Overvalued or Undervalued?
By Catherine Holahan
Tech stocks have taken a beating of late on concerns that the U.S. economic slowdown, coupled with a strengthening dollar, will erode earnings. With earnings season set to begin, we wonder whether the sell-off is warranted.
To help answer that question, we looked at some of tech's bellwethers, examining each company's stock price in relation to its expected earnings and earnings growth. The results may surprise you. Every slide contains expected per-share earnings for the most recent quarter; the share price compared with projected 2008 earnings (also known as the p-e ratio or earnings multiple); and the price/earnings to growth ratio, or PEG, a metric that helps analysts compare valuations of high-growth companies. The PEG in each case is based on expected earnings for the next five years.
We then compare each company's PEG to the PEG for the Standard & Poor's 500 Information Technology sector, which has a p-e of 14.4 and a PEG of 1.1. Companies with a PEG significantly higher than that of S&P's IT group may be considered overvalued, except where indicated. Companies with a substantially lower PEG are potentially undervalued, except in certain cases outlined below.
