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Technology Stocks : How high will Microsoft fly? -- Ignore unavailable to you. Want to Upgrade?

To: Reginald Middleton who wrote (8568)	6/22/1998 5:36:00 PM
From: Wizard	Read Replies (1) \| Respond to of 74651

two things: >>You see, there are plenty of very valid reasons why a well informed market would choose not to rely on EPS, growth in EPS, or analyst's estimates of EPS to actually value a corporation, especially in comparison to its peers. Just because two companies (such as Intel and AMD) report different accounting treatments doesn't mean they are uncomparable. This is indeed the job of a buyside analyst. If the analyst can decipher the relative aggresive or conservative policies then they can adjust the multiple accordingly (at least in theory). For example, if Intels earnings estimate is $1.00 as reported but $1.15 if the depreciation schedule is dragged out a few years and we go by cash earnings to adjust for any non-cash deal related amortization charges, because that is how AMD happens to be doing it, then one needs adjust the multiples for the earnings differential. This can usually be estimated (albeit with errors). Warren Buffet has said "better to be approximately right than exactly wrong." I take this to mean that it is not necessarliy important to figure out to the penny what Intel and AMD made last quarter on a comparable basis. >>If it is true then you must agree that conventional wisdom relies on the EPS number. I don't know exactly what you mean here. Conventional wisdom does rely on the EPS number but not necessarily in its printed form (the prevailing estimates). The fact that P/E multiples are markedly different in sectors with very similar companies indicates that investors adjust valuation for the perceived differences. I think we are saying the same thing here. My point is that a study of the lack of correlation between printed estimates (or reported numbers) relative to prices and implied market caps does not necessarily mean that stocks do not trade relative to earnings expectations. My view rests on something which one is not able to prove or disprove; that investors do care about sales and earnings but normalize the valuations through the P/E and PSR ratios. If one company has higher Return On Invested Capital than another, that too will be factored into the multiple. You seem to be saying that earnings are overrated. I agree with that part. However, from what I undestand thus far, I don't necessarily agree with what you are implying from there. You seem to then be implying that because EPS doesn't correlate with the price on the date of the earnings report, earnings don't have anything to do with stock valuation. I am not arguing that the P/E ratio and Wall Street estimates are good indicators of future stock performance. Just that (in theory at least), Wall Steet can use sales/earnings and multiples effectively if they are adjusted for the vagaries of accounting and the true growth and profitability of the firm relative to the risk.