(SMH) Technology Stocks Are Cheap Given Profit Outlook, T. Rowe's Eiswert Says
By Tim Mullaney
Feb. 4 (Bloomberg) -- Earnings at technology companies such as Intel Corp. may top analysts’ estimates by as much as 20 percent in 2010, a sign valuations are too low, according to the manager of T. Rowe Price Group Inc.’s global technology fund.
After an 8.5 percent drop in Standard and Poor’s 500 Information Technology Index in January, the nation’s biggest technology companies are trading at their lowest price-to- earnings ratio since the mid-1990s, said David Eiswert, manager of the Global Technology Fund at Baltimore-based T. Rowe Price.
“It’s amazing how bullish companies are in the tech supply chain,” Eiswert, whose fund gained 80 percent last year, said in an interview. “The multiples today are half of what they were in 2003.”
The cash stockpiles of technology companies limit how much investors can lose if the economic rebound falters, Eiswert said. U.S. gross domestic product expanded 5.7 percent in the fourth quarter of 2009. The economy will grow 2.7 percent this year, according to a Bloomberg survey of economists.
“In 2003 and 2004, technology was overvalued by 10 to 20 percent, and in December it was undervalued by 10 to 20 percent,” said Eiswert, 37, citing an analysis by Credit Suisse. After the market’s fall in 2008 and gains last year, “we’ve come back to a place that’s normal, or a little below,” he said.
Beating Peers
Apple Inc., Qualcomm Inc., International Business Machines Corp., Juniper Networks Inc. and Palm Inc. are the five biggest holdings in Eiswert’s fund, accounting for about 20 percent of its $250 million in assets, according to data compiled by Bloomberg. The fund beat 90 percent of its peers last year, according to Bloomberg data.
Intel, the world’s largest chipmaker, trades at 11 times T. Rowe’s estimate of 2010 earnings, Eiswert said. Analysts estimate profit for Intel of $1.66 a share this year, giving it a price-to-estimated-earnings ratio of 11.9, according to data compiled by Bloomberg.
Intel, based in Santa Clara, California, fell 66 cents to $19.02 at 4 p.m. New York time in Nasdaq Stock Market trading.
Profit at semiconductor companies likely will exceed analysts’ predictions by 10 percent to 30 percent in 2010, Eiswert said. He has doubled the fund’s investment in chipmakers since the third quarter, buying shares of Intel, San Diego-based Qualcomm and Phoenix-based ON Semiconductor Corp.
Corporate technology spending may increase 1.7 percent this year, following a 3.1 percent drop in 2009, Morgan Stanley said Jan. 22, citing a survey of chief information officers. Goldman Sachs Group Inc. said Jan. 11 that it expects “modest” increases in corporate spending this year.
Stockpiling Cash
Technology companies are stockpiling cash, which means the businesses may be less expensive than their price-to-earnings ratios suggest, Eiswert said. Investors should deduct a company’s cash to calculate how much the market is paying for the underlying business, and then compare that price-to-earnings multiple to historical norms, he said.
For example, Apple, maker of the iPhone and Macintosh computer, is on pace to have as much as $50 billion in cash and short- and long-term securities by year-end, up from $39.8 billion on Dec. 31, Eiswert said. That means investors value Apple’s underlying business at 13 times analysts’ estimates for this fiscal year, he said. Analysts predict Apple will post profit of $10.95 a share this year, giving it a price-to- earnings ratio of about 18, according to a Bloomberg survey.
“The good thing about tech right now is it’s not that dangerous,” Eiswert said. “If Apple decided to buy back $30 billion of shares tomorrow, they could do it.”
To contact the reporter on this story: Tim Mullaney in New York at tmullaney1@bloomberg.net.
Last Updated: February 4, 2010 16:17 EST
