<<Is SGP overvalued?>> Yes and no.
It all depends, apparently, on how you slice the salami.
I have a hunk of SGP stock. That is fortunate, because it is primarily SGP that has kept my stock portfolio in the black this year (if only slightly). All my "undervalued" stocks (oil service, furniture, etc.) are way down (from -20% to -60%).
At the same time, SGP's valuation ratios do give me the willies. On the basis of these ratios, the answer to your question would have to be "yes". They are all over the industry average, not to speak of the S&P 500 average (data from Telescan & MarketGuide Comparison Ratios):
PE Ratio: 48.5 (89th percentile of all stocks)
Price/Sales: 10.3 (93rd percentile)
Price/Cashflow 42.5 (94th percentile)
Price/Free Cashflow 80.3 (S&P 500 average: 45.13)
On top of that, SGP is overvalued in terms of its PEG ratio. I use the Telescan Company Growth Ratio, which is the same thing as the PEG ratio, but in reverse (the higher the number the better, rather than the lower the better).
Company growth ratio: .4 (7th percentile of all stocks)
Company/industry growth ratio: .9 (37th percentile)
Wow, looks bad, doesn't it? Why do people continue to drive the price of SGP up? Perhaps because they are slicing the salami differently, looking at different statistics, such as:
Gross Margin: 80.0 (Industry average: 69; S&P 500 average: 49.1)
Net Profit Margin: 21.5 (Industry: 18.4; S&P 500: 10.8)
Return on Assets: 24.9 (Industry: 17.6; S&P 500: 8.3)
Return on Investment: 42.4 (Industry: 25.5; S&P 500: 13.3)
Return on Equity: 53.3 (Industry: 37.7; S&P 500: 22.9)
So, SGP is phenomenally profitable. It is also phenomenally consistent, as the following statistics indicate:
EPS Consistency, 10-yr: 99th percentile of all stocks
EPS Consistency, 5-yr: 99th percentile
Dividend Consistency, 10-yr: 86th percentile
Dividend Consistency, 5-yr: 99th percentile
Relative performance, 5-yrs: 98th percentile
Relative performance, 3-yrs: 98th percentile
Relative performance, 1-yr: 97th percentile
EPS positive surprise, last 4 quarters: 4 (99th percentile)
And so forth.
The question is, does it make sense to pay a premium for SGP? Or to hold on tot it, given its already lofty valuations? Briefing.com seems to think it makes sense to pay a premium for the whole sector, not just for SGP. Take a look at its recent Sector Rating:
Despite historically high valuations and an earnings miss by group leader Pfizer, Briefing is upping its rating on the pharmaceutical industry from 3/2 to a straight 2. For better part of last 4 years, drug stocks have been among the market's elite performers. Dependable top and bottom line growth and the group's resistance to economic cycles have been the key factors driving component issues to record heights. These same factors make the group a standout today. The average long-term projected growth rate for the major drug companies is an impressive 15.5%, or slightly better than 2x the rate estimated for the general market. Meanwhile, the group trades at roughly 32x projected earnings for the upcoming fiscal year or about 1.5x the market multiple. A steep price to be sure, but given group's earnings dependability and its price persistence, Briefing contends that group can trade as much as 175% to 200% of market rate without being excessively valued. This leaves significant room to the upside even though industry trades at historically high valuations. Low interest rate and inflation environment also supports inflated multiples. One reason market confident group will continue to deliver solid double-digit growth is an impressive pipeline of new drugs. Bolstered by improvements in technology, recent trend toward collaboration (with smaller biotech companies), and routinely high levels of R&D spending, the outlook for new therapies is as good today as at any time in recent memory. According to a recent survey conducted by the Pharmaceutical Research and Manufacturers Association (PhRMA), US drug companies now have more than 1,000 new medicines in development. More receptive regulatory environment also a major factor, as new drugs are brought to market sooner - reducing costs. Another development working in the group's favor over the longer-term is the aging of the population. Globally, the over-65 population is forecasted to rise from 380 million to over 690 mln by the year 2025 - according to a World Health Organization study. World population is not only getting older, but life expectancies are getting higher. These trends definitely bode well for the drug industry as elderly account for a disproportionate percentage of health care expenditures.....While we would be more comfortable jumping into the group after a bout of weakness due to the inflated valuations, the group's solid momentum and excellent long-term fundamental outlook argue for continued outperformance over the near- and long-term....
A toss-up, I would say. In the meantime, I personally cannot afford to sell my SGP. :-)
jbe |
