By JACK HOUGH
Big Tech is stuffed with cash and trading at a significant discount to the broad market. That's a sign of investor pessimism, and earnings for the group might indeed be due for a dip, but a handful of companies are too cheap to ignore. Some even pay respectable dividends.
Among U.S. technology firms with stock market values over $5 billion, the median sells for 14 times projected earnings for its current fiscal year. That's in line with the market's historic average and a smidgen below the median price of 15 times projected earnings for all firms worth more than $5 billion, not just technology companies. Adjust company values for the amount of net cash they hold (cash and short-term investments minus debt and similar obligations) and big tech falls to 13 times earnings while big everything rises to 17 times earnings.
That's a significant reversal for the sector. Over the past two decades, tech has traded on average at a 30% premium to the broad market based on earnings, according to Bernstein Research.
Perhaps investors view current technology profits as unsustainably rich. Corporate profits in general are near record levels and technology firms are more profitable than most companies. Over the past year the median big tech firm turned 19 cents of each sales dollar into operating profit, versus 15 cents for the broader S&P 500 index. There are signs the economy is slowing again: crude oil and house prices are slowing, consumer spending looks weak and jobless claims recently increased. And even though technology is more or a staple than it used to be, recent earnings for the group have been more volatile than those for other sectors besides financials, basic materials and telecom.
The three companies below, however, have been stable earners in recent years, and their price-to--earnings ratios, adjusted for cash levels, are in single digits.
P/E, adjusted for net cash: 6.3
P/E, adjusted for net cash: 7.7
P/E, adjusted for net cash: 9.9
If "analog" sounds old-fashioned it's only because analog recordings like records and tapes gave way to digital ones like compact discs and computer files. The world still runs on analog chips, which describe those that interact with real phenomena, like light, sound and temperature. Analog Devices (ADI)