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Growth profiles of 13 companies

The previous article showing the profile of Apple’s growth vs. its P/E prompted a similar review of a set of comparable companies. The cohort is composed of:

Apple
HP
Dell
Lenovo
Acer
Sony
Samsung
LG
Nokia
RIM
HTC
Microsoft
Google

The following charts are a simple representation of P/E (line chart with left scale) with Net Income growth super-imposed (bar chart with right scale.) The time period is 22 quarters; 11 quarters after the crisis (i.e. quarters after the one ending in Sept. 2008) and 11 quarters before the crisis (quarter ending 12/20/05 through the one ending 6/30/08).

We made one change to the growth data from the previous post where the Net Income growth is not quarterly year-on-year but average of four quarters year-on-year. This reflects the fact that P/E is also a trailing twelve months’ earnings. It also has the benefit of smoothing the growth data making it easier to discern.

Here are the charts:

Note that all charts are to the same scale (P/E from zero to 50 and Net Income growth from -100% to 200%). Some clipping of the values is possible. Growth from unprofitable periods are undefined (i.e. when measuring growth from to b, if a is negative, the data is omitted.)  Growth from a positive period to a negative period is defined as -100% (i.e. when measuring growth from to b, if b is negative, the value is defined as -1).

There are some anomalies, for example growth due to an acquisition or loss of profitability due to re-organizations, however the patterns are probably what matter most.

Next post will discuss the relationship between P/E and growth in the pre- and post-crisis time windows for all these companies.

  • http://twitter.com/ecclespaul Paul Eccles

    Hard to spot a correlation between these parameters.

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

      I ran regressions on all of them and only one stock shows correlation (though not perhaps significant): HTC.

      • Chandra2

        Horace, just for education, can you write about how you run the regression ( tools etc. ) and more importantly how you interpret the output with respect to correlation.

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

        It’s actually trivial. In Numbers, on any scatter plot you can select to plot a trend line (linear, polynomial, exponential) and to show a formula for said and an R-squared value.

  • http://twitter.com/jtsd Julien Theys

    Very interesting, although the graphs could probably use a key to make it easier/faster to grasp.

  • http://profiles.google.com/alfredo.quiles Alfredo Quiles

    Sorry but I can see correlation (inverse correlation). the line goes up when growth is negative (!) for many stocks (Dell, Nokia, Samsung). I agree with Julien, the graphs need a legend (“Bars == growth, Line == PE ratio) or something.

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

      Sorry, I had made the description is the previous post on Apple. I now copied it into this post as well.

  • Anonymous

    Horace, what would be interesting would be to produce a similar analysis where you compare P/E ratio with market cap and see if there’s a stronger (presumably inverse) correlation.

    It might be necessary to use a longer time frame to get a big enough spread of market cap values.

  • Alan

    The P/E ratio seems like a poor measure because the Earnings is the trailing twelve months while the Price is indicative of the market’s estimate of the leading X months of growth / earnings. Has anyone ever used the price from 12 months prior to Earnings to see how good a predictor The Market is?

  • Anonymous

    Some of these firms are just software (MSFT), and some include more long-term assets. As such, Microsoft reported very little depreciation ($2.5B on $18.8 of net income). LG reported $1B on depreciation on $1B in net income for 2010. So, I would think tracking free cash flow a little more closely might illuminate more correlation between growth and the cash the business is producing (versus earnings, with the impact of accounting strategies).

  • Sacto Joe

    How comparable are these companies? For example, Dell is a manufacturing company like Apple, but its margins are razor thin. It doesn’t take much of an improvement to register an increase in earnings when you earn so little, percentage-wise.Also, companies like RIM and Microsoft are clearly under attack by a paradigm shift pioneered by Apple. It would make sense to see their P/E’s dropping like a rock.

    In short, this is worthwhile data, but it doesn’t come close to telling the whole story of why Apple’s P/E ratio is relatively low. Perhaps a chart like your 3d chart that permits rhe addition of a third vector would help.

    • Anonymous

      They are very comparable because they are competitors.

      Dell’s low margins are just part of the comparison.

      At some point, all of these competitors will be high-margin or out-of-business. The DIY thing that keeps Dell in business is a relic. It can’t be sustained in an era where I just saw 4 grannies sitting on a train together, recommending apps to each other, and simultaneously installing them on their iPads. Native C, virus free apps, on computers that don’t crash, and which fit into almost any purse. Dell?

      • Sacto Joe

        I think you misunderstood me, John. It’s obvious that Dell and Apple are comparable as manufacturers of computer devices. But Horace is comparing their growth in earnings. The problem is Dell’s net compared to Dell’s gross is razor thin. Last quarter, they had a net income of $890 million on revenues of 15.7 billion, or a net to gross of 5.7%. Apple had net earnings of 7.8 billion on earnngs of 28.6 billion, or a net to gross of 27%. Also, Dell had a very respectable 76% increase in earnings from the same quarter a year earlier but its revenue was basically flat – which means its earnings totally sucked a year ago. Apple grew its net 122% AND grew its revenue 82%!

        And that’s why I say comparing their earnings growth makes little sense.

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