To the other responses here, let me add that a company's pe will be lower in an industry that is thought of as "capital intensive." With intc having to one day invest 10 billion dollars for a new fab, it is very capital intensive, although it has great margins.
for example, which company is worth more?
a) $5 eps. No reinvestment of those earnings needed to sustain the $5eps.
b) $5 eps. Company has to reinvest $2 eps to sustain its market share, hold its competitive position, or grow its revenues enough to cancel out declining margins. If it continually reinvests high amounts of profits, it will stay at $5 eps or grow slightly.
It is self evident that company a is worth more. In 5 years it would have retained a total of $25 eps, while company b will have retained 15 to keep eps the same.
intc is like b. Wrigley is like a.
Wrigley deserves the higher pe. Period.
But then one offers that intc growth will be greater, it dominates its market, blah, blah, blah.
Well, intc's market cap is much higher, by many times.
The bottom line, imho, is that pe is based on:
1)future growth rate.
2) return on equity.
3) market dominance.
4) earnings predictability.
INTC is screwed on #4, and relatively weak on #2.(Not compared to IBM, F, C, T, etc)
Right now csco, and msft pass this test with flying colors.
amat does poorly, too.
gene
p.s. pe is also effected by short term e shortfalls. |
