Fool's Eye View

[ September 29, 2000 ]

Apple Turnover Lower

By Maynard Paton (TMFMayn)

Carburton Street, London -- Friday morning's Fool's Eye View is fast becoming a regular report on the latest hi-tech woes from the US. Last week, TMFJimmyC described how shares of Intel (Nasdaq :INTC) plunged 20% after the company announced that a weak European marketplace would cause its third quarter earnings to arrive below expectations. That news caused a sea of red to wash over Jimmy's own portfolio and I suspect he may find a similar experience this morning.

That's because, overnight, Apple (Nasdaq: AAPL) became the latest Nasdaq favourite to issue a profit warning. The company announced that its earnings for the three months ending 30 September 2000 would be "substantially below expectations". The computer firm now expects profits of $110m for the third quarter, a figure that compares starkly with the $165m that had been previously expected.

According to Apple, there were three factors that led to the profits shortfall, each of which revolved around reduced turnover:

• "Lower than expected September sales due to a business slowdown in all geographies";
• "Education sales, which normally peak during September, were lower than expected", and;
• "The Power Mac G4 Cube is off to a slower than expected start".

Steve Jobs, Apple's CEO, described the slowdown as a "speedbump", but, as could be expected, "remained positive about the future".

Last night, during after hours trading, Apple shares had fallen to as low as $29, having finished the session proper at $53.5. The news looks to have put to an end a glorious two-year share price spurt, Apple having risen from $6 at the start of 1998 to peak at $69 earlier this year.

Danger, danger

To me, the latest warning easily demonstrates the real dangers of "high price to earnings (P/E) investing". Anytime a company on a rich growth multiple announces unpleasant news, the shares will suffer a stomach-churning de-rating.

Let's look back at Intel. Before its warning, Intel shares traded at around $62, equating to a forward P/E of 36. After the warning and the release of revised broker forecasts, Intel, now at $44 (after a 30% decline), trades on a forward P/E of 27. And before yesterday's news and the inevitable share price hammering the company will suffer later today, Apple only traded on a prospective P/E of 29...

So, who will be next after Intel and Apple? Anyone for Dell Computer Corporation (Nasdaq: DELL), a member of the Qualiport? I must admit to being slightly nervous over the company's short-term outlook, especially when the company stands on a forward P/E of 36. After reviewing Dell's second quarter performance, I think it will be very tough, but not impossible, for the company to achieve its stated 30% sales growth target. There could be an upset on the horizon... will we see Dell in next week's Friday morning news slot?

After all of the recent news from the US computer industry, I suspect no highly-rated "tech stock" is immune to issuing disappointing financial statements. Indeed, one striking feature of the recent share price plunges is that the more established US companies having a hard time are "only" on P/E ratings of around 30-40. And so, for those investors with a liking for smaller companies with even greater optimism factored into their valuations, the danger of any severe share price de-rating is even greater.

Where Next?

• TMFJimmyC warns "This Time it's Intel"
• The Qualiport ask "Sell Dell?"
• Visit the Apple discussion board (US Fool) | website