Monday, January 02, 2006

 

Flashback: A Talk with Scott McNealy and P/S ratio's

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Nearly 4 years ago, there was a great interview with Scott McNealy of Sun Microsystems. There was a tremendous quote by him (referenced below) that really puts things into perspective when thinking about P/S (Price to Sales) ratio's. P/S is also the same as Price to Revenues.

For example, lets use Taser. The company's gross revenue for 2005 was a mere $55 Million. With 61 million shares outstanding and a current price of about $7 per share, the company is currently valued at a still rather hefty $427 Million. Now divide 427 by 55 and you have a P/S of about 7.8 which is still actually quite high even with it's huge 85% price decline in 2005.

In past Bear Markets, most P/S ratio's went well below 1 before a true bottom was actually reached! Something we're still pretty far away from as the Stock Market Mania never really ended.

After the McNealy "snippet" from the Business Week interview - I've put together a list of a few P/S ratio's of some well known US companies. Particulary high P/S ratio's are in RED.
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BW - Sun's stock hit a high of $64. Did you think what tech stocks were doing two years ago was too good to be true?

Scott McNealy -Two years ago we were selling at 10 times revenues* when we were at $64. At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don't need any transparency. You don't need any footnotes. What were you thinking?

*NOTE: As of Dec. 31, 2005 - Sun Micro was trading just over $4 per share with a P/S of 1.3
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P/S ratio's of well known US Companies - December 31, 2005 -


  • Advanced Micro Devices = 2.3
  • Alcoa = 1.0
  • American Express = 2.1
  • Apple Computers = 4.3
  • AT&T = 2.1
  • BellSouth = 2.4
  • Berkshire Hathaway = 1.8
  • Boeing = 1.1
  • Chevron = 0.7
  • Cisco Systems = 4.2
  • Citibank = 3.0
  • Dell Computer = 1.3
  • Eastman Kodak = 0.5
  • EBAY = 14.7
  • Ford Motors = 0.08
  • General Motors = 0.06
  • General Electric = 2.3
  • GOOGLE = 23.7
  • Halliburton = 1.6
  • Home Depot = 1.1
  • IBM = 1.4
  • Intel = 4.0
  • Johnson & Johnson = 3.5
  • Kellogg = 1.8
  • Kraft = 1.4
  • Lowes = 1.3
  • McDonalds = 2.1
  • Merck = 3.2
  • Microsoft = 6.9
  • 3-M = 2.8
  • Motorola = 1.6
  • Newmont Mining = 5.4
  • Pfizer = 3.3
  • Time Warner = 1.9
  • YAHOO = 11.6


Comments:
great blog and great post! Makes you wonder how exactly they're "valuating" their companies.

sounds like OTB to me.

thanks for stopping by and Happy New Year!
 
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