Global Sweet Spot in Tech Stocks as Net Estimate Falls Least

Global Sweet Spot in Tech Stocks as Net Estimate Falls Least

Profit forecasts for computer and software makers are holding up better than any industry in the world, a sign of confidence that corporate spending will keep the American economy expanding next year.

Net income at companies from Apple Inc. (AAPL) to Oracle Corp. (ORCL) will rise 11 percent in 2012 on average, according to more than 2,900 analyst projections compiled by Bloomberg. The profit estimate is down 2.3 percent from its peak this year, the smallest reduction of any industry in the MSCI World Index. Utility forecasts (MXWO0IT) were cut the most at 29 percent.

The resilience in technology, which accounts for more of the U.S. market (SPXL1) than any other industry, underscores optimism that the American economy is recovering even as Europe’s debt crisis spreads and China’s growth slows. Bears say estimates for record profits are too high and investors risk the same losses they suffered in 2000 and 2007, when computer-related shares began declines exceeding 56 percent.

“Technology companies are being helped by the dramatic improvement in the health and profitability of corporations,” Stephen Wood, who helps oversee about $163 billion as the New York-based chief market strategist for Russell Investments, said in a telephone interview on Dec. 9. “When the market finally has the time to assess fundamentals, IT stocks will be one of the sectors that will benefit.”

Intel Cuts Forecast
The Standard & Poor’s 500 Index (SPX) fell 1.5 percent and the MSCI World lost 1.6 percent today as Moody’s Investors Service and Fitch Ratings said last week’s summit did little to ease pressure on Europe’s struggling governments. Intel Corp. (INTC) led losses in technology companies, dropping 4 percent, after cutting its fourth-quarter revenue forecast.

Capital spending at U.S. companies is the highest since 2008 and investment in equipment and software climbed at a 15.6 percent annual pace in the third quarter, according to the Commerce Department. Technology expenditures may climb 3.9 percent to $2.7 trillion in 2012, research firm Gartner Inc. said Oct. 17.

Concern Europe’s debt crisis would trigger a global recession dragged equity markets in 37 of the 45 countries in the MSCI All-Country World Index into bear markets in 2011, or declines of 20 percent from a peak. The S&P 500 lost 19 percent between April 29 and Oct. 3 before paring the slump to 8 percent.

Lower Valuations
Technology stocks are trading at lower valuations than drugmakers or housewares suppliers. Computer and software makers in the MSCI World are priced at 14.6 times reported earnings, according to data compiled by Bloomberg. The industry has a so- called PEG ratio, an indicator popularized by Fidelity Investments’ Peter Lynch, of 0.87.

The PEG ratio, found by dividing the price-earnings multiple by estimates for profit growth over the next three years, for health-care providers in the MSCI gauge is 1.11. Household product-makers trade at 1.49 and the full index is valued at 1.11. The closer the ratio is to 0, the cheaper the company.

“They’re at very reasonable valuations,” Tom Wirth, who helps manage $1.5 billion as senior investment officer for Chemung Canal Trust Co., in Elmira, New York, said in a telephone interview on Dec. 7. “The outlook is fabulous for the tech group, mainly because this is the one area where businesses feel they need to invest.”

Better Performance
The MSCI World slipped less than 0.1 percent last week after the European Central Bank damped speculation it would boost sovereign-debt purchases. The gauge of computer-related shares increased 0.7 percent in the past five days, the second- biggest advance among 10 industries, to pare its decline for the year to 0.8 percent.

Some of the smartest investors are buying technology companies. Warren Buffett, the billionaire chief executive officer of Berkshire Hathaway Inc. in Omaha, Nebraska, spent more than $10 billion on shares of International Business Machines Corp. (IBM), making the company his second-biggest holding.

While analysts have boosted 2012 profit estimates for the world’s largest computer-services provider by 6.5 percent, the shares are valued at 9.5 percent below the average from the past decade, data compiled by Bloomberg show. Armonk, New York-based IBM climbed 2.6 percent last week to a record $194.56, bringing its 2011 gain to 33 percent.

SAP (SAP)’s Targets

Estimates for 2012 income at Redwood City, California-based Oracle and SAP AG, which develop business software, have increased more than 4.6 percent this year, according to analysts’ forecasts compiled by Bloomberg. SAP is poised to meet earnings targets, Bill McDermott, the Walldorf, Germany-based company’s co-chief executive officer, said in a Nov. 29 webcast.

Projections for technology companies have fallen less than any other group in the MSCI World this year amid increased spending on iPhones, tablet computers and digital cameras. Forecasts for telephone-service operators dropped 9.7 percent since peaking on May 2, and estimates for raw-material producers and oil suppliers were reduced more than 10.8 percent.

Analysts say computer companies will post more growth next year than drugmakers or producers of household goods, the only MSCI World industries with rising share prices this year. Health-care providers in the global equity benchmark may increase income by 4.5 percent in 2012, while an index of grocery store operators, foodmakers and tobacco companies will earn 9.3 percent more, according to data compiled by Bloomberg.

‘Can’t Live Without’
“People may reduce spending in other places, but they won’t cut their smartphone,” said Arthur Kwong, the head of Asia Pacific equities for BNP Paribas Investment Partners, in an interview from his Hong Kong office on Nov. 22. The firm oversees about $740 billion. “It’s something people can’t live without.”

Technology stocks tumbled during the last two bear markets. The industry lost 56 percent in the 16-month decline triggered by the U.S. financial crisis beginning in October 2007, about the same as the MSCI World Index. (MXWO) The group plunged 83 percent, more than any other industry, as the Internet bubble burst from March 2000 to October 2002.

“If Europe has a really bad outcome, then all bets are off because then it’s still only the basic consumer staples, utilities, things that people can’t live without,” Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, said in a telephone interview on Dec. 7. His firm oversees $550 billion. “It’s going to be a very, very dire economic environment.”

Texas Instruments
Germany, France and four other nations may lose their AAA credit ratings depending on the result of a summit of European Union leaders on Dec. 9, S&P said on Dec. 5. The European Central Bank lowered borrowing costs and introduced measures to stimulate bank lending and fight off a recession after policy makers met to lay the foundation for closer fiscal union. Texas Instruments Inc. (TXN) predicted fourth-quarter sales last week that fell short of analysts’ estimates. Shares of the Dallas-based company have slumped 7.9 percent in 2011. The second-largest U.S. chipmaker gets most of its revenue from semiconductors that are key components in everything from missiles to washing machines.

Sales at electronics stores advanced 3.7 percent in October, the most since 2009, according to a report last month from the Commerce Department in Washington. Expectations for technology spending among U.S. shoppers in November reached the highest level in 11 months, a gauge compiled by the Arlington, Virginia-based Consumer Electronics Association showed.

Apple’s Valuation
Apple sold more than 4 million iPhone 4S devices in the first three days after it was introduced in October, more than double the number sold last year during the introduction of the previous model. Analysts’ estimates for the Cupertino, California-based company’s 2012 profit have risen 54 percent this year, pushing valuations to 11.3 times projected income. That’s about 22 percent below the four-year average, according to data compiled by Bloomberg.

Cambiar Investors LLC’s Brian Barish said he’s buying industrials, energy and technology stocks on speculation European leaders will prevent the region’s debt crisis from worsening into financial turmoil similar to the collapse of Lehman Brothers Holdings Inc. in September 2008.

“It seems pretty clear that the euro zone is going to prevent a Lehman-type situation from happening,” Barish, who helps oversee about $8 billion as Denver-based president of Cambiar, said in a Dec. 6 Bloomberg Television interview. “To the extent they’re able to avoid that, we see a lot of value.”

source: bloomberg.com