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If Exxon, Corning, Eli Lilly earn so much, how can S&P be so cheap?

If Exxon, Corning, Eli Lilly earn so much, how can S&P be so cheap?
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First Published: Wed, Feb 20 2008. 01 01 AM IST

Exxon Mobil, the world's largest oil firm, earned $40.6 billion in 2007. The stock rose 155% in the past five years, more than double the S&P 500’s 62% gain, as energy demand pushed up oil prices
Exxon Mobil, the world's largest oil firm, earned $40.6 billion in 2007. The stock rose 155% in the past five years, more than double the S&P 500’s 62% gain, as energy demand pushed up oil prices
Updated: Wed, Feb 20 2008. 01 01 AM IST
New York: Exxon Mobil Corp. earned more in 2007 than any public company ever. Profit at Eli Lilly and Co. this year may climb by the most this decade, while Corning Inc. is forecast to make more per dollar of sales than at any time in 20 years.
All three companies are also trading at cheaper valuations than the Standard and Poor’s (S&P) 500 index, the benchmark for American equities, which itself is the least expensive in 18 years.
Exxon Mobil, the world's largest oil firm, earned $40.6 billion in 2007. The stock rose 155% in the past five years, more than double the S&P 500’s 62% gain, as energy demand pushed up oil prices
Fourth-quarter net income for the S&P 500’s 412 members that have reported dropped an average 19%, hurt by more than $146 billion (Rs5.83 trillion today) in bank credit losses, data compiled by Bloomberg shows. Take out financials and profits climbed 18%. The earnings growth and low prices make non-bank stocks, including energy companies, pharmaceuticals and consumer-electronics suppliers attractive, say BlackRock Inc., the Hartford Financial Services Group Inc. and Wells Capital Management, which oversee more than $1 trillion.
“Fear has taken control of valuations more than fundamentals, which are pretty good,” said James Paulsen, chief investment strategist at Wells Capital, which oversees $220 billion and is recommending industrial companies, metals producers and retailers. “Most corporations are still coining money.”
Companies in the S&P 500 trade at 13.71 times estimated 2008 profit, according to analysts surveyed by Bloomberg. Index members last traded at a valuation of less than 14 times historic earnings in October 1990.
Historically cheap
Banks, brokerages, insurers and real estate companies are the least expensive group in the S&P 500, trading at 10.91 times forecast profit. Excluding financials, the index is valued at 14.2 times, the lowest since November 1995, data from New York-based investment bank Brown Brothers Harriman and Co. shows.
Non-financial companies are on track to post their biggest quarterly profit increase in almost two years, according to data compiled by Bloomberg. Earnings may rise 10% in 2008, the data shows.
“Earnings for financial stocks will be under pressure, but for the rest of the market, they’re doing better than expected,” said Robert Doll, who oversees $1.3 trillion as chief investment officer of global equities at BlackRock in Princeton, New Jersey. “There are names that have good fundamentals and selling at reasonable prices that we’re willing to own,” he added.
Doll cited drug companies and energy producers, including Exxon Mobil, the world’s largest oil company.
Exxon’s climb
Energy companies in the S&P 500 trade at 10.96 times forecast profit, the cheapest among non-financial industries in the index. Exxon Mobil is valued at 11 times its estimated 2008 profit of $7.64 a share.
The company, located in Irving, Texas, earned $40.6 billion in 2007, or $7.28 a share. The stock climbed 155% in the past five years, more than double the S&P 500’s 62% gain, as global demand for energy more than doubled the price of crude oil to $95.50 a barrel on 15 February.
Corning, the biggest maker of glass for flat-panel displays, is expected to earn $2.74 billion this year, amounting to 40% of sales. That would be the highest profit margin since at least 1988, Bloomberg data shows.
The Corning, New York-based company this month reiterated its first-quarter forecast and said a slowing US economy isn’t hampering demand for high-definition televisions. Almost half of Corning’s sales come from liquid-crystal display glass, and the company forecasts demand will increase by as much as 30% this year. Corning trades at 13.54 times estimated profit.
Health-care companies in the S&P 500 trade at 14.32 times profit, the lowest compared with reported earnings since at least 1995, according to Bloomberg data.
Profit increase
Eli Lilly, the world’s biggest maker of psychiatric drugs, said last month that fourth-quarter profit increased more than sixfold because of sales of the antidepressant Cymbalta and impotency pill Cialis. The Indianapolis-based company is forecast to earn $3.90 a share this year, an increase of 44%. Excluding costs taken for four acquisitions, it earned $3.54 a share in 2007, for a projected growth rate of 10%.
The company trades at 13.01 times forecast earnings.
Pharmaceutical companies are “very attractive right now”, said Quincy Krosby, who oversees about $330 billion as chief investment strategist at the Hartford in Connecticut. “Regardless of what happens with Wall Street and write-downs, people are getting older and they are going to need drugs.”
Analysts’ estimates for 14.6% profit growth this year may be too high because the economy may tip into a recession, said Henry Herrmann, president of Waddell and Reed Financial Inc., which oversees $65 billion in Overland Park, Kansas.
‘Snapback’
“Incorporated in consensus estimates for 2008 is a sharp snapback in profits in the second half,” Herrmann said. “In my mind, that has a big question mark around it.”
Even so, Bank of New York Mellon Corp.’s Christopher Sheldon said current multiples may underestimate the potential for Federal Reserve interest rate cuts and the government’s $168 billion economic stimulus measure to reignite consumer demand.
“It’s time to begin to go fishing,” said Sheldon, who helps oversee about $150 billion as director of investment strategy at Bank of New York Mellon. “You just don’t want to empty the whole pond.”
Jeff Kearns, Eric Martin, Carol Massar and Kelly Bit contributed to this story.
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First Published: Wed, Feb 20 2008. 01 01 AM IST
More Topics: S&P 500 | Exxon | Corning | Valuations | Banking sector |