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Politics : Formerly About Applied Materials -- Ignore unavailable to you. Want to Upgrade?

To: StanX Long who wrote (55072)	11/4/2001 11:56:14 PM
From: StanX Long	Read Replies (1) \| Respond to of 70976

Tactics: Are tech valuations still frothy? By Arnold Berman Red Herring November 2, 2001 redherring.com This article is from the October 15, 2001, issue of Red Herring magazine. Irony is common in a bear market. The same pundits who exclaimed "valuation does not matter" at Nasdaq 5,000, now complain that "technology stocks are still expensive" at Nasdaq 1,700. Advertisement Explore within this space It gets better: what was once an unsurpassed growth industry, according to its fans, is now a plain old cyclical industry, according to its critics. And those critics are busy chastising investors for not appreciating both that cyclicality and the fact that earnings will likely remain depressed for a long time. Even more disconcertingly, they assert that technology stocks are still expensive despite the incredible beating share prices have already taken. More often than not, however, the critics are employing valuation approaches that they would never use to value traditional cyclical stocks. If International Paper (NYSE: IP), for example, earns just 5 cents per share next quarter, few portfolio managers would suggest that the stock was worth only $5, or 25 times annualized earnings of 20 cents. After all, investors tend to value cyclical issues at least partly on the basis of their "earnings power." For many cyclical stocks with no great growth appeal, trailing earnings or peak historic earnings are a better measure of earnings power than earnings in depressed periods for their industry. Lots of investors are saying that stocks like Texas Instruments (NYSE: TXN) or Cisco Systems (Nasdaq: CSCO) are still expensive. These investors point out that Texas Instruments only earned 3 cents per share last quarter, which, based on a September 10 stock price of $28.61, would amount to a price/earnings ratio of 238 on an annualized basis. Investors are also lamenting the high multiples of stocks on the basis of consensus earnings estimates for 2002. LOOKING DOWN THE ROAD But current 2002 earnings estimates are not a particularly good reflection of the long-term earnings power of most technology companies. Over the last few quarters, operating expenses for many technology companies grew at a pace that indicated the vendors expected top-line growth to be much higher than they were able to deliver. As a result, margins and earnings have been crushed. Most technology companies are now very focused on lowering their expense structures. If spending does not improve, operating expenses will be slashed much further. Under almost any scenario, the recent mismatch of expense growth and revenue growth will not continue. Nor will the recent dismal level of earnings performance.