ISM/PE Compression

  • Posted: 17 October 2011 06:21 PM

    Excepting the collapse of 2008, during the period fiscal 2006 through 2009, average quarterly ISM compression ranged from 2.43% to 4.19%  During the last 3 quarters of calendar 2006, ISM actually expanded.

    In fiscal 2010 average compression zoomed to 9.28%.  Most of that occurred after OCT 2010 earnings report.

    For the first three quarters of fiscal 2011, compression has averaged 13.29%, even in light of stellar earnings.

    I think ISM compression, in the week post OCT earnings 2011, will not exceed 7.8%.

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  • Posted: 17 October 2011 06:41 PM #1

    Could someone tell me what ISM is an abbreviation for? Apparently some sort of PE multiple and not the more typical Institute for Supply Management, but I can’t for the life of me figure it out. TIA…

         
  • Posted: 17 October 2011 06:58 PM #2

    karom - 17 October 2011 09:41 PM

    Could someone tell me what ISM is an abbreviation for? Apparently some sort of PE multiple and not the more typical Institute for Supply Management, but I can’t for the life of me figure it out. TIA…

    Sorry Karom.

    I think WS has bastardized the use of the term PE.  When you listen to analysts they talk about good PE’s (too low) and bad PE’s (too high).  I find great fault with that mindset.  “PE” is what it is and nothing more.

    The relationship of earnings to price, in my opinion, measures investor sentiment for an equity.

    Perfect examples of what I mean are AMZN’s “PE” (currently 110), NTFX (currently 29), or IBM (currently 15).  None of these firms are as large as Apple, growing anywhere near as fast, have the cash horde, gross margins or growth potential.  Yet they have “PE"s virtually the same to much higher than AAPL, a situation that WS appears happy with.

    I use the term Investor Sentiment Multiplier (ISM) because I think that more accurately reflects what price divided by earnings actually measures.

    Changing my mindset to that definition has also changed my appreciation of how AAPL trades, and led to insights I don’t think I could have made using the “PE” monicker.

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    Posted: 18 October 2011 09:45 AM #3

    Gregg Thurman - 17 October 2011 09:21 PM

    Excepting the collapse of 2008, during the period fiscal 2006 through 2009, average quarterly ISM compression ranged from 2.43% to 4.19%  During the last 3 quarters of calendar 2006, ISM actually expanded.

    In fiscal 2010 average compression zoomed to 9.28%.  Most of that occurred after OCT 2010 earnings report.

    For the first three quarters of fiscal 2011, compression has averaged 13.29%, even in light of stellar earnings.

    I think ISM compression, in the week post OCT earnings 2011, will not exceed 7.8%.

    If you consider the forward P/E ratio, you will see that since 2010q3, it has been at about 10.

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  • Posted: 18 October 2011 11:34 AM #4

    awcabot - 18 October 2011 12:45 PM

    If you consider the forward P/E ratio, you will see that since 2010q3, it has been at about 10.

    hmmm, I wonder what could have occurred last October, and carried forward until now, that kept forward ISM (sorry I just can’t bring myself to use PE) at 10.  Could it have been failure to meet investors (the really big boys) own estimates?  Did Apple miss its internals, and has only just recently fixed the ‘problem’?

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    Posted: 18 October 2011 12:35 PM #5

    Gregg Thurman - 18 October 2011 02:34 PM
    awcabot - 18 October 2011 12:45 PM

    If you consider the forward P/E ratio, you will see that since 2010q3, it has been at about 10.

    hmmm, I wonder what could have occurred last October, and carried forward until now, that kept forward ISM (sorry I just can’t bring myself to use PE) at 10.  Could it have been failure to meet investors (the really big boys) own estimates?  Did Apple miss its internals, and has only just recently fixed the ‘problem’?

    Have you looked outside at the rest of the world?  It is not like aapl is the only stock suffering from P/E compression.  I would agree that AAPL has not been rewarded with a multiple commensurate with their growth, but just because people were running up the stock price of Netflix or Amazon, doesn’t mean they will do the same for Apple. 

    Here is one theory on P/E compression from the Federal Reserve of San Francisco

    Historical data indicate a strong relationship between the age distribution of the U.S. population and stock market performance. A key demographic trend is the aging of the baby boom generation. As they reach retirement age, they are likely to shift from buying stocks to selling their equity holdings to finance retirement. Statistical models suggest that this shift could be a factor holding down equity valuations over the next two decades.

         
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    Posted: 18 October 2011 12:43 PM #6

    The fact that one or two stocks could be given high p/e’s tells me that if WS wanted to it would give us a high p/e.  There is plenty of money in the market that could be moved around and drive our stock up.

    Since the financial meltdown in 2008 WS is very skeptical about how long Apple can continue to give us hot products.  Now that SJ is gone that concern has become even more pronounced.

    I think in 3 years we will get a rightly deserved 25 p/e after they are proven wrong and Apple continues to grow at a brisk pace.

         
  • Posted: 18 October 2011 01:28 PM #7

    omacvi - 18 October 2011 03:43 PM

    The fact that one or two stocks could be given high p/e’s tells me that if WS wanted to it would give us a high p/e.  There is plenty of money in the market that could be moved around and drive our stock up.

    Agreed.  That, of course, means that the real problem with the price of AAPL has to be internal to Apple.  My model that tracks institutional sentiment clearly shows that this is true.

    Since the financial meltdown in 2008 WS is very skeptical about how long Apple can continue to give us hot products.  Now that SJ is gone that concern has become even more pronounced.

    I think in 3 years we will get a rightly deserved 25 p/e after they are proven wrong and Apple continues to grow at a brisk pace.

    There has been the overhang caused by SJ’s health, but performance to guidance is the real driver of AAPL.  For the last year that hasn’t been good.

    An ISM of 25 won’t just happen given time, it will only happen when the investors with the clout (cash) move on AAPL.  THAT will take performance, and that doesn’t mean just exceeding guidance.

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    Posted: 18 October 2011 05:03 PM #8

    To appease everybody, my theory is AAPL is subjected to two compressive forces:

    a.  Population effect.  Appeased pats.

    b.  WS in show me the money mood.  Appeased omacvi and Gregg.

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  • Posted: 19 October 2011 03:46 PM #9

    Mace - 18 October 2011 08:03 PM

    To appease everybody, my theory is AAPL is subjected to two compressive forces:

    a.  Population effect.  Appeased pats.

    b.  WS in show me the money mood.  Appeased omacvi and Gregg.

    I think we may have good news concerning ISM compression.

    This quarter’s ISM compression was 12.2%.  What’s good about that?  Twelve point two two percent is lower than any of the preceding four quarters.

    Average compression of prior 4 quarters ... 13.4%.  This quarter’s compression represents a reduction in compression (from prior 4 quarter average) of 8.9%.  I think this is significant, and could be reflective of institutional acceptance of TC’s emphasis on Q1 performance.

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  • Posted: 19 October 2011 04:38 PM #10

    omacvi - 18 October 2011 03:43 PM

    The fact that one or two stocks could be given high p/e’s tells me that if WS wanted to it would give us a high p/e.  There is plenty of money in the market that could be moved around and drive our stock up.

    Sometimes a comment, or thought, by someone else needs to roll around inside my head before I realize the importance of it.  This is one of them.

    I went to my chart of ISM compression and noted that it began in earnest Q4/2010.  Compression rate almost doubled that quarter and remained at that level for the next 5 quarters (inclusive of Q4/2011).  Something happened during Q4.  What was it?

    Q4/2010 was the SECOND quarter of iPad availability.  A lot went on surrounding the iPad launch.  One was that I think Apple intentionally restricted total Q3 (launch quarter) iPad units to the amount actually sold.  I think this because the iPad addressed a new market.  How do you forecast sales in a totally new market?  I don’t know, and I don’t think Apple’s expertise in market forecasting for the iPad is as good as it is with Apple’s other products.  Still Apple new that there would be significant demand in Q3, but shipped a quantity less than that demand.  This gave Apple tremendous accuracy in forecasting iPad unit sales for their FQ3/2010 Guidance.

    Apple’s FQ3/2010 guidance was $2.38.  I had been using a factor of 1.5 to determine Apple’s internal estimates for several quarters with a great deal of accuracy.  Applying 1.5 to guidance of $2.38 results in internal estimate of $3.51.  Apple’s actual results for FQ3 was $3.51.

    Apple now had some data from which it could more accurately forecast future sales, but did not count on panel supply problems.  Since Q4/2010 (5 quarters) Apple has missed my estimate of their internal numbers 4 times.

    ISM compression increase coincides exactly with iPad availability (post launch quarter), and iPad’s poor performance when measured against WS expectations.  Apple’s earnings during this period, have been buoyed by iPhone and Mac performance.

    I contend that Apple continues to have problems getting its arms around iPad demand and production.  TC’s unusual confidence statements during last night’s conference call leads me to believe that those issues may be behind us, once and for all.

    The only remaining question is the degree that new management is going to sandbag in the future.  It would be reckless to change practices overnight, so if a change is coming it will be gradual (spread over 2 years?).

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    Posted: 24 October 2011 10:00 PM #11

    Gregg Thurman - 24 October 2011 10:40 PM

    Well, not entirely…

    I read a very interesting article that described one of the major reasons (if not THE major reason) the US economy isn’t growing as fast as economists would like it to, was because the US consumer has been paying off debt, rather than taking on additional debt.  This isn’t just abandoning, or re-negotiating, home loans.  The US consumer is deleveraging, paying off credit card debt in historic amounts, cutting up and closing credit card accounts, paying cash for cars, selling toys, etc., to the tune of $1.3 Trillion dollars since 2009, more than negating the effects of Obama’s Stimulus packages.

    I think the bank meltdown has altered our conceptual belief that debt is benign, at the very least at the consumer level.

    This will slow economic growth for a long time, but when the consumer feels secure again, then economic growth will be real, and not fueled with artificially wealth.

    That means investment liquidity on the retail level isn’t as great as it used to be just 4 years ago.  The meltdown probably erased a lot of institutional liquidity as well.  I’ll wager that this is part of what is holding AAPL’s ISM down.

    The liquidity just isn’t there to fuel the value of AAPL, commiserate with its revenue/earnings growth.  Add some missed numbers and AAPL is trading as high as it can.

    Does this mean AAPL is doomed to remain undervalued by traditional valuation methods?  I don’t think so.  As Apple’s competitors shrink in size and profitability, investment money will shift from the losers to the winners (Apple).

    With this, updated below:

    AAPL is subjected to three ISM compressive forces:

    a.  Population effect.

    b.  WS in show me the money mood.

    c.  On-going deleveraging since financial crisis in 2008.

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    Posted: 25 October 2011 12:19 AM #12

    Mace - 25 October 2011 01:00 AM

    snip….........
    c.  On-going deleveraging since financial crisis in 2008.

    We’ve only seen the first act in that play. There’s a LOT more to come and it AIN’T going to be pretty. I’ll be tickled pink if aapl can maintain a low double trailing PE next year.

      cheers to the longs
        JohnG

         
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    Posted: 25 October 2011 12:36 AM #13

    Seems to me PE has become completely irrelevant, and it’s like complaining about the weather for all the good ruminations on it do. $4XX is just a big number people see and it scares them. Why $5XX doesn’t seem to scare people more from GOOG, I dunno.

    As I’ve said before, I have capitulated on the split issue, let’s just do it.

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    Posted: 25 October 2011 12:41 AM #14

    johnG - 25 October 2011 03:19 AM
    Mace - 25 October 2011 01:00 AM

    snip….........
    c.  On-going deleveraging since financial crisis in 2008.

    We’ve only seen the first act in that play. There’s a LOT more to come and it AIN’T going to be pretty. I’ll be tickled pink if aapl can maintain a low double trailing PE next year.

      cheers to the longs
        JohnG

    Seriously johnG, just get out now!  A P/E of 9 means a share price of 405 even if Apple can make $45 in earnings by the end of the September 2012 quarter.

    I don’t begrudge you for being bearish - I mean a wounded bull - but you’re giving off all sorts of cognitive dissonance here by still being invested in AAPL now.  A P/E drop below 10 within 12 months means sell AAPL, right now.

    [ Edited: 25 October 2011 12:44 AM by Mav ]

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    Posted: 25 October 2011 12:44 AM #15

    JDSoCal - 25 October 2011 03:36 AM

    Seems to me PE has become completely irrelevant, and it’s like complaining about the weather for all the good ruminations on it do. $4XX is just a big number people see and it scares them. Why $5XX doesn’t seem to scare people more from GOOG, I dunno.

    As I’ve said before, I have capitulated on the split issue, let’s just do it.

    omacvi - 24 October 2011 06:17 AM

    I think we will reach your target give or take a few months.

    However we could have further p/e compression simply because WS sees something we all noticed.

    60% of recent revenue comes from products that did not exist 5 years ago.  That is a concern for a company in the business of new technology.  5 years ago the iPod made up 48% of Apple revenue and today the iPod makes up only 4%.

    In 3 years if Apple can show that the iPhone can still maintain 40%+ of revenue then I think we will get a higher p/e.  I am not worried but instead will spend every penny in buying aapl while is still on sale.


    After spending some time at the Apple Store in RG today and then watching the memorial for Steve where I heard from Cambell , TC, and Jonny Ive, I am more certain then ever I am investing in the best company in the world.  In 10 years we will look back the same way we look back today and see how far we have come.

    Google has consistently generated most of its income from search for at least 10 years without any competition