They need to keep JNPR above $10.00. A lot of mutual funds don't hold stocks below $10.00.
The JNPR Cowen's presentation suggests they are still winning contracts, but that the dollar values would be significantly reduced. In some case, the agreements will not result in any matter revenues for a while.
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Stocks' value gauges bound to fall
As corporate profit levels drop, so must U.S. shares
By Thom Calandra, CBS MarketWatch
Last Update: 2:13 PM ET Sept. 19, 2001
NEW YORK (CBS.MW) - The U.S. stock market's price-earnings multiple, perhaps the closest thing to a universal measure of value, remains at historically high levels, data show.
The price-earnings ratio of the Standard & Poor's 500 index (SPX: news, chart, profile), which represents about two-thirds of the market's capitalization, is somewhere between 22 and 26, according to McGraw Hill-owned S&P and several other sources. The index's ratio is a moving target largely because of the current-year earnings that are projected and the equity market's free-fall this week.
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Right now, the 500 American companies in the index are seen earning a total of $45.98 a share, says Rick MacDonald, senior economist at S&P. That would give the index, trading at 1,022 Wednesday morning, a price-earnings ratio of 22.2. The index was last down 3 percent to 1001.
In discussions Wednesday with S&P staff, MacDonald said the dollar-figure forecast for operating earnings is almost bound to come down in coming days. That is not good news for S&P 500 investors or the stock market in general.
"The feeling is that the number could be as low as $40 (for the year)," MacDonald said from California. "If you look at some of the reports from the (Wall Street) banks, they are finally cutting their year-end targets after the attacks. The biggest challenge facing the market is that Q3 (third-quarter) earnings will be ugly."
At $40 of operating profits for this year, the S&P 500 Index, one of the stock market's broadest barometers of performance, would hold a price-earnings ratio of 25.55. That still appears to be expensive, given the rush by Wall Street analysts to reduce their profit estimates for American companies. See earlier report.
Price-earnings ratios measure the stock price divided by earnings per share. In the wake of the Sept. 11 terrorist attacks, Wall Street analysts this week are lining up to slash their earning forecasts for companies and their year-end targets for equity indexes. Credit Suisse First Boston, for example, on Wednesday downgraded 11 media and cable companies in the wake of the terrorist activity.
History is a guide to how expensive American stocks really are. According to information compiled by Dow Jones & Co., the S&P 500 Index's lowest price-earnings ratio was 5.9 in 1949. The price-earnings ratio for the S&P 500 Index hit 36.43 in the second quarter of 1999, during a period now seen as a stock-market bubble.
A year ago, the index was about 28, according to news reports at the time. S&P's data reveal expectations for $60.34 of operating earnings next year for the index's companies. This would give the index a forward price-earnings ratio of just 16.9. Few analysts and economists, alas, expect corporate profits for America's leading 500 companies to come anywhere near $60 a share for 2002.
Aside from the index's information technology sector, which includes Internet company Yahoo (YHOO: news, chart, profile) and hard-hit Sun Microsystems (SUNW: news, chart, profile) and is shown with a current-year price-earnings ratio of more than 700, the index's most expensive segment is telecommunication services (with a price-earnings ratio of about 35), followed by consumer discretionary (about 30).
The consumer discretionary segment includes AOL Time Warner (AOL: news, chart, profile). Walt Disney (DIS: news, chart, profile), Hilton Hotels (HLT: news, chart, profile) and other media, entertainment and leisure companies that could see their growth all but evaporate in a sharp economic downturn. The telecom services segment of the index includes Global Crossing (GX: news, chart, profile) and other carriers that are bleeding cash or loaded with debt right now. The current price-earnings levels from S&P are from earlier this month, before the Sept. 11 attack that is battering the U.S. stock market.
Expensive in some views, cheap in others
The 78 information technology companies in the index represent about 16 percent of the market capitalization, more than any group except financial services, which represents about 17 percent.
MacDonald says the S&P 500 Index traditionally has been "more insulated" in uncertain times because "people look to quality, and these are the largest companies." The index, for instance, was down about 3 percent Wednesday afternoon in yet another market sell-off while the Dow Jones Industrial Average was losing 3.3 percent and the Nasdaq 100 Index 4.9 percent.
"Also, it is pretty well diversified, with defense sectors, growth and so on," MacDonald said about the S&P 500 Index. "So as people move out of airlines, money goes into aerospace stocks. That speaks to the value," said MacDonald.
The economist noted that this week's market sell-off might have been worse had the Federal Reserve not guided official interest rates lower by 50 basis points, or a half of a percentage point. He also pointed out that the worst may be yet to come.
"Investors know there are a lot of earnings warnings sitting out there," he said Wednesday. "So there is no reason to catch a falling knife."
To be sure, the price-earnings multiples of benchmark indexes such as the S&P 500 Index may not be much help in gauging fair value for the stock market. "P-E ratios have become increasingly suspect as valuation tools. What does a P-E of 50 really mean?" says Rafael Resendes of research firm The Applied Finance Group in Chicago.
"If my firm generates a 25 percent return on its assets, and is growing at 10 percent per year, it will support a very different P-E than a similar firm growing at 10 percent but not even earning its cost of capital," Resendes says.
In a white paper, Resendes and fellow researcher Daniel Obrycki also explain how the introduction of technology companies such as Yahoo and Qualcomm (QCOM: news, chart, profile) to the S&P 500 Index has put price-earnings ratios all over the map. Yahoo's price-earnings multiple for its trailing 12 months, for instance, has ranged from 32.5 to 807.2 during the past three years through July.
Economists and equity strategists, such as Ed Yardeni at Deutsche Bank, also point out that fair value for stock prices should take into account U.S. Treasury bond yields, which compete with stocks as a possible investment.
Government bond yields, which are relatively free of risk when compared to stocks, have been falling since the terrorist attacks as investors rush to buy bonds during the crisis. Yardeni and others think that stock prices, which have a risk premium attached to them because of the shifting nature of profit-growth prospects, are relatively cheap when compared to the bond market.
One benefit for stocks may come in the rising dividend yields for depressed shares. Dividend yields, as long as corporate directors continue to approve their payout, increase as a stock's price decreases. Hard-hit Ford Motor (F: news, chart, profile), at Wednesday's price of $16.30, held a yearly yield of 7.4 percent.
For more information on the S&P 500 Index, see spglobal.com.
Thom Calandra is Editor-in-Chief of CBS MarketWatch |
