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Cover Story: Where To Invest '96: The Investment Scoreboard: Earnings Outlook
CAN'T TELL THE WINNERS WITHOUT A SCORECARD
It has been a great year for the stock market--and a bang-up year for corporate earnings. When finally tallied, 1995 earnings per share for 900 companies should be up 41% on average. And 1996 looks promising, too, with earnings estimated to rise 19%.
Other optimistic news: Inflation is running at a tame 2.8%, long-term interest rates are around 6%. While the economy is slow, the prospects for a recession in 1996 have diminished to almost nil. Still, the benefits from the most recent wave of corporate restructurings have been squeezed out of most industries. Companies will feel more intensely the pressure from better-managed, more efficient competitors.
BUSINESS WEEK's Investment Outlook Scoreboard will help you sort through the opportunities and pitfalls. Using data from Standard & Poor's Compustat, a division of The McGraw-Hill Companies, the Scoreboard breaks down the 900 companies into 24 industries, allowing investors to compare key ratios and growth measures company by company and industry by industry. I/B/E/S International Inc., a Primark company, supplies the earnings estimates for 1995 and 1996 based on its survey of 2,786 analysts.
TRUCKING ALONG. Most striking about the predictions for 1996 is the consistency of growth the analysts' anticipate. While eight industry groups should finish 1995 worse off than the previous year, in 1996 only the steel industry is expected to post declining earnings.
The projected big winner: the trucking and shipping industry, with earnings expected to jump 106%. Within that industry, Roadway Services Inc. is the standout. I/B/E/S projects that Roadway will earn $2.80 a share in 1996, up 337% from 1995's 64 cents per share. The Akron-based trucking company plans to sell its air-freight subsidiary, spin off its long-haul trucking unit, and change its name to Caliber System Inc.
To find investment opportunities, BUSINESS WEEK looked at the data using six investment criteria. The screening devices show that Denver-based Western Gas Resources Inc. is a leader in estimated earnings growth in 1996, while snowmobile manufacturer Polaris Industries' yield of 18.3% is the highest of the 900 companies on the Scoreboard.
A note of caution: What appears cheap may well turn out to be expensive. As Michelle R. Clayman, chief executive officer and chief investment officer of New Amsterdam Partners LP, a New York-based money management firm, puts it: "With value screens, you sometimes find cheap stocks, but you sometimes find cheap stocks that will get even cheaper."
Another measure to see whether a stock is undervalued is the ratio of stock price to book value per share. The lower the ratio, the more the stock seems underpriced. This year's price-to-book value list is chock-full of retailers, but the top two, Caldor Corp. and Bradlees Inc., went into Chapter 11 in 1995. Stores not in bankruptcy proceedings, such as home-improvement retailer Hechinger, are under intense pressure from larger competitors including Home Depot and Wal-Mart Stores. An investment in any of these embattled companies is not for the risk-averse.
Companies with high price-to-earnings ratios are said to be selling at a premium relative to the market. Does that mean companies with low p-e ratios are bargains? Maybe. Look at Stone Container Corp. Its projected 1996 p-e is 3.6 vs. an average p-e of 13 for the 900 companies. Chicago-based Stone Container makes paper and packaging. Industry forecasts show linerboard capacity increasing by 3.8% a year through 1998, which will put further downward pressure on prices. Newsprint production, though, should go up by only 0.3% a year. A price increase there might stick. Stone has also made some recent acquisitions and pared some high-interest debt, which could improve the bottom line in the years to come.
Another way to search the data is to look for companies with large differences in earnings estimates. Topping the variance list is Tele-Communications Inc. The cable-TV giant's numerous purchases, spin-offs, and strategic alliances seem to have left analysts confused; the variation among its 21 estimates is 850%. If earnings come in surprisingly strong, the stock could be a winner.
Any investment you make must be accompanied by a hard, in-depth look at the numbers and a cold, clear-eyed acknowledgement of the risks. Anything less will turn your investment into a mere roll of the dice.By Frederick F. Jespersen in New York