This Week’s Tech Earnings Winners and Losers: Apple, ARM Holdings, Juniper, TriQuint and More (AAPL, SANM, TXN, STM, ARMH, CLS, HLIT, JNPR, RFMD, ISIL, SLAB, TQNT)
Earnings season is upon us in the tech sector. What should investors expect from these reports? What are the key storylines to follow and are these stocks likely to trade higher or lower in the wake of their results?
In NextInning.com’s earnings previews, available free to trial subscribers, key storylines are evaluated, analyst expectations are audited, and in depth valuation analyses are provided to develop fair value ranges for dozens of stocks. next Inning’s model portfolio has returned 288% since 2002, nearly six times the return of the S&P 500.
In its latest earnings preview, next Inning looks at several popular stocks, including Apple (AAPL), Sanmina-SCI (SANM), Texas Instruments (TXN), STMicroelectronics NV (STM), ARM Holdings (ARMH), Celestica (CLS), Harmonic (HLIT), Juniper Networks (JNPR), RF Micro Devices (RFMD), Intersil (ISIL), Silicon Laboratories (SLAB) and Triquint Semiconductor (TQNT).
Here is just a tiny sample of what Editor Paul McWilliams wrote about Apple:
“I first suggested considering Apple as a good speculative investment in June 2003 at the split adjusted price of $9.85. Today Apple trades nearly 6,000% higher. While Apple remains one of the greatest companies in the world and will likely continue to grow, I believe the evidence suggests hyper-growth days for its stock price are in the past. From here I think a realistic three- to six-month upside expectation is around 10% and given the risks outlined in this report, I think the downside risk is that or slightly more.
“Based on this view, I think it is time for Apple investors to reassess the balance between risk and potential reward presented by Apple and, with that, consider diversification…”
Tags: AAPL, ARMH, CLS, HLIT, ISIL, JNPR, RFMD, SANM, SLAB, STM, TQNT, TXN
A PEG ratio cannot be used alone but is a very powerful tool when integrated with the basics (price, volume and chart reading). you must enjoy crunching numbers and have a calculator handy to estimate your own PEG ratio. Access to quality statistical information from the web such as past earnings and future earning estimates is essential to calculate this fundamental indicator. A variety of websites produce a PEG ratio but I have not found one site that has a reliable PEG ratio that I can use for my own research, so I calculate it myself, ensuring accuracy with the final number.
I am going to use the definition from investopedia.com as it makes complete sense and doesn’t get too confusing (below the definition is further explanation and a current real time example, using Apple Computer).:
The PEG Ratio:
The PEG ratio compares a stock’s price/earnings (P/E) ratio to its expected EPS growth rate. If the PEG ratio is equal to one, it means that the market is pricing the stock to fully reflect the stock’s EPS growth. This is normal in theory because, in a rational and efficient market, the P/E is supposed to reflect a stock’s future earnings growth.
If the PEG ratio is greater than one, it indicates that the stock is possibly overvalued or that the market expects future EPS growth to be greater than what is currently in the Street consensus number. Growth stocks typically have a PEG ratio greater than one because investors are willing to pay more for a stock that is expected to grow rapidly (otherwise known as growth at any price). It could also be that the earnings forecasts have been lowered while the stock price remains relatively stable for other reasons.
If the PEG ratio is less than one, it is a sign of a possibly undervalued stock or that the market does not expect the company to achieve the earnings growth that is reflected in the Street estimates. Value stocks usually have a PEG ratio less than one because the stock’s earnings expectations have risen and the market has not yet recognized the growth potential. On the other hand, it could also indicate that earnings expectations have fallen faster than the Street could issue new forecasts.
- provided by Investopedia.com
PEG Ratio Example:
Using Apple Computer Inc., I will demonstrate how to calculate the PEG ratio without relying on other websites.
First, you will need to gather the past earnings numbers; going back at least 2 years and going forward two years. (All data is from Thursday, June 23, 2005)
Now we need to calculate the growth from year to year.
Subtract the earnings of 2004 by 2003 and then divide by 2003.
Repeat the process to determine the growth rate for the following years:
2004: (0.36-0.09)/0.09 x 100 = 300% growth rate
2005: (1.31-0.36)/0.36 x 100 = 264% growth rate
2006: (1.52-1.31)/1.31 x 100 = 16% growth rate
Now, take the current price (we will use the close from Thursday, June 23, 2005: $38.89) and divide it by 2004 earnings and then by the 2004 growth rate:
2004: 38.89/ 0.36 / 300 = .36 PEG Ratio
2005: 38.89/ 1.31 / 264 = .11 PEG Ratio
2006: 38.89/ 1.52 / 16 = 1.59 PEG Ratio
Using the definition from above, Investopedia states that a stock is evenly valued at a PEG ratio of 1 in a rational and efficient market. please note that the stock market is not very rational or efficient so we only use this number as a secondary indicator and tool, after our fundamental and technical analysis is complete. Apple’s PEG Ratio of 0.11 for 2005 was discounted into the price when these estimates first hit the street, giving us the big run-up late last year. Going forward, the stock’s earning potential looks to slow considerably and the PEG ratio clearly shows us the tremendous jump in numbers from 2005 to 2006. A PEG ratio of 1.59 for 2006 is not the best rating going forward but still under the red flag ratio of 2.00.
Finally, once you determine the PEG ratio of the stock you are looking to buy, take the time to calculate the PEG ratio for the sister stocks in the industry group to see if they have higher or lower PEG ratios. keep in mind, PEG ratios don’t work for companies with negative or non-existent earnings numbers.