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Technology Stocks : Hewlett-Packard (HPQ) -- Ignore unavailable to you. Want to Upgrade?

To: w0z who wrote (2910)	6/4/2003 6:47:13 PM
From: Dave B	Read Replies (2) \| Respond to of 4345

Bill, PEG is pretty useless as well. Until the irrational late 90s no one ever seriously compared the PE ratio of a company to its growth rate. For much of the late 1990s, the Price/Sales ratio was more important than the Price/Earnings ratio. There you are. For much of the late 90s, any idiot with a brokerage account could make money. It didn't take PE, PS, or PEG to do that. The entire market was out of its mind, and it was a great period for making money, but it won't happen again for another 80 years. There were no "rational" indicators during this period as companies with virtually no sales or profits had billion dollar valuations. As opposed to your statement that "P/S is always listed as a key valuation metric", in reality it was rarely listed as a valuation metric before the mid 90s. The market will slowly get back to similar dynamics that it had before the late 90s, and P/S will mean very little. Let me try it this way. You, Duke and I all own local 7-11s, all with $10M per year in sales. We simultaneously decide to sell our stores. Who's going to get more for their business -- you with $1M/year in profits, Duke with $50K/year in profits, or me with $1M/year in losses? Certainly we're not going to get the same price for our stores. The person who buys your store can expect to take home $1M per year right off the bat. You'd get quite a bit for a $1M profit stream. Duke's going to get less because $50K isn't very exciting -- a lot of reasonably educated people could do better by working a regular job and not working 16 hours per day. Finally, I'm going to get very little for mine. The person who buys mine will have to keep funnelling more money into it. Only an idiot would pay the same price to me that you get. So the fact that the P/S ratios of our companies is different is not wrong, rather it is a recognition of the fact that it is the earnings that are more important. The fact that my company has a lower P/S ratio is not an indicator that it's undervalued and will therefore perform better than the others as an investment. Using the P/S ratio of a company as a valuation sounds like the Sales guys I've known who thought that we were doing great because they were all ahead of quota, not realizing that they were losing money with every sale. How long do you think that's going to go on? What is really* important is the expected stream of future earnings, which is quite complex due to changes in total market growth, market share changes and profit margin changes.* We're in 100% agreement on this. And that's what makes a market. Expectations change every day which is why prices fluctuate every day. If we relied only on past earnings reports, then prices would only change once per quarter. Every announcement made about a company or its competitors changes the earnings expectations for the future. Expectations can also change based just on general economic conditions. One of the on-line posters I know claims that almost any stock follows a 70-20-10 rule, where 70% of the movement is due to the general market, 20% is due to industry news and conditions, and 10% is actually due to the stock itself. I'm not sure if I agree, but it's another data point. Past earnings are important primarily as a starting point for the expectations of the future. Given IBM's current share and profitability position, one must ask whether we expect them to grow earnings faster than HPQ can from a much lower starting position. As HPQ is beginning to deliver, the market is beginning to realize it may be a much better value than IBM: Agreed. HP's price has been depressed because of uncertain expectations about the outcome of the acquisition. So if HPQ delivers, then the price will come up as the "uncertainty factor" get priced out. But there's still a lot of uncertainty -- it's not as if HP is gaining share above and beyond the combined CPQ/HWP shares in a lot of categories. If HPQ can't gain back the share it's lost once the cost-cutting phase is over, then it's probably fairly or over-valued right now. You can't cost-cut your way to growth and profitability. Dave