OK, jach, with some trepidation as to the quality of any
discussion, I will venture a response to your latest series.
(Please, if you decide to respond to this message do not
quote yourself again--I've already read the posts).
There are a number of factors which determine a stock's price.
Among the most important in this sector are:
1. Estimates of future earnings.
2. The visibility of those future earnings (ie., how confident
can you be that those earnings will be achieved?)
3. Stability of earnings (the market awards a premium to those
companies with more stable earnings)
4. The perceived quality of earnings (how much of earnings
are due to accounting decisions?--this is what killed orcl
last week, even though they met estimates)
5. The company's position in a market and the market's overall
health or growth.
6. A company's technology.
7. A company's ability to deploy its technology.
You suggested that LU NT and CSCO be compared based on sales,
or price to sales ratio. I would submit that this is not a
very important factor in pricing any of these three companies.
I took a few minutes to put together some comparative stats
on the three companies:
CSCO NT LU
Price 103.25 58.81 103.25
PE 125.9x na 89.0
1998 act .82 -.99 (loss) 1.16
1999 est 1.47 2.24 2.31
2000 est 1.83 2.67 2.78
MSN (http://investor.msn.com/research/wizards/srwtarget.asp?Symbol=lu)
"If company was priced like peers":
1999 est 249.46(Jul) 192.86(Sep) 198.89(Dec)
2000 est 310.55(Jul) 229.89(Sep) 239.36(Dec)
1999 incr +142% +228% +93%
2000 incr +201% +291% +132%
No. Analysts 29 25 31
Ests Variab. +/-10% +/-18% +/-20%
Confidence "High" "Med" "Med"
Price/Book 17.9x 3.5x 16.2x
Price/Sales 17.0x 1.9x 4.49x
Yield nil 0.30% 0.15%
Earnings history by quarter, and amount over (under) ests:
12/97 .29 +2.5% .74 +1.4% .86 +13.2%
3/98 .30 +3.5% .27 +8% .14 +55.6%
6/98 .32 +3.2% .41 +5.1% .32 +18.5%
9/98 .34 +3.0% .42 +10.5% .41 +5.1%
12/98 .36 +0.0% .72 +2.9% 1.05 +3.9%
Taking each of the above:
1. The MSN numbers attempts to quantify the uncertainty
of earnings estimates. Here, CSCO is viewed as superior.
2. All of the above, according to MSN, would appear to be
undervalued relative to their peers.
3. The yields of all three companies are not meaningful
to any investment decision or future return.
4. CSCO has returned a remarkable history of earnings
increases quarter to quarter. NT has been penalized for
its 1998 misstep, and variability in quarter to quarter
earnings. LU has been penalized for variablity in quarter
to quarter earnings, and has not been rewarded for
earnings surprises.
5. CSCO's ability to deploy its technology into the marketplace,
to identify new technologies for deployment have been rewarded
in the stock's price.
6. CSCO's dominance in the core of the internet have earned it
a premium.
7. CSCO's ability to deliver end-to-end solutions have given
it a dominant position among corporate IT purchasers, and
earned a premium in the stock price.
8. CSCO is perceived to have better quality earnings than
NT especially, and also to LU.
All of the above explain a premium for CSCO over either of
the companies you want compared. Whether the market is rewarding
with too much premium is open to debate, but that a premium
is due is not really in question.
And to state that CSCO is "very much" overpriced is overstating
things, to say the least.
I look forward to your well-thought-out response.
JS |
