Categories

A comparison of P/E compressions

Following the presentation of growth/PE of comparable companies in the previous post, here are charts showing the Growth vs. P/E as a scatter plot. I highlighted the quarters pre-crisis as red dots and the quarters post-crisis as blue dots. I also added a vector line showing the migration of the average (centroid) of the pre-crisis values to post-crisis values (11 points averaged in each case).

Note the relatively strong separation of data (pre- and post-crisis) for the following companies: Apple, HP, RIM, HTC, Microsoft and Google. Of these the sharpest separation was that of Apple.

  • Canucker

    Yet Apple also stands out as being the most resilient to the financial crisis. The disconnect is the idea that a purveyor of “luxury” goods does less well when times are tough. Several problems with that thesis. Firstly, Apple’s prices are much tighter in terms of comparisons and its products are not so much seen as luxury items, rather entertainment/distractions which people want/aspire to when the news is depressing. Secondly, the wealthy are the least hit in terms of retail confidence (but Apple is not dependent upon the wealthy). Lastly, when money is tight, quality is more important.

    • Sacto Joe

      “Luxury” is both a relative term and potentially a loaded term. Apple makes a healthy margin on its products. People seem to equate that with Apple being a luxury. But that depemds on your usage. I do CAD work on my Mac. I need a good-sized screen and plenty of power to work optimally. And my iPad has replaced my old portable completely, for an extremely affordable price. Finally, my iPhone is my electronic equivalent of a swiss army knife. It’s an extremely good value.

      Apple isn’t succeeding by building “luxury” items. It is succeeding by changing the definition of what’s a necessity!

  • Jon

    Crisis? What crisis?

  • RB

    Horace,

    If you add RISK as the third dimension, then I do strongly belive we will see a dew more revelations.

    By RISK I mean, well that it rather making educated guesses, how likely it appears that a specific company is to see the projected growth or even decline.

    It shoul be a bit like in “classic” finance, the higher the risk you are willing to take the higher is the interest you need to realize on that investment.

    Even if it sounds very simple, it still might be that Apple’s P/E ratio is in the basement because if you invest in apple that growth is currently like money in the bank already.

    Regards

    RB

    • http://twitter.com/disc1979 Dirk Schmidt

      Capital costs (risk) is included in every multiple.

      • Ian Ollmann

        Can you measure risk by how far off the consensus estimate is from actual results over time? I suppose beta might be another measure.

  • Hossein

    What is the conclusion?

    • http://www.asymco.com Horace Dediu

      There is more analysis coming. The amount of data and the process take too much space for one post.

  • MOD

    I think there are more than 2 or 3 variables at work here to explain what is going on in the stock market.
    Apple is a difficult company to value even for us “experts.”

    From the data above, the Apple, RIM, Microsoft, Google, (and perhaps HP) charts are most identical. Maybe you could focus on these 5, take an average, subtract the common decline, and see how Apple fares.

  • Ben

    Horace-

    I have a couple of quick questions for you unrelated to this specific article. While it’s clear that the great majority of your analysis revolves around Apple as the dominant player in the mobile market, I think it would take an obscenely obtuse reader to suggest that there is any level of “fanboyism” on these pages. That being said, my questions are:

    1- Let’s say a ‘black swan’ mobile player appears and eviscerates Apple in the market: would Apple remain the central focus of your analysis so that you could follow their denoument as you’ve followed their crescendo, or would you shift your focus to this new, successful player?

    2- If not for Apple, what other company do you feel has an interesting enough story to focus on in a style similar to the Asymco blog? Is there any other category that you feel is as well poised for a revolutionary shift as computing/mobile was when the iPhone and iPad arrived?

    -Ben

    • MOD

      1- Regarding a “black swan”, Google/Android are already working hard at “eviscerating” Apple. Horace has studied them and all other OSs (Palm/HP, Windows, RIM, etc.) in detail, and continues to do so.

      Horace’s background is 20+ years in computers and business, BS, MS in Computer Science and MBA from Harvard, including 5+ years working for Nokia as a market analyst.

      Have more respect.

      2 – I do not see Asymco to be focused on Apple, though Apple has invented the Iphone/Ipad, and thus a lead player.

      If you want to ask what company(ies) are as interesting as Apple, that is a good question. I would say HTC is an interesting innovator, in their own way. If I were in charge at Apple, I would seriously consider licensing iOS to HTC and have them make Iphone compatibles, though I understand this is against Apple strategy of quality. But what if HTC already proves to be a quality mfg.

      Apple did once allow compatibles, which sold well, but were discontinued, by Apple, as I recall.

    • http://www.asymco.com Horace Dediu

      1. I only use Apple as a lens through which I look at mobile computing, which itself is a tool to understand how computing is changing. For eight years I did the same using Nokia, and to a lesser degree, Microsoft as my lens. The focus is always up for debate.

      2. I thought about Google for a while and they are still potentially interesting though Facebook may be more so. Amazon is interesting longer term (after five years). Twitter is fascinating. These are all service companies but it may turn out that they will be making devices as well as they wrap new business models around the technology.

      The trouble is that they are not as good candidates as Apple since there is less data in plain sight to use as evidence and to test hypotheses.

  • Glenn

    With apologies, I am still unclear as to the meangfulness/relevancy of “P/E compression.”. I generally follow your analysis, so it’s frustrating that I have no idea where this argument is leading.

    • MOD

      It is showing a similarity between decreases (compression) of the PE ratio (number) from before the financial crisis period to the current period.

      Some companies moved in similar ways, some did not. It is a combination of four variables: Market price (P), Earnings (E), EPS Growth (Earnings per Share growth), and time period (before and after financial crisis).

    • http://www.asymco.com Horace Dediu

      P/E compression is a term used to describe the effect of a company’s Price over Earnings ratio being reduced over time. The most common reason it happens is that a company’s growth slows down. But we live in a time when compression seems to be happening to companies whose growth is increasing.

      For many months the focus of this analysis was Apple alone, but now we’re turning attention to Apple’s “business neighborhood” and seeing if the effect is happening to its neighbors.

      The point being that if the phenomenon of compression is likely to be due to general anxiety then the best course of action for an analyst is to ignore the market’s vote for the time being.

  • Pingback: Growth and punishment: The vector space model | asymco()