Last week Horace wrote about the apparent “reasonableness” of analyst Apple estimates. He explained how the consensus for Apple’s growth was always deeply pessimistic because its performance could be argued to be anomalous. It was just too good to be true. We reproduce the chart here:
The estimates look like characteristic “tell-tales” of a company running strong into the wind.
This conservatism in the face of rapid growth sounds “reasonable” but is it always practiced? And what about the ability of this conservative strategy to predict dramatic changes in growth? To test, we started to look at the predictions for RIM. RIM has also enjoyed strong growth over a similar time frame as Apple. How did analysts predict its performance? The following chart was prepared using the same technique as the one for Apple.
After processing more than 1500 data points on the performance of thirteen technology companies, patterns are beginning to emerge. The steps so far:
The final step is to plot the changes in the relationship between pre- and post-crisis for the set of companies normalized to the same starting point and then classifying them:
The chart shows how the “average P/Es” changed after 9/30/2008 vs. how the companies performed during those periods. An evocative categorization is suggested for the four quadrants.
One way to read the data would be as a degree of effect of the crisis.
The reason we look at valuation is that it offers insight into how innovation is perceived. If a company is a successful innovator it usually creates vast wealth for its owners. However, the timing of that wealth creation depends greatly on its recognition by others. In other words, valuation lets you determine how recognizable innovation is. If your analysis tells you that a company is supremely innovative but nobody else recognizes this then you have an investable opportunity.
So with that in mind we like to compare industry and innovation analysis with what “the market” thinks about Apple.
The latest method we had in mind was to compare P/E (a measure of valuation) and Growth. We’ve shown before that they seem to be moving in different directions. That’s not been news for over a year. What we will try to do now is to see if there is discernible change in the relationship before and after the financial crisis.
The following chart is a simple representation of P/E (line chart with left scale) with Net Income growth super-imposed (bar chart with right scale.) We chose a time period of 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 then plotted a scatter of all these pairs (P/E vs. Net Income Growth).