There is a very simple way to determine if a company's earnings are real or phantom: Look at its book value per share over time. You take shareholders equity, subtract non-tangible assets like "goodwill." divide by the split-adjusted number of shares. The result is split-adjusted, tangible book value per share.
Why is this a good metric? If a company is really making money, the value of the things it owns minus its liabilities should be going up. Accounting with respect to gains and losses is so complex that it is difficult to tell what is real and what is imaginary.
For Intel, at the end of 1997 (5 years ago, before the tech stock bubble), it was (19,295-0)/[1,628 shares *4 (splits)] = $2.96
As of 6/30/02, its (35580-4338)/6677 shares = $4.68
The difference, $1.72 is the true earnings per share over the period, an average of 0.38 per year. Add to that a few pennies in dividends. Based on that, Intel's P/E is still over 40.
For AMD, in 12/97 the split-adjusted tangible book value per share was (2029.5-0)/(140.45*2)= $7.22.
As of 6/30/02, its (3512.4-0)/341.8= $10.28
The difference, $3.06 is the true earnings per share over the period, an average of 0.68 per year. Pretty darn good for an $8 stock, no?
HOW CAN THIS BE, you ask? No, its not losing money in the stock market, because they probably made as much in '98 thru '00 as they lost the next two years. The primary reason, Intel doesn't have anything to show for its great "earnings" is that it pissed away $1Billion per quarter buying its own stock. AMD kept its money or invested in plant, but didn't over-invest. Consequently, their shareholders experienced dilution of about 15%. Big deal, even with the dilution, the company is a lot richer than it was 5 years ago.
I predict that Intel will stop the buybacks before the end of the year. In the long run, that will be good for the stock. But I also believe that the constant buying of stock in the open market is one reason that it hasn't fallen to a more reasonable PE. Intel won't drop much on an announcement of the end of buybacks. First of all, they'll stop the buybacks long before they announce it, and it will fall because of the lack of buying pressure caused by the buybacks. Secondly, they'll keep authorizing a $billion a quarter for buybacks, they just won't use it all, or they'll say its a temporary stop in buybacks or something like that. In any event, most of the damage will have been done long before anyone knows it has stopped. By that time the market may acutally applaud Intel's new-found prudence.
Petz |
