Buyers, sellers determine company value
THE MOTLEY FOOL
I’ve heard that Facebook is being valued at around $100 billion. Is that too high? – T.G., Boulder, Colo.
To a great degree, a company’s value is in the eyes of its beholders. You may sell your shares of Acme Explosives (ticker: KBOOM) when its market value hits $1 billion, thinking that’s too high – but someone will buy those shares, thinking the value is too low.
With Facebook, we can look at a few numbers to assess its suggested value. One estimate is that it will earn $2 billion (before taxes and interest) in 2011. If so, then its implied price-to-earnings (P/E) ratio will top 50, which is on the steep side ($100 billion divided by $2 billion is 50).
Apple’s forward-looking P/E ratio was recently around 12, and Google’s around 13.
For more context, consider the rough market values of Apple ($300 billion), General Electric ($200 billion), Google ($170 billion) and Amazon.com
($90 billion). Looking at those, does a $100 billion value for Facebook seem reasonable? Think about how reliable the company’s expected earnings and growth rates are, and how sure you are that it will still be around in five or 10 years. With new companies it can be smart to wait for a promising track record before investing.
The Motley Fool owns shares of Google and Apple, and our newsletter services have recommended Apple, Google and Amazon.com
How many mutual funds are there? – M.R., Gainesville, Fla.
According to the Investment Company Institute, at the end of 2010 there were 8,545 mutual funds in existence. No wonder it can be hard to find outstanding funds. There are some terrific ones out there, though – learn more at www.fool.com/mutualfunds/mutualfunds.htm
MY DUMBEST INVESTMENT
I used to believe in buying and selling a lot, but The Motley Fool has converted me to the buy-and-hold approach. I learned my lesson with investments such as an oil sands company touted in a (non-Fool) newsletter. They said it was a great bargain near $4, and my 1,000 shares are sitting at less than $1 apiece now.
I used to enjoy the thrill of seeing something go up, but then many of my buys never did, or they lost most of their value. Now I prefer to invest in solid companies that aren’t likely to tank if I go on vacation for a few weeks or don’t check my holdings every day. – Kaye S., Austin, Texas
The Fool responds: When you’re thinking of buying a stock, stop and ask yourself whether you’re really investing or speculating. Are you buying because the company has a proven track record, competitive advantages, rosy growth prospects and an appealing price? Or is it a company that might strike gold or cure cancer or somehow make you rich overnight? Solid stocks can deliver great rewards to the patient.
I trace my roots back to London in the 1700s and to companies in the 1800s that were involved in construction and that published Edgar Allan Poe and Nathaniel Hawthorne. Today, with a market value topping $14 billion, I’m the world’s leading education company, a top business information company and a major general publisher. My properties include the Penguin brand, the Financial Times newspaper, and names such as Scott Foresman, Prentice Hall, Addison-Wesley, Allyn and Bacon, Benjamin Cummings, Longman, Putnam, Viking, Dorling Kindersley, Puffin and Ladybird. I have a 50 percent stake in The Economist, as well. Who am I?
Last Week’s Trivia Answer: Born in Grand Rapids, Mich., in 1912, I’m the world leader in office furnishings. My first patent, in 1914, was for a steel wastebasket (then-standard straw ones were fire hazards). Next came fireproof desks for a skyscraper. Gen. Douglas MacArthur and Japanese officials signed surrender documents ending World War II on one of my tables on the USS Missouri. I introduced Movable Walls in 1971. Today I sport three main brands – Turnstone, Coalesse, and my namesake. One of my sub-brands, Nurture, focuses on space and health care environments. I rake in more than $2 billion annually. Who am I? Answer: Steelcase
THE MOTLEY FOOL TAKE
Hewlett-Packard’s (NYSE: HPQ) second-quarter results met low expectations, but the company lowered its full-year forecast again. That sent shares downward.
H-P explained its dour outlook by pointing to fallout from the disasters in Japan, slow sales of consumer PCs, and an underperforming enterprise services segment.
The Japanese excuse is interesting, as neither Cisco Systems nor IBM played the earthquake and tsunami card this quarter. Cisco mentioned a reshuffling of its components inventories to handle Japanese business disruptions. Big Blue gets 11 percent of its revenue from Japan, but saw no reason to complain. Did H-P suffer from the catastrophe in ways its peers just didn’t? Hmmm.
New CEO Leo Apotheker aims to beef up the company’s software offerings. He also aims to offer the WebOS operating system H-P got via its Palm acquisition on all H-P PCs, along with Windows.
Hewlett-Packard shares have recently been trading near a price-to-earnings (P/E) ratio of 9, compared to its five-year average of 15. That’s attractive, as are its strong returns on equity and invested capital. Many are doubting the company’s strategy and promise, though. So do a little digging and see what you think.
the state of u.s. manufacturing
Many Americans believe that U.S. manufacturing is dying. Fortunately, it’s not really true. We’re making more things today than almost ever before. Even adjusted for inflation, manufacturing output is near an all-time high. In real terms, we’re making more than twice as much today as we were in the early 1970s.
So where’s the disconnect? It’s this: Manufacturing jobs have been tumbling for decades, and they’re falling at an increasing pace. There were more than 19 million manufacturing jobs in 1980. Today, there are a little more than 11 million. The decline in manufacturing employment is real. It’s bad. And it’s getting worse.
Blame productivity. Manufacturers have grown incredibly efficient over the past several decades. They’re able to build the same amount of stuff with far fewer people.
Take the auto industry. In 1990, the average American autoworker’s share of total auto production was 7.15 vehicles per year. By 2010, each worker was producing 11.2 vehicles annually. That means fewer auto workers are needed today than 20 years ago.
As tragic as the loss in manufacturing jobs has been for many, this is how the economy is supposed to work over time. Technology improves, businesses find ways to do things with fewer people, and the world goes on – changed, but better.
In 1900, 44 percent of all jobs were in agriculture. Tremendous improvements in farm productivity pushed that number to 2.4 percent by 2000. We could, as we do with manufacturing jobs, become nostalgic about the days when farm jobs were aplenty. Don’t. Those who would have once plowed fields now work in more productive endeavors – programming computers, curing cancer, building roads, what have you. We don’t want those farm jobs back.
The question now is where laid-off manufacturing workers will go next.