Market Meltdown
Unfortunately, all you kid money managers, the shares of everything from Sun Microsystems Inc. to JDS Uniphase Corp. to General Electric Co. still cost too much.
That might not seem possible after the latest bear-market-in-a-flash clipped 34.2% off the tech-happy Nasdaq composite index in five weeks.
But at $76.50, Sun Microsystems stock is still priced at 87 times its earnings for the latest 12 months. Sun certainly does well; Thursday it reported operating profit in the quarter ended March 26 jumped 49%.
Analysts surveyed by First Call estimate earnings of the company, whose computers power Web sites, will rise 21% annually for the next five years.
If such long-range guessing proves true, and if Sun’s price remains unchanged between now and then, the shares would still be 34 times the company’s earnings in five years, a number that in the past gave rational investors pause.
JDS Uniphase, which makes things like lasers, transmitters and amplifiers for fiber-optic transmission, has annual sales of $674 million and is expected to earn just 36 cents a share this year. Now, even though its stock has dropped almost in half since early March, it has a total market value of $56.7 billion--more than General Motors Corp. or McDonald’s Corp. Can that be explained?
GE, a combination manufacturer, finance company and broadcaster, has pretty much survived the blood bath. It reported Thursday that first-quarter profit rose 20% to $2.59 billion, or 78 cents a share, and Chairman Jack Welch is widely heralded as the CEO to beat all.
Still, GE shares go for 43 times earnings in the past 12 months. About four years ago, the price-to-earnings ratio was 18--and Welch was a genius then too.
You can run through the same kind of exercises with any number of stocks. Motorola Inc. still trades at 46 times earnings. The semiconductor and cell phone company’s annual profit peaked in 1995--though Motorola says it will beat that this year.
Ariba Inc., which makes computer software for processing orders from one business to another on the Internet, has only red ink to back up a $11.4-billion stock market value.
Shares of Applied Materials Inc., which makes equipment for making semiconductor products, fell 19% in the past two days but were still valued at 62 times the company’s earnings.
Even investors who continued to pay attention to P/E ratios in recent years were tempted to think that historical benchmarks needed adjustment. After all, we were experiencing the best U.S. economy ever. Companies expanded, everybody was working, inflation was at rest.
But on Friday the government reported that prices of such things as clothes, housing and medical care in March rose at their fastest pace in more than five years. If that isn’t just a blip, one key support beam for the market may be kicked out from under it.
Let’s say it is a blip, though, and corporate earnings can keep climbing without being eaten in large part by inflation. Shouldn’t stocks be worth more, justifying higher P/Es? Perhaps, but how much higher?
When many of today’s money managers were in grade school, investors ventured to pay 30 or 40 times earnings only for shares in the most-promising companies. Today, the average P/E for every company in the Standard & Poor’s 500 index is about 27.
Sun Microsystems’ earnings might be worth more today than they would have been years ago. But by betting 87 times Sun’s earnings instead of say 35 times, investors are saying the computer maker’s profit is 2 1/2 times more valuable than in the old days. Not likely.
Simply put, there’s a lot of air left in the balloon.
