Jerry. Check this out from The NY Times this morning:
August 14, 2001
MARKET PLACE
The Wait for a Tech Rebound May Be Long
By ALEX BERENSON
ighteen months into the worst bear
market for technology stocks ever,
many Wall Street strategists are warning
investors not to expect the sector to turn
around anytime soon.
The problem, they say, is that profits at
first-tier technology companies like Cisco
Systems and EMC have fallen as fast as —
or even faster than — the companies'
stocks. As a result, many big technology stocks are now even more
expensive based on a price-to-earnings ratio than they were last year. For
example, the forecast for Cisco's earnings has dropped 82 percent since last
fall while the company's stock is down about two-thirds.
Price-to-earnings ratios typically rise during an economic slowdown as
investors bet earnings will recover quickly once the economy gains steam.
But the pessimists argue that investors are refusing to accept the hard truth
that technology earnings, like technology stocks, were inflated by a bubble in
1999 and early 2000.
The skeptics note that Wall Street analysts are cutting their profit estimates
for technology companies next year, implying that this year's slowdown is not
an aberration but instead a return to permanently lower growth rates. It will
take at least several years before companies like Cisco and Oracle recover
fully and enjoy the profit margins and earnings they did at the peak of the
millennial boom, they say.
"A year ago, I thought valuations were outrageous, but I thought
fundamentals were pretty solid," said Steven Wieting, senior economist at
Salomon Smith Barney. "Now we've found out that valuations and
fundamentals were both extremely problematic." Earnings at technology
companies in the Standard & Poor's 500-stock index will fall about 50
percent this year compared with results last year, according to Charles L.
Hill, research director for Thomson Financial/First Call, which tracks
corporate profits. That plunge accounts for most of the expected drop in
profits for the overall S.& P. 500 this year, although earnings at
nontechnology companies are also expected to sag slightly.
A survey of some important technology companies illustrates how hard
profits have been hit. In February, analysts expected that EMC, which
provides storage systems for big companies, would earn about $1 a share
this year and $1.30 a share next year, according to I.B.E.S., which tracks
earnings estimates. By June, they had cut those estimates to about 80 cents a
share for this year and $1 for 2002. Now they are forecasting that EMC will
earn only 30 cents in 2001 and 41 cents in 2002.
At Cisco, which makes much of the equipment that routes data on the
Internet, earnings estimates for the year ending in July 2002 have fallen to 18
cents a share from about $1 a share in January. By way of comparison,
Cisco earned 54 cents a share in fiscal 2000. The last time Cisco earned less
than 18 cents a share was in 1996, when the company earned 15 cents a
share.
Cisco is not alone. On average, technology earnings have fallen to 1997
levels, Mr. Wieting said. "We've erased several years of growth, more than
anything that you would expect as a payback for 2000."
Investors are hoping that earnings will quickly recover to their 2000 levels,
he said. But history shows that profits do not simply yo-yo back after a drop
like this year's, he said. At a growth rate of 25 percent annually — far above
historical averages — technology earnings will not surpass last year's levels
until 2005.
"A moment of silence for profits," said Byron Wien, director of investment
strategy at Morgan Stanley. "People are in denial now. Everybody wants to
believe that the good old days are going to come roaring back, and that's not
the case."
Yet Mr. Wien noted that technology stocks continue to have an outsized
hold on investors' imaginations. Cisco, Oracle, Intel and Microsoft continue
to be among the nation's most heavily traded stocks, with tens of millions of
shares changing hands each day. "Look at the Nasdaq most actives;
technology stocks consistently dominate that list," he said.
To be sure, many Wall Street analysts remain optimistic that this summer's
tax rebates and the Federal Reserve's interest rate cuts will provide a quick
tonic for earnings at companies of all stripes. For instance, Goldman, Sachs
raised its rating on Intel and several chip makers yesterday, saying that
business may improve in the fourth quarter.
"The U.S. economy has shown remarkable recovery characteristics," said
Christine Callies, chief United States strategist at Merrill Lynch.
Ms. Callies expects earnings at the S.& P. 500 to rise 25 percent in 2002.
That would be the best performance for the S.& P. in more than a decade.
She predicts that the S.& P. 500 will rise about 20 percent by early 2002 as
investors realize how quickly the economy is rebounding.
"Early stage recoveries tend to be so strong," she said.
But Doug Cliggott, chief equity strategist for J. P. Morgan, said that earnings
were unlikely to recover until the middle of next year and that the S.& P. 500
would probably not begin to gain until late 2002.
Last year, technology companies were operating in a "dreamlike
environment," with heavy demand from both well-financed Internet start-ups
and established companies worried about competition. This year, he said,
reality has set in for companies, if not yet for investors. |
