Reuters Editor-in-Charge of U.S. Markets David Gaffen gives us a summary of how to use price-to-earnings ratio trends to better understand a company’s stock value:
The share price effectively acts as a way of discounting future earnings, so the price-to-earnings ratio suggests whether a company or index is expensive or not. Sometimes, this P/E ratio expands, i.e., the ratio grows. If the price is rising faster than earnings increase, it reflects optimism that things in the economy and for earnings are going well. If it the ratio expands because the price is stagnant and earnings are declining, it’s a sign that investors aren’t willing to push stocks higher because earnings are falling, and if it goes into an area considered expensive, investors would “re-value” the stock, that is, sell it until it becomes more fairly valued.
Valuation figures would suggest that the S&P 500, now at an all-time record (boy, everyone was real worried about the default there!), isn’t particularly expensive, trading with a forward price-to-earnings ratio of 14.5 times, a shade below the long-term average of 14.85. With that as a starting point, earnings season should be watched closely for signs that any appreciation in stock prices is warranted, or whether equities could go into a steady period of churning without much in the way of gains.
For if earnings expectations need to keep coming down, as Reuters reporters Rodrigo Campos and Julia Edwards pointed out in a story Thursday, that’s going to cause expansion in price-to-earnings ratios in the way you don’t want: lower E, not higher P.
Tobias Levkovich, chief strategist at Citigroup, said 2014 earnings estimates have to come down. At 11 percent, they’re way too frothy, he said, pointing to cyclical sectors that have priced in a lot of appreciation already, particularly materials, industrials, discretionary and health care stocks.
One measure of how companies are doing relates to their profit margins before factoring in taxes and interest paid, butseveral sectors have been pretty lousy on this front: industrials, energy, tech, and materials have seen sharp declines in profit margins in the second quarter of 2013, according to Goldman Sachs, and as more bellwethers report, starting with General Electric and Honeywell on Friday, a sharp eye should be kept on this as one key gauge of health.
IBM has been the poster child for the margin decline seen by tech companies. Margins on its earnings before interest and taxes fell to 17.8 percent for the first nine months of 2013, down from 19.2 percent in 2012. Why focus on profit margins? This measure pulls out the different tax brackets and capital structures at different kinds of companies. For example, IBM had a favorable shift in taxes this quarter, muddying the results.
Google, to take another example, posted a margin of 26.1 percent for the first nine months of 2012; for 2013, that margin has dropped to 23.4 percent. The saving grace for glorified ad company Google is that the Google is increasing revenue and plowing more money into expenses.
IBM, on the other hand, saw profits drop by more than $3 billion in the first nine months of 2013. So it was able to beat on earnings, albeit with lower margins, while missing on revenue.
Which has kind of been the story for some time: The industrials sector got going on Friday, and Honeywell is doing well from this perspective, with margins rising to 14.7 percent in the first nine months of 2013, from 13.8 percent for the first nine months of 2012. A handful of others come in next week, including Caterpillar. That company’s EBIT figure for first-half 2013 was 9.9 percent, down from 14.8 percent in 2012. That’s not a good trend.
"Future index returns will depend on growth in book value, which is another way of saying that the valuation expansion phase of this market cycle is largely behind us," Goldman wrote.
Want to learn more? You can follow David on Twitter @davidgaffen and visit David’s blog at Reuters. A portion of this content will also appear on Reuters Counterparties newsletter. Photo by REUTERS/Brendan McDermid.
Congress approved a deal to end a partial government shutdown and pull the world’s biggest economy back from the brink of a historic default that threatened financial calamity. http://reut.rs/1fDXYz2
Obama vowed to sign the bill and begin reopening the government “immediately.” The deal, however, offers only a temporary fix and does not resolve the fundamental issues of spending and deficits that divide Republicans and Democrats. It funds the government until January 15 and raises the debt ceiling until February 7, so Americans face the possibility of another government shutdown early next year.
Photo: U.S. Senator Harry Reid (D-NV) and President Barack Obama. Taken on October 16, 2013. Photos by Kevin Lamarque and Yuri Gripas.
U.S. Senator Harry Reid says a bipartisan compromise has been reached in the Senate to raise debt limit and reopen the federal government. Senator Ted Cruz, champion of Tea Party conservatives, says he does not intend to delay passage of the deal, saying that the timing of the Senate vote will not make a difference in the outcome “so I do not intend to delay the vote.”
A deal to turn the lights back on for the U.S. federal government seems nearer. As the Senate reconvenes, lawmakers announce a deal to end the shutdown.
Watch live: http://reut.rs/PoliticsLIVE
Photo: Statue of Grief and History stands in front of the Capitol Dome in Washington, DC. REUTERS/Joshua Robert
World Wrap: October 7, 2013
Rival Libyan factions try for independence, bloodshed continues after weekend violence in Egypt, and Syria wins praise for starting disarmament process. Today is Monday, October 7, and this is the World Wrap, brought to you by @dwbronner.
Libyan factions far from secession as U.S. raid highlights unrest
Ali Zeidan, Prime Minister of Libya, addresses the 68th United Nations General Assembly at the UN headquarters in New York, September 25, 2013. REUTERS/Adam Hunger
Libyan oil battles. Two years after the end of Muammar Gaddafi’s 42-year regime, Libya is divided into rival factions striving towards independence and vying for oil:
The main city Benghazi has already set up its own council demanding to run local affairs, and called for state oil company NOC to return to an area that was once Libya’s economic heartland. “The government and congress exploit Libya’s wealth and use it to serve their agendas,” said Ibrahim al-Jathran, the former head of an oil protection security unit who defected and seized eastern ports as a self-styled federalist chieftain. Yet as chaotic as Libya appears, it is far from partition or from taking the path of Iraq, where federalism splits oil revenue between Baghdad’s Arab-led government and a Kurdish enclave that runs its own administration and armed forces. Rather than a widespread popular movement, Libya’s autonomy protests have grown out of Tripoli’s lack of control, tribal loyalties and a series of unresolved local grievances over security, corruption and poor services that have festered since the 2011 revolution.
Analysts say that declarations of independence by various federalist groups lack the necessary support on the ground to make a political difference. It would be difficult for independent groups to trade oil without Tripoli’s consent, as the government has threatened to destroy unauthorized international shipments. Still, the unrest could make it easier for Islamist operatives to take hold in the region. Over the weekend, U.S. forces captured an al Qaeda leader wanted for the 1998 bombing of an American embassy in Nairobi, prompting an angry response from Libyan Prime Minister Ali Zeidan:
The capture of Nazih al-Ragye, better known as Abu Anas al-Liby, also provoked a complaint about the “kidnap” from the Western-backed Libyan prime minister, who faces a backlash from armed Islamists who have carved out a share of power since the West helped Libyan rebels oust Muammar Gaddafi two years ago… “This won’t just pass,” [Abdul Bassit Haroun, a former Islamist militia commander who works with the Libyan government. Islamist militants] said. “There will be a strong reaction in order to take revenge because this is one of the most important al Qaeda figures.”
The U.S. also attempted to capture a wanted militant in Somalia on Saturday but was unsuccessful.
A riot police officer fires tear gas during clashes between anti-Mursi protesters, and members of the Muslim Brotherhood and ousted Egyptian President Mohamed Mursi supporters, along a road at Ramsis square, which leads to Tahrir Square, at a celebration marking Egypt’s 1973 war with Israel, in Cairo, October 6, 2013. REUTERS/Amr Abdallah Dalsh
Cairo clash resurgence. Suspected militants killed six Egyptian soldiers and fired a grenade at a satellite station in Cairo, following one of Egypt’s deadliest weekends since former president Mohamed Mursi was deposed by the military in July:
Dozens of supporters of deposed President Mohamed Mursi of the Muslim Brotherhood were killed on Sunday in clashes with his opponents and security forces. The death toll from the violence across the country rose to 53, state media said, with 271 people wounded in one of the bloodiest days since the military deposed Islamist President Mohamed Mursi in July. Further confrontations may shake Egypt this week, with Mursi’s supporters calling protests for Tuesday and Friday. They are likely to be angered by the publication of an interview with Egypt’s army chief on Monday in which he said he told Mursi as long ago as February he had failed as president.
Egypt’s military has cracked down on Muslim Brotherhood leaders since breaking up pro-Mursi protest camps in an August 14 attack that left hundreds dead. The political unrest has led Islamists in the turbulent Sinai region to increase attacks, killing more than 100 Egyptian security officers since July.
A Free Syrian Army fighter helps a civilian carry his belongings in Deir al-Zor October 6, 2013.
Assad acclaimed. International leaders praised Syria for starting to destroy its chemical weaponsover the weekend, in compliance with a U.N. resolution demanding chemical disarmament passed last week:
An official from the international mission overseeing the stock pile’s elimination said Damascus had made an excellent start, and the United States acknowledged its rapid compliance with a U.N. resolution on destroying chemical weapons as extremely significant… U.S. Secretary of State John Kerry said Sunday’s work was a good beginning and offered rare praise for Assad, a leader Washington insists lost legitimacy when he responded with force to protests against his rule which erupted in March 2011… “I think it’s also credit to the Assad regime for complying rapidly, as they are supposed to,” [Kerry] said. “I’m not going to vouch today for what happens months down the road, but it’s a good beginning, and we should welcome a good beginning.”
Opposition activist Susan Ahmad argues the disarmament program is a step backwards, saying “It is all about giving Assad more time to kill more people. And here he is, using Scud (missiles) and recruiting fighters.” The U.N. expects 4 million more Syrians to flee their homes or country in 2014.
Nota Bene: Suspected Islamist fighters attack a northern Mali city in the first strike on the former rebel stronghold in months.
Global gastronomy - A chart shows the diets of different nations. (The Atlantic Cities)
Romancing rays - Manta rays won’t mate in the Maldives’ nutrient-low waters. (The Guardian)
Presidential flame - Putin launches torch relay for Sochi Olympics. (BBC)
Cloud crackdown - Europe Union wants to regulate the Cloud. (New York Times)
Ski rush - North Korea rushes to finish luxury ski resort. (Associated Press)
Check out more from World Wrap at Reuters dot com.
"Through their discoveries, Rothman, Schekman and Sudhof have revealed the exquisitely precise control system for the transport and delivery of cellular cargo," the Nobel Assembly at Sweden’s Karolinska Institute said in a statement when awarding the prize of 8 million crowns ($1.2 million).
Medicine is the first of the Nobel prizes awarded each year. Prizes for achievements in science, literature and peace were first awarded in 1901 in accordance with the will of dynamite inventor and businessman Alfred Nobel.
At least 12 people were killed in a shooting on Monday at the U.S. Navy Yard in Washington, DC. One suspected gunman was among the dead and authorities were searching for two other possible assailants.
The shooting took place about three miles from the White House, starting about 8:30 am EDT (1230 GMT) on Monday.
US Secretary of State John Kerry holds a news conference with UK Foreign Secretary William Hague on the situation in Syria. Rough Cut (no reporter narration).
Video: Russian legislators told President Vladimir Putin they want to fly to Washington, DC and meet with U.S. lawmakers ahead of a critical vote on whether the U.S. should carry out military strikes on Syria. Reuters Deborah Gembara reports.
A new U.S. intelligence report says that 1,429 people were killed in a chemical weapons attack, including at least 426 children, on August 21 outside Damascus, Syria.
"Read for yourself, everyone, those listening, all of you, read for yourselves the evidence from thousands of sources, evidence that is already publicly available" - US Secretary of State Kerry
DOCUMENT: U.S. Government Assessment of the Syrian Government’s Use of Chemical Weapons
Photo: U.S. Secretary of State John Kerry makes case for limited U.S. military action against Syria for its suspected use of chemical weapons. REUTERS/Larry Downing
World Wrap: August 30, 2013
British prime minister Cameron suffers major embarrassment over Syria vote, Rwanda accuses Congo of shelling, and angry farmers converge on Colombia’s capital. Today is Friday, August 30, and this is the World Wrap, brought to you by @dwbronner and@clarerrrr.
UK parliament votes down war motion for first time since American independence
Britain’s Prime Minister David Cameron leaves Number 10 Downing Street to attend Parliament in London, August 29, 2013. REUTERS/Suzanne Plunkett
Cameron’s Syria shame. UK Prime Minister David Cameron suffered a humiliating defeat when the British Parliament voted down a motion to take military action against Syria, the first time a British Prime Minister lost a vote on war in centuries:
Commentators said it was the first time a British prime minister had lost a vote on war since 1782, when parliament effectively conceded American independence by voting against further fighting to crush the colony’s rebellion. Speaking immediately after the vote, Cameron told parliamentarians he would not seek to go against parliament’s will. “It is very clear tonight that while the House has not passed a motion, it is clear to me that the British parliament, reflecting the views of the British people, does not want to see British military action – I get that and the government will act accordingly,” he said.
France said it would back a strike against Syria despite the UK’s decision, and U.S. Defense Secretary Chuck Hagel said Washington will continue efforts to put together a global coalition. Any military action is expected to be delayed until after the U.N.’s chemical weapons inspectors leave Syria on Saturday. Meanwhile, Obama’s National Security Advisor Susan Rice has led efforts to convince Congress that the U.S. must act:
Her views on the Syrian conflict have basically mirrored the president’s cautious approach of avoiding getting the United States bogged down in another costly war. Obama has withdrawn U.S. troops from Iraq and is winding down the combat mission in Afghanistan… Rice has been active in U.S. efforts to assemble something resembling a coalition of like-minded nations to respond to what U.S. officials say is undeniable proof that the Syrian government of Assad used chemical weapons to kill hundreds in a Damascus suburb on August 21. That effort suffered a big setback on Thursday as close ally Britain said it would not participate in any military action.
Most global leaders, with the notable exceptions of Russia and Iran, believe Assad is responsible for the apparent chemical attack. Reports of another awful incident have emerged after footage showed the aftermath of what appeared to be a Napalm-like attack. Roughly 100,000 Syrians have been killed since the country’s civil war started two-and-a-half years ago.
A Congolese armed forces (FARDC) tank fires a shot as soldiers battle M23 rebels in Kibati, outside Goma, in the eastern Democratic Republic of Congo, August 30, 2013. REUTERS/Thomas Mukoya
Break from border violence. Democratic Republic of Congo’s M23 rebels withdrew from the frontline on Friday and agreed to a ceasefire in order to allow an investigation of alleged shelling in neighboring Rwanda:
Rwanda accused Congo on Thursday of shelling its territory and said such “provocation” would not be tolerated, raising fears of an escalation in the conflict in eastern Congo where army troops and U.N. peacekeepers have been battling the rebels. The United Nations has thrown its weight behind Congo’s government, saying its peacekeepers witnessed the M23 rebels firing shells into Rwanda.
Congo’s M23 rebels say the government has not integrated their forces into the army, as per a 2009 peace deal that halted four years of rebellion in eastern Congo.
A student demonstrator holds a sign that reads, “Support the strike because I am the grandson of a farmer” during a protest against the government of President Juan Manuel Santos in Bogota, August 29, 2013. REUTERS/Jose Miguel Gomez
Farmer fracas. Colombian President Manuel Santos called for military reinforcements on Friday to rein in violent protests in Bogota that have left two dead. Thousands of Colombian farmers have come to the capital to demand changes to policies they say have forced them into poverty:
Protesters wearing typical farmer attire of woolen ponchos, brimmed hats and rubber boots to show their solidarity, marched in 15 columns toward the Plaza Bolivar, where the presidential palace and Congress are located. There were also protests in Medellin, Cali and elsewhere across the nation… The already grueling life of farming families has become harder in recent years since income from harvests has failed to cover costs of fertilizers and transportation. Potato, corn and milk producers complain that free trade agreements with Europe and the United States have made it almost impossible to compete with cheaper imports. Droughts followed by unusually heavy rains have also made farming conditions difficult over the past several years.
Santos has said he will lift import taxes on several products to help lower crop production costs, and that he is working on more permanent solutions to ease the financial burden on farmers.
Nota Bene: One road serves as both a lifeline and bottleneck in landlocked South Sudan.
A litany of errors - Reuters columnist Hugo Dixon discusses the damage done by Britain’s anti-war vote. (Reuters)
V-Rox - Russians rock out during a first of its kind, SXSW-like music festival. (The New York Times)
Putin portraitist out - The artist behind a painting of a scantily-clad Putin flees to Paris. (The Atlantic)
Charges flushed - A Zimbabwean man skirts charges of intending to use an image of Mugabe as toilet paper. (BBC)
Pseudoscience - An Indonesian education chief wants to impose mandatory virginity tests on girls entering high school. (Time)
Check out more from World Wrap at Reuters dot com.