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Technology Stocks : American Power Conversion
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To: Boots who wrote (1689)7/29/1997 3:17:00 PM
From: shane forbes   of 2574
 
Boots a couple of points in your argument are not valid:

1. The 18.5% is operating income not net income. For instance they had about 200 million in sales and about 38 million in operating income or about 19%. You now have to include "other income" and take out taxes to get net income. So you need to apply 2/3 to your earnings numbers to approximate net income (VERY roughly - check APCC's tax rate and the relative value of "other earnings" to operating income).

2. Usually when a company talks about growth in earnings they mean earnings per share and not merely earnings. EPS is the more relevant number for shareholders. Check out the news section for APCC in SI. There is an article titled something like "APCC sees 20-25% EPS growth for 1997." This of course takes into account share dilution.

Taking the 2 points into consideration you will see that they need to grow their revenues to meet expectation. But this kind of growth should be well within their capabilities. The funny thing is that EPS is up considerably more than 25% for the first 6 months cp. to 1996. So the implication is for deccelerating growth in EPS for next 2 quarters (from the first half clip). This could mean that q3 and q4 '96 were outstandingly good, q1'96 and q2'96 were pretty bad, or APCC is skittish about the next 2 quarters. Maybe there were some special operating efficiences last year? But what about the new plants this year? These bring down costs a lot. And what about symmetra? Hoping that APCC is setting up the analysts by lowering expectations. (Note that in the conference call APCC was asked whether they were being too pessimistic about the next 2 q. and they said they were not.)

(As a rule of thumb if you can spot a company with 18.5% sustainable net income watch it like a hawk and buy on dips!! 18.5% is in the unbelievable range - something like the only CSCOs of the world can do on a regular basis. The vast majority of corporations in America would be lucky to hit double digits in net income as a % of sales on a consistent basis. We have got used to high returns on sales because we are investing in the "hummer" industries.)

$-)
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