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Wednesday, June 30, 2010

Market Thought... the new year

Tomorrow officially marks the new year. That means the big-boys look more and more at 2011 estimates. For large multi-national corporations (ie IBM, GS, MSFT, INTC, AAPL, F etc) earnings estimates will be strong.

Let me use IBM as an example (but each company has their own specific situation regarding product cycles and macro economic effects)...

The longer-term:

With today's move, IBM is trading with a trailing PE of 12, and 2011 forward est. PE is at 10.1. Their CEO was very clear discussing their expected $20eps earnings by 2015 due to their business and backlog. The CEO did this before, and IBM exceeded the previous projections. IBM has a history of over-delivering. (This was with the greatest recession of our life time.) So a forward PE of 10.1, with a company of this track record, means IBM is very cheap here.

The shorter-term:

Over the last couple of months IBM has been trading with a PE around 12. Currently IBM is projected to complete the 2010 year with an eps of 11.27, but when taking into account its consistent out performance, it should be more like 11.50. Slap a 12 PE on these figure we have a stock that should have a trailing PE of 135-138 by the end of this year.

The market attempts to predict. It will begin to price in 2011 earnings in the second half of the year because that is how the big-boys play this game (when they are not sucking their thumbs :). If the stock does not begin to price it in, the street will be saying that eps will decline. Considering the history of management, and the product cycle the sector is in (and the fact that corporations are not slowing down IT spending despite a threat of double-dip recession because companies have the largest amount of cash on their balance sheet is 30 some years), the market will be wrong.

Corporate spending on certain things will be maintained no matter the environment. Another 'Lehman-freeze in credit' will not happen, at least over the next 3 years. There is too much liquidity available via the $1 trillion dollar Euro deal, approximately 50% of the American stimulus needing to be spent and Asia still doing okay.

We may slow down some, but markets will not freeze. The example above with IBM can be done with pretty much all the multi-nationals. Because of this, in my opinion, the anticipated slow down is priced into the market right now. And it is creating inefficiencies in prices for names like IBM. (Any many many others like F, MSFT, INTC etc.)

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