that the author was suggesting that this was the “correct” valuation, and now that the price was below the line, the stock is now somewhat oversold. BUT, at the crossover, the P/E appears to have been around 31 – way different from the P/E of crossovers on the other graphs. So what SHOULD the P/E of a stock be?

That of course is the proverbial $64,000 question. But if you look at the table comparing the estimated earnings rise, it seems as though people will give a higher P/E for a higher growth rate. That is pretty much what we expect. In fact, for the high growth stocks, it seems like people are paying about 25 P/E for the EPS expected 2-3 years out. Perhaps that is not unreasonable??




Stock 2003 2011 % Current P/E PEG
Starbucks 0.30 1.75 580 21 0.85

Citigroup 2.8 3.5 125 7.6 1.80

BoA 3.0 5.5 183 9 1.91

Circuit City 0.6 0.6 100 xx NA

Best Buy 1.2 4.2 350 15.5 0.98

Apple 0.25 * 10 4000 46 1.61

Sunpower
(start 12/30/2006) 0.25 * 5 2000 637 2.48

Home Depot 1.6 3.2 200 10.4 0.87

LJ International
(start 1/30/2004) 0.2 0.40 200 15.50 NA

* - estimated