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Technology Stocks : Semi Equipment Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Return to Sender who wrote (9168)	4/10/2003 9:35:18 AM
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INDEX INTELLIGENCE: DJX—A Fundamental Look at the Dow optionetics.com By Frederic Ruffy, Optionetics.com 4/9/2003 3:00:00 PM The Dow Jones Industrial Average ($INDU) surged to start trading this week on signs that US-led coalition forces were set to takeover Baghdad and perhaps declare a military victory. Prior to the rally, stocks had performed relatively well on hopes that the end of war would lift a significant economic burden that had been weighing on investor sentiment. However, while the end to the war may help boost the economy, it might eventually lead the focus of attention away from geopolitical events and back at fundamentals. In that respect, investors might not have as many reasons to cheer because a look at the valuations at many of America’s largest companies reveals that many stocks today are still not cheap. The Dow Jones Industrial Average consists of thirty well-known US corporations. The full list is included in the table below. Currently, twenty-nine of the thirty companies are actually profitable. Only Hewlett-Packard (HPQ) has failed to deliver profits. Notice that it is the only Dow company with a negative price-to-earnings (P/E) ratio. The average P/E ratio of the other components is 21.00. Is a P/E ratio of 21.00 high or low? Well, the price to earnings ratio is generally a function of growth rates. That is, when a company is growing earnings rapidly, it will command a higher price-to-earnings ratio when compared to a company with a slow rate of earnings growth. Therefore, when looking at valuations, it is important to consider the P/E ratio only in relationship to growth rates. Dow Component Symbol Price-to-Earnings Ratio 2003-2004 Earnings Growth Rate (%) PEG Alcoa Inc. AA 36.0 49.56 0.73 Amer. Express AXP 17.1 11.11 1.54 Boeing BA 9.6 7.54 1.27 Citigroup Inc. C 12.7 11.38 1.12 Caterpillar Inc. CAT 22.6 54.19 0.42 Du Pont DD 21.4 33.52 0.64 Disney (Walt) DIS 31.2 32.31 0.97 Eastman Kodak EK 11.6 6.64 1.75 Gen'l Electric GE 17.9 9.26 1.93 Gen'l Motors GM 10.2 14.94 0.68 Home Depot HD 16.5 14.88 1.11 Honeywell Int'l HON 11.2 22.09 0.51 Hewlett-Packard HPQ neg 22.88 nm Int'l Business Mach. IBM 25.9 13.66 1.90 Intel Corp. INTC 35.9 33.90 1.06 Int'l Paper IP 56.0 108.59 0.52 Johnson & Johnson JNJ 26.3 13.36 1.97 Morgan (J.P.) Chase JPM 31.7 24.07 1.32 Coca-Cola KO 26.1 10.38 2.51 McDonald's Corp. MCD 20.1 3.76 5.35 Minnesota Mining MMM 26.1 12.63 2.07 Philip Morris MO 5.8 8.66 0.67 Merck & Co. MRK 17.6 9.73 1.81 Microsoft Corp. MSFT 28.1 5.88 4.78 Procter & Gamble PG 21.1 9.85 2.14 SBC Communications SBC 9.6 4.88 1.97 AT&T Corp. T 11.5 -20.97 -0.55 United Technologies UTX 13.2 8.09 1.63 Wal-Mart Stores WMT 29.8 14.29 2.09 Exxon Mobil Corp. XOM 20.6 -6.22 -3.31 The most common way of comparing P/E ratios to growth rates is with the price-to-earnings-growth rate, or PEG, formula. It is computed by dividing the company’s P/E ratio by its earnings growth rate. For example, if XYZ is trading at a price to earnings ratio of 50 and the earnings growth rate of the company is 25%, the PEG ratio equals 2.00 (50/25). Generally, when companies are trading at P/E ratios well below their growth rates, the stock is considered undervalued. In the case of XYZ, the PEG ratio of 2 suggests overvaluation. The table above shows the expected earnings growth rates for the thirty Dow stocks for 2003 and 2004. Two of the companies, AT&T (T) and Exxon Mobile (XOM), are expected to see earnings declines during that period. The remaining twenty-eight companies are expected to see average earnings growth of 20.4%. Therefore, based on analyst (polled by First Call) estimates, the earnings growth rate is very close to the price-to-earnings ratio. However, the average PEG ratio (excluding HPQ, XOM, and T) is relatively high. The average PEG ratio is 1.65 and suggests that many of the components of the Dow are, on average, still overvalued. Looking over the individual components of the Dow reveals an important aspect of today’s market. Namely, there seems to be a wide disparity among individual stocks in terms of valuation. There are a large number of stocks that appear undervalued using various metrics like the PEG formula, and a large number that seem overvalued. In other words, the terms “undervalued” and “overvalued” might not be suitable terms when discussing the market as a whole. Instead, traders might want to take a sector or stock-specific approach, and analyze each company based on their own specific fundamentals. Frederic Ruffy Senior Writer & Index Strategist Optionetics.com ~ Your Options Education Site Visit Fred Ruffy’s Forum