Hi Dan, RE: "25% growth in 2003 would do little or nothing to help margins."
I tend to view this differently.
A stock price can increase because of expense cuts or revenue increases (assuming reasonably fixed GM) and this can be particularly powerful when both of these occur at the same time.
So, I think when rebounds occur, they tend to be powerful because the growth rate increases as a business recovers and grows, and this combined with expense cuts at the same revenue level, helps fuel the stock price.
i.e. A company makes R in Revenue when expenses are X, but after a contraction and during a recovery to R, the expenses tend to be (X - cuts), which means earnings could be better for the same revenue level R. And assuming the business growth rate increases, which it would in a recovery, then C would also increase because of increased earnings from those increased revenues, where C = P/E.
So, when a recovery occurs, I believe two things happen, C improves because growth rate increases and E tends to get better (because expenses have been cut), which means P = EC = (increasing E) (increasing C) = exponential**2 impact on P in a recovery.
Since the price of the stock is a function of both expenses cuts multiplied by a factor of the increase in revenue growth (and assuming reasonably fixed GMs), the impact appears it could be powerful.
Regards,
Amy J |
