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20% Pullback Coming

|Includes: SPDR S&P 500 Trust ETF (SPY)

Click here to access the latest S&P reported numbers. As of 10/22/2009, 190 companies representing 50.9% of the S&P market value had reported. Filtering the data and excluding financials whose numbers are manipulated and government assisted, only 40 issues as indicated below have year-on-year increases in revenue:

TICKER

COMPANY

SALES $ MIL

SALES PYR $ MIL

% CHG PYR

SECTOR

ABT

Abbott Laboratories

$7,761.00

$7,497.66

3.51%

Health Care

ACS

Affiliated Computer Svcs'A'

$1,677.00

$1,604.45

4.52%

Information Technology

AMZN

Amazon.com Inc

$5,448.00

$4,265.00

27.74%

Consumer Discretionary

AAPL

Apple Inc

$9,870.00

$7,895.00

25.02%

Information Technology

AZO

AutoZone Inc

$2,232.49

$2,210.51

0.99%

Consumer Discretionary

BCR

Bard (C.R.)

$637.00

$616.80

3.27%

Health Care

BBBY

Bed Bath & Beyond

$1,914.91

$1,853.89

3.29%

Consumer Discretionary

BBY

Best Buy

$11,022.00

$9,801.00

12.46%

Consumer Discretionary

BIIB

Biogen Idec

$1,120.52

$1,092.96

2.52%

Health Care

BA

Boeing Co

$16,688.00

$15,293.00

9.12%

Industrials

BSX

Boston Scientific

$2,025.00

$1,977.00

2.43%

Health Care

BMY

Bristol-Myers Squibb

$5,487.00

$5,254.00

4.43%

Health Care

CELG

Celgene Corp

$692.24

$586.74

17.98%

Health Care

CTXS

Citrix Systems

$401.04

$398.89

0.54%

Information Technology

COH

Coach Inc

$761.44

$752.53

1.18%

Consumer Discretionary

DO

Diamond Offshore Drilling

$908.38

$900.38

0.89%

Energy

EBAY

eBay Inc

$2,237.85

$2,117.53

5.68%

Information Technology

FDO

Family Dollar Stores

$1,811.42

$1,765.78

2.58%

Consumer Discretionary

FLIR

FLIR Systems

$285.55

$276.74

3.18%

Information Technology

FRX

Forest Labs

$1,013.30

$972.78

4.17%

Health Care

GIS

Genl Mills

$3,518.80

$3,497.30

0.61%

Consumer Staples

GILD

Gilead Sciences

$1,801.39

$1,371.27

31.37%

Health Care

GOOG

Google Inc'A'

$5,944.85

$5,541.39

7.28%

Information Technology

ISRG

Intuitive Surgical

$280.13

$235.99

18.70%

Health Care

LH

Laboratory Corp Amer Hldgs

$1,185.20

$1,135.10

4.41%

Health Care

LLY

Lilly (Eli)

$5,562.00

$5,209.50

6.77%

Health Care

LMT

Lockheed Martin

$11,056.00

$10,577.00

4.53%

Industrials

MKC

McCormick & Co

$791.70

$781.60

1.29%

Consumer Staples

MRK

Merck & Co

$6,049.70

$5,944.00

1.78%

Health Care

NOC

Northrop Grumman

$8,726.00

$8,381.00

4.12%

Industrials

DGX

Quest Diagnostics

$1,897.20

$1,834.60

3.41%

Health Care

RTN

Raytheon Co

$6,205.00

$5,864.00

5.82%

Industrials

RHT

Red Hat Inc

$183.63

$164.38

11.71%

Information Technology

SNDK

SanDisk Corp

$935.17

$821.50

13.84%

Information Technology

STJ

St. Jude Medical

$1,159.61

$1,084.14

6.96%

Health Care

SYK

Stryker Corp

$1,653.30

$1,653.00

0.02%

Health Care

UNH

UnitedHealth Group

$21,695.00

$20,156.00

7.64%

Health Care

WAG

Walgreen Co

$15,703.00

$14,596.80

7.58%

Consumer Staples

WDC

Western Digital

$2,208.00

$2,109.00

4.69%

Information Technology

ZMH

Zimmer Holdings

$975.60

$952.20

2.46%

Health Care

 

It’s pretty clear from the above that only Health Care and IT are still enjoying reasonable increases in revenue. Given this, one has to believe that there is no way in the current economic climate that companies can expect significant increases in revenue in the foreseeable future and therefore a corresponding increase in reported earnings. Yet that is what is being predicted in the S&P Earnings Estimates for 2010 of $73.88 which is 34% higher than the 2009 estimate of $54.99 as indicated below:

 

 

12 MONTH

 
   

OPERATING

 
   

EARNINGS

 

DATE

PRICE

PER SHR

PRICE/

(type of estimate)

 

(bottom up)

EARNINGS

       

2011 estimate

     

2010 estimate

 

$73.88

 

2009 estimate

 

$54.99

 

2008

903.25

$49.51

18

2007

1468.36

$82.54

18

2006

1418.30

$87.72

16

       

09/30/2009

1057.08

   

06/30/2009

919.32

$39.79

23

03/30/2009

797.87

$43.00

19

12/31/2008

903.25

$49.51

18

12/31/2007

1468.36

$82.54

18

12/31/2006

1418.30

$87.72

16

12/31/2005

1248.29

$76.45

16

12/31/2004

1211.92

$67.68

18

12/31/2003

1111.92

$54.69

20

12/31/2002

879.82

$46.04

19

12/31/2001

1148.08

$38.85

30

 

Using the 2010 estimate of $73.88 and applying a price multiple of 16 (which appears reasonable given historic trends indicated above) gives you a S&P price of 1,182, pretty much where the market is today. But looking back in time to 2002 before the housing bubble and resulting equity withdrawals, together with lax lending standards, helped propel economic growth, the 2009 estimate of $54.99 appears optimistic but for now I’ll assume it’s achievable. And with no magic equity stimulus this time round, I believe we are likely to be range-bound earnings-wise for the next few years. So applying a price multiple of 16 to the earnings estimate of $55 gives you a S&P price of 880. And that’s why I predict a 20% pullback coming soon.

Disclosure: Long BMY.