Written by John Mangun
Outside the Box
As of this writing, the Philippine Stock Exchange index (PSEi) needs another 100 points to make history.
The 4,000 mark has been the top of the mountain, the unreachable pinnacle for 15 years. Each time that it seemed like the flag would be planted on the top of this Mount Everest, something blocked in the way.
No one is predicting that this time there will be another failure. In fact, the general attitude is that 4,000 is just a road marker to much higher prices, not a final destination.
So what comes after 4,000?
The PSEi is not a stock. It is a composite of 30 issues, with Philippine Long Distance Telephone Co. (PLDT) weighting 16 percent of the index. Security Bank weighs 1 percent, so any movement of PLDT is 16 times as significant as Security Bank. GMA 7 has a weight of 0.59 percent, so each movement in PLDT is the same as 30 fluctuations of GMA 7.
While the PSE index reaches a new historical high, PLDT needs to go up by 30 percent, or nearly P800, to hit its historic high. And that is one important reason you hear comments about the PSE going to 5,000 and beyond. Or maybe not.
Prices are determined the same way prices of pork and chicken at the wet market are settled. Priced too high by the seller, no one buys and prices drop. Priced too low, and everyone buys pushing prices higher.
Now, the question is how do we figure out if a stock price is too high and we should sell, or too low and we should buy. What is a reasonable way to value the price of a stock?
You probably do not remember, but on October 23, 2002, you could have bought all the shares of PLDT you wanted for P210. An investment of P100,000 would now be worth P1.14 million. So why didn’t you? Because you thought that P210 was too high a price to pay for PLDT in 2002.
So if P210 was too high in 2002, then why is P2,400 too low a price for PLDT in 2010? And P2,400 must be too low if the market is going much higher than 4,000.
What is a fair price for PLDT?
If you were buying an existing company, you would look at the earnings and earnings growth. Assets are important, but not as important as profits as you would have to sell those assets to make any money. If you were to buy a company showing P1-million annual profit, you would have to pay the owner an amount equal to several years of profits. Do you pay for five, 10, 15 years of profits to own the company? In the stock market this is called the Price Earnings Ratio (PER).
PLDT has a current PER of 11.4 based on 2009 earnings of P210 per share and a price of P2,406. For 2010, earnings are expected to be at least P230, so if the PER stays the same, the price should be P2,635. Theoretically, we should see PLDT move up by about 10 percent. The question is, what is a reasonable PER in order to predict a future price?
The Tokyo stock market has seen an average PER as high as of 60. The PER for the Standard & Poor’s 500 was 139 in September 2009. The current New York Stock Exchange PER is 14.2. The average for the PSE is 12. There is no hard rule on a valid PER.
However, a company that sees EPS growth of a modest and reasonable 10 percent annually will double its profit in 7.2 years. Assuming that growth continues, in 15 years the buyer would own the company “free,” as earnings would more than equal the original buying price. Therefore, a conservative PER is 15.
Based on 2010 EPS and a PER of 15, PLDT should move to P3,450 and still be fairly valued. PLDT at P3,450 would see the price up 40 percent, and that should put the PSE index, if all the other components stay the same price as today, at 4,300.
There are other shares that have far to go also. If GMA 7 has a 15 PER with an expected EPS of P0.694, the stock trades at P10.41. For Megaworld, the price is P2.64. Other companies look even more interesting using this analysis: Filinvest Land, P2.58; First Gen Corp., P21.97; San Miguel, P133; First Philippine Holdings Corp., P200; and SM Development, P13.68.
Movements like these would definitely put the PSE index in the high 4,000s or even higher.
Some issues, like Jollibee, are trading at a much higher PER of 33. Is Jollibee overvalued and priced too high? Maybe, but Jollibee is a special company in that, if you want to trade the economic growth of the country, Jollibee may be the best indicator, as economic growth directly impacts Jollibee’s earnings. A 33 PER for Jollibee says investors believe the Philippines’ economic growth will continue to be very strong. This economic growth is allowing Jollibee to expand and grow at a very high rate, which drastically increases earnings.
There is a lot of talk right now about the PSE going too far, too fast. Will the break of 4,000 be a time of “irrational exuberance” that traps investors in a falling market? I do not believe so because: 1) Corporate earnings growth is very strong; 2) The PSE has been historically undervalued; 3) We are seeing the capital flight from the West to countries like the Philippines that I have been talking about for many months.
There were many negative comments yesterday about the government borrowing $1 billion from the international markets. Wrong. It is great because this borrowing is peso-denominated, further evidence of capital flight to the Philippines and more proof that the peso will appreciate.
Trade wisely. Take profits at resistance levels and reposition in quality companies with lower PERs. Expect a correction in the next weeks, so be ready for some great-buying opportunities.
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Tuesday, 14 September 2010
Written by John Mangun