Asian technology companies are in the throes of extreme investor pessimism.
As many as 14 tech stocks with a market value of more than $1 billion (Rs4,200 crore) in Asia, excluding Japan, have an estimated price-earnings to growth, or PEG, multiple of less than 0.5, according to Bloomberg data.
Most of them are Taiwanese.
The estimated PEG multiple is a forward-looking indicator. It is calculated by dividing the price-earnings multiple by the expected growth in a company’s earnings per share over a five-year cycle. It’s a measure of how much investors are willing to pay for future growth.
A crude rule of thumb is that a ratio of 1 represents fair value, with figures of 2 (or more) representing overvaluation and 0.5 (or less) suggesting undervaluation.
The indicator is far from perfect. The policy rate in Taiwan is at a seven-year high. As borrowing costs in an economy rise, the PEG often tends to decline. Besides, a stock that looks undervalued may just be too risky in investors’ judgement.
And that might explain why these 14 “cheap” Asian stocks have disappointed shareholders, with a median return of minus 34% so far this year. Clearly, money managers are concerned that slowing global growth will take a toll on technology companies, just as it had in late 2000.
Back then, different segments of the information technology hardware industry tumbled in a sequence, says Bill Shope, an analyst at Credit Suisse Group in New York.
Printer makers took the first blow—in the third quarter of 2000. Three months later, sales growth of personal computers slumped. The server market began cracking in the second quarter of 2001. Soon after, demand for enterprise storage deflated.
UBS AG last week said the global economy will be “precariously close” to a recession in 2009.
Tech investors who are betting on history to repeat itself may discover that this time around, things aren’t quite as bad. Companies are better prepared to withstand a demand slowdown.
“Despite this painful remembrance of things past, we believe the industry has changed drastically since the bubble’s collapse,” Shope said in a report. “Not only have the companies increased their exposure to software and services, but many of the leading companies have also dramatically improved their cost structures.”
To be sure, the outlook for the information-technology industry is clouded by significant risks, especially in the PC business, where last year’s price stability may not last, Credit Suisse says.
Dell as outperformer
Volumes, however, may remain strong this year, with a big chunk of the growth coming from the Asia-Pacific region.
Some companies may be better placed than others to battle bad economic conditions. Shope’s top picks are Dell Inc., Apple Inc. and EMC Corp., the world’s largest maker of storage computers.
Dell has been ranked “outperform” by at least three other analysts in the past month.
This could be good news for Dell suppliers in Asia, such as Hon Hai Precision Industry Co., the world’s largest contract electronics manufacturer.
“Dell is using Hon Hai (5-10% sales) for its push into retailers such as Wal-Mart and Staples,” says Credit Suisse analyst Keng Hock Lim in Singapore.
Hon Hai also makes the Apple iPod and iPhone.
Even after an 8% gain last week, the Taipei-based company’s shares are down 19% this year. The estimated PEG multiple for the stock is 0.4, according to Bloomberg data.
Copper prices have slid 12% since 12 July. And that’s good news for Hon Hai, which needs to buy the metal in large quantities.
Hon Hai’s sales rose 35% last month from a year earlier, the company said in a statement to the Taiwan Stock Exchange last week.
Demand for iPhones may be sustained by its much-awaited introduction in fast growing mobile phone markets such as India and China.
As for iPods, the kind of severe recession that would make potential consumers delay their purchases is perhaps not yet on the horizon. And that means Steve Jobs can continue to attract customers with new versions of the media player that Piper Jaffray and Co. analyst Gene Munster expects the Apple boss to unveil as early as next month.
Investors may be taking too bleak a view of the prospects for at least some Asian hardware suppliers. Now may be the time to buy earnings growth at throwaway stock prices.
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