<< In a bear market, a company with 10% annual EPS growth might have a P/E of 5 or 6. >>
That's inaccurate, IMO. Maybe a small company in a non-growth or cyclical sector, with a limited history of earnings growth might have a PE in that range. But, the world's largest software company in a sector that certainly plays a huge and growing role in the future will not have a PE such as this. 20 is on the low end by historical standards for companies of this nature, IMO.
Historically, overall P/E's have averaged between 12 and 15. As you probably know, for a particular company, historical P/E is approximately equal to annual earnings growth, so a company with 10% annual growth can be expected to have a P/E of about 10 (even stipulating that MSFT could get back to positive earnings growth of around 10%, that would price it fairly at about $18/share).
My response was specifically about the kind of P/E you can expect in a bear market. Obviously this is lower than the overall historical average. For a company with 10% annual growth, 5 or 6 is a good P/E during a bear market (which would price MSFT at about $9 to $11/share).
Even right now, with annual earnings growth of around 40%, AAPL sells for a P/E of 7.5. And this market is nowhere near its bottom, in my opinion. In contrast MSFT is still sitting pretty with a historically very high P/E of 32, despite a NEGATIVE operational earnings growth (they included investment earnings in their numbers, but there are no historical averages for this because historically it is unheard of).
Anyway, if you're satisfied with annual earnings growth of 10%, you could get a lot of better bargains than MSFT. Buy GM (earnings growth 12.3%, P/E 5.5) or WBB (earnings growth 21.63%, P/E 6).
By the way, why are you using Price-to-Sales as a historically significant metric? It is easy to put together a business plan that manufactures sales by spending money. For example, the "Send me a quarter and I'll send you a dollar" business plan would rapidly gain sales, but would not create earnings. In the "New Economy" Bubble Age, people used P/S because their business plans were never intended to be profitable, but rather to launch an IPO and cash in. Now that the bubble is popped, Earnings are much more interesting again.
Dave |
