Sorry -- the Market Is Still Overpriced: David Pauly
New York, April 14 (Bloomberg) -- Unfortunately, all you kid money managers, the shares of everything from Sun Microsystems Inc. to JDS Uniphase Corp. to General Electric Co. still cost too much.
That might not seem possible after the latest bear-market-in- a-flash clipped 34 percent off the Internet-happy Nasdaq Composite Index in five weeks.
But at 76 1/2, Sun Microsystems stock is still priced at 87 times its earnings for the latest 12 months. Sun certainly does well; yesterday it reported profit in the quarter ended March 26 jumped 67 percent. Analysts surveyed by First Call estimate earnings of the company, whose computers power Web sites, will rise 21 percent annually for the next five years.
If such long-range guessing proves true, and if Sun's price remains unchanged between now and then, the shares would still be 34 times the company's earnings, a number that in the past gave rational investors pause.
JDS Uniphase Corp., which makes things like lasers, transmitters and amplifiers for fiber-optic transmission, has annual sales of $674 million but no earnings. Now, even though its stock has dropped almost in half since early March, it has a total market value of $56.7 billion -- more than General Motors Corp. or McDonald's Corp. Can that be explained?
Welch Up Top
General Electric, a combination manufacturer, finance company and broadcaster, has pretty much survived the bloodbath. It reported yesterday that first-quarter profit rose 20 percent to $2.59 billion, or 78 cents a share, and Chairman Jack Welch is widely heralded as the CEO to beat all.
Still, GE shares go for 43 times earnings in the past 12 months. About four years ago, the price-earnings ratio was 18 -- and Welch was a genius then too.
You can run through the same kind of exercises with any number of stocks. Motorola Inc. still trades at 46 times earnings. The semiconductor and cell phone company's annual profits peaked in 1995 -- though Motorola says it will beat that this year.
Ariba Inc., which makes computer software for processing orders from one business to another on the Internet, has only red ink to back up a $11.4 billion stock market value.
Shares of Applied Materials Inc., which makes equipment for making semiconductor products, fell 19 percent in the past two days but were still valued at 62 times the company's earnings.
Good Times
Even investors who continued to pay attention to P-E ratios in recent years were tempted to think that historical benchmarks needed adjustment. After all, we were experiencing the best U.S. economy ever. Companies expanded, everybody was working, inflation was at rest.
The government reported today that prices of such things as clothes, housing and medical care in March rose at their fastest pace in more than five years. But yesterday Federal Reserve Chairman Alan Greenspan said that with the help of productivity gains, inflation remains under control. He said that outside of oil, there was no ``evidence of an acceleration in unit costs.'
If earnings can keep climbing without being eaten in large part by inflation, shouldn't stocks be worth more, justifying higher P-Es? Perhaps, but how much higher?
When many of today's money managers were in grade school, investors ventured to pay 30 or 40 times earnings only for shares in the most-promising companies. Today, the average P-E for every company in the Standard & Poor's 500 Index is 30.
Sun Microsystems earnings might be worth more today than they would have been years ago. But by betting 87 times Sun's earnings instead of say 35 times, investors are saying the computer-maker's profits are two and a half times more valuable than in the old days. Not likely.
There's a lot of air left in the balloon.
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