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Strategies & Market Trends : Guidance and Visibility -- Ignore unavailable to you. Want to Upgrade?

To: 2MAR$ who wrote (7579)	7/19/2001 7:59:44 PM
From: 2MAR$	Read Replies (2) \| Respond to of 208838

A little yesterday re: MERQ :Falling Prices Do Not a Bargain Make By Cintra Scott ARE STOCKS GETTING more expensive? The answer is a resounding NO if you look at share prices since last earnings season. The S&P 500, for instance, has dipped 3% over the past 12 weeks. But the answer is YES if you evaluate a stock based on its price-to-earnings ratio. The current year's earnings estimates for the S&P have dropped more than 5%. That means Es are falling faster than Ps, which drives up the P/E ratio. So despite the pain, stocks are, in fact, getting more expensive. ADVERTISEMENT search for jobs: But that doesn't mean there aren't bargains out there. Sometimes, share prices fall while earnings prospects remain the same or even improve. Those may be among the stocks to seek out before the overall market improves. So we scoured Zacks database in search of companies with sinking Ps and buoyant Es. (For the complete recipe, click here.) We ran the screen each day this week, to test the market's choppy waters. Day-to-day price swings did cause some stocks to pop up or drop off our list — but the larger theme remained the same: Energy stocks are getting cheaper while profits continue to soar. Of course, there's a pretty big rub here. Energy prices are likely to fall in the future, taking industry profits down with them. Yet not all energy companies will be equally affected by weaker prices — a little tidbit you wouldn't glean by watching the sector's stocks trade down as a group over the last few months. And you might want to tuck that notion away for future reference, since some experts think the days of all energy stocks being joined at the hip are coming to an end. The Shaw Share Redemption The Shaw Group (NYSE:SGR - news), for example, isn't your typical energy stock. It makes piping systems for power plants and other industrial buildings but doesn't take anything out of the ground or light up any houses. Demand for new power-plant construction pushed the company's earnings and stock price up along with the rest of the sector this spring. The stock hit a new 52-week high of $63.48 on May 22, while the California energy crisis was in full force. But since the hysteria started dying down, Shaw shares have been sawed nearly in half, to just $33.47 as of Thursday's close. But Shaw's current fiscal-year earnings continue to grow. On July 10, it reported earnings of 42 cents a share — 83% greater than a year ago and two cents better than Wall Street's expectations. The company also indicated that its backlog of contracts had increased by 313% to a record high, meaning it should be pretty busy for the next couple years. On the conference call with analysts following the earnings announcement, Shaw Chief Executive J.M. Bernhard said there were no indications that demand had reached or even come close to a peak. So what's going on with Shaw's stock price? One answer can be found in the futures market, where electricity prices are falling. Lower electricity prices make consumers happy; they also make power plants less profitable. But ``futures pits are not a great proxy for power plant development,'' says Merrill Lynch analyst Fritz von Carp. He thinks Shaw has been oversold on shortsighted concerns. The decision to build power plants is based on normalized supply and demand projections for the next five or 10 years, not next week's price per megawatt hour. Moreover, Von Carp says there's an unusually strong correlation these days between the stock prices of very different energy-related companies. In fact, the analyst created one index of refineries and one of generators and found that the two moved more in tandem now than they have for the past 15 years. And as a piping-system builder, ``Shaw doesn't even own power, but it trades as if it did,'' he says. He thinks this high correlation is likely to decrease as investors realize it's premature to worry about demand for construction dying down. There's another nagging concern for Shaw. A year ago, the company acquired fellow power-plant builder Stone & Webster, more than doubling its size. There has been persistent speculation that Shaw's use of purchase accounting to track Stone & Webster's outstanding contracts would artificially inflate its profit margins in the short term, setting investors up for a disappointment down the road. But the May quarter's profit margins calmed those fears. A year after the merger, profit margins are growing and are expected to hold steady next quarter. Indeed, by all accounts, Shaw is on a growth tear. Analysts following Shaw predict the company will increase its earnings per share by 29% each year for the next three to five years. Since Shaw's P/E is 25, its stock is trading at a 15% discount to its growth rate, which makes some on the Street smell a bargain. Merrill's Von Carp says the earliest that demand for power-plant construction could peak is in 2003, based on industry research and Shaw's own record-breaking backlog. With its strong fundamentals, Von Carp expects the stock to turn around. Mercury Rising? Thanks to earnings erosion (and in the case of tech, high valuations), not much outside the energy sector survived our screen. But Mercury Interactive (NASDAQ:MERQ - news) was a noteworthy exception. On Wednesday afternoon, the software company said it met consensus earnings expectations of 18 cents a share even though its revenues were light. That came as a relief. On Thursday, the stock climbed nearly 6% — after falling 43% since July 1. The tricky thing about our screen during a particularly volatile earnings season is that companies meet our requirements one day, but drop off the next. That could be the case with Mercury. On Wednesday's conference call, the company said weak information-technology spending could flatten its third-quarter results. The jury is still out on how far annual estimates will tumble, but on Thursday Wall Street Journal all-star earnings forecaster Neil Herman lowered his from 89 cents to 75 cents — just 6% greater than last year's results. But analysts still expect strong earnings growth over the long run. Merrill Lynch's Chris Shilakes on Thursday reiterated his EPS growth estimate of 35% a year for the next five years. He notes that Mercury is the ``800-pound gorilla'' in the growing applications testing market. With a P/E of 32 (based on revised estimates), the stock is trading at a discount to its projected growth rate, which is still rare among software companies. If sentiment shifts and earnings firm up, Mercury could have room to rally. But remember to mind those P's and E's before you invest.