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Politics : Formerly About Applied Materials

AMAT 225.18

-1.5%

Nov 18 3:59 PM EST

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To: Jacob Snyder who wrote (39979)	11/25/2000 10:03:33 PM
From: brunn	Read Replies (1) of 70976

Jacob, I believe that AMAT may be one cyclical company for which P/E may be at least as reliable as P/S (I use both.) I agree that cyclical companies are more reliably valued by sales. This is because most cyclical companies--e.g.automotive companies--lose money during down years. P/E therefore becomes meaningless and P/S and P/B are the only remaining metrics. AMAT however (knock on wood) has not lost money over the last 10 years. Therefore, a meaningful P/E still could always be calculated--although I realize that the E will plummet more than the S due to fixed costs (which will inflate P/E relative to P/S). What is the disadvantage of using P/S? It ignores profit margins. AMAT currently is enjoying its best ever profit margin--about 22%. Prior to this cycle profit margins peaked around 15% in 1995-96. It is unrealistic to expect AMAT to fall to historic P/S levels if over time they have shown they can get more earnings out of their sales. True, the profit margin will fall dramatically with the next downturn, but by that time the market will begin predicting future earnings and profit margins and since AMAT's profit margin peaked 50% higher in 2000 than in 1996 it would be reasonable to predict even further margin improvement with the next cycle. In the end, earnings growht increase a company's value more than revenue growth. I agree that predicting future earnings is totally unreliable but coming up with a reasonable revenue projection is about as hard. I agree that creative accounting can affect earnings more than revenue but I feel this is more of a concern for less established companies.

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