Saturday July 27, 7:19 am Eastern Time
Reuters Market News
Tech Stocks Way Down, but for Many Not Cheap Enough
By Peter Henderson
SAN FRANCISCO (Reuters) - Shares of Apple Computer Inc.(NasdaqNM:AAPL - News) trade for only two or three dollars more than the per-share value of the company's cash stockpile, the kind of deal that would have once led investor David Dreman to reach for his wallet.
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Not any more.
"In this market you kind of throw the normal valuations aside. It's got to be ultracheap now," said Dreman, chairman of Dreman Value Management, with about $6 billion under management.
As investors sift through the wreckage of technology stocks, some 90 percent or more below their giddy highs, it would seem common sense that there must be plenty of bargains.
But value investors schooled in good deals and industry analysts hunting for a bottom see few good bets in an industry still struggling for profitability. According to these skeptics, very few companies look cheap at current levels.
Apple, for example, trades around $14 with about $11 per share in cash, but Dreman, who owns shares in the company is not increasing his stake.
"In a time like this I might want to be more high yield, very low PE (price to earnings ratio), and pretty assured of growth," he said.
The problem, Dreman and other investors say, is that the U.S. technology bubble dwarfed historical precedents and that moribund companies now have meager earnings.
"There has never been a bubble like this in appreciation," Dreman said. "Even dropping the Nasdaq 100 (index) by 80 percent doesn't bring it back. There is still a lot of water."
Take PC-maker Dell Computer Corp (Nasdaq:DELL - News), long admired for its low-cost business model and a shining success in the down market. The stock has traded at about 50 times current earnings over the last four quarters, too expensive, says Timothy Ewing, a portfolio manager at Lunn Partners in Chicago.
Software giant Oracle Corp.(NasdaqNM:ORCL - News), with a PE ratio of about 23 over the last four quarters, is also not cheap, even after a 32 percent drop in its share price this year, he said.
Apple, which Ewing is considering buying, and PC maker Gateway Inc.(NYSE:GTW - News), are trading near cash value, but often at that level "you are really making a bet on whether the company is actually going to survive or not," he said.
Cash hordes can decline with losses, and investors would have difficulty realizing the cash, since management generally would fight attempts to disburse cash or break up their company, said Merrill Lynch technology analyst Zhen-Hong Fan.
Even so, ratios of share price to sales are hitting historical troughs in the technology sector, he said.
"The problem right now is lack of earnings," he said. The expected PE over the next 12 months is an average of about 25 for the top 100 technology companies traded in the United States, compared with a range of 10 to 30 during the pre-bubble years of 1995-1998.
"In other words, it is sort of at a reasonable valuation level, but it is not really at the floor cheap level yet," he said.
Sun Microsystems Inc.(Nasdaq:SUNW - News), trading 94 percent off its record high at $3.84 on Friday, is still around 20 times estimated calendar 2003 earnings.
Further, most tech earnings estimates do not include the expense of stock options granted to employees, a hotly debated topic. Since stock options are more prevalent now than in the early 1990s and 1980s, including their cost would make companies look even more expensive compared to past valuations, analysts said.
A Merrill study found tech earnings would be about 70 percent lower if options were expensed, as a few companies, such as Amazon.com Inc. have agreed to do.
The sole computer hardware company Merrill recommends is Hewlett-Packard Co.(NYSE:HPQ - News), a value trade at around 12 times estimated earnings for this fiscal year and about 9 times estimated 2003 profits.
"Many of these companies, especially those that have very strong existing market share and balance sheet and so forth, they will survive. They will be around," Fan said.
"What needs to be changed in investors' minds is they are not going to be 20-30 percent growers. Valuation needs to be adjusted. Unfortunately." |
