The price to earnings ratio is a generally accepted valuation measure that is easy to use and dates back to the days before computers.
Stocks are valued based on the perceptions of people in the market as to the expected future value of those stocks. These valuations rely primarily on the expected future growth of cash flows. Book earnings are considered an approximation of these cash flows and, therefore, people have justified the use of the P/E ratio in the analysis of stocks.
In the case of a stock such as Intel, the P/E ratio suffers for a number of reasons. Specifically, many people have a hard time believing that Intel, because of its size, can continue to grow at the tremendous rates it has historically.
Intel has also suffered recently from the misconception that it is a company that will be negatively affected by the low book-to-bill ratio and the reduced prices for memory. As many people in this forum have mentioned, the book-to-bill is based on dollar sales not units. Memory prices have paid an apparently large role in driving the ratio below 1. Memory, however, is a commodity. Intel derives the majority of its revenues from high value added products such as processors, which are not yet commodities. They continually advance the technology of their products and lower their prices in order to prevent the commoditization of their products.
Another problem that affects Intel's P/E is that, as a technology stock, its long-term outlook is perceived as cloudy. Coca-Cola, on the other hand, is considered by investors to be a permanent icon on the landscape of America.
I hope this (relatively) brief note is helpful.
My personal expectation is that Intel should hit $70 by the end of the year. This is based on conservative projections, and is, hopefully, short of the actual. |
