Friday, June 1, 2007

Valuations in the Stock Market and M&A Activity - A Few Comments

From Bloomberg:

Valuations seem more realistic then during the internet bubble:

The (Standard & Poor's) index's 500 members are 45 percent less expensive relative to historical profits than when the index last peaked, and 30 percent cheaper than when it fell to a decade low in October 2002. . . .

``The market is definitely much more fairly priced than it was back in 2000,'' said Michael Mullaney, who helps manage $10 billion at Fiduciary Trust Co. in Boston. ``It's on a much more solid fundamental footing . . . .

. . . . The flood of money into the U.S. stock market helped boost the average price-earnings multiple for S&P 500 shares to 32.8 in March 2000. That compares with a 25.7 average earnings multiple when the market fell to a low in October 2002 and an 18 multiple today.

For those of you that have forgotten (or never knew) how bad it was:

The S&P 500 plunged 49 percent between March 2000 and Oct. 9, 2002, dragged down by an 82 percent decline in computer- related shares. Those stocks had surged more than 12-fold during the 1990s and led the S&P 500's record-breaking rally.

Looks like the money moved overseas. Let's hear it for diversifying your risk.

Shares in Asia and so-called emerging markets have also outperformed the S&P 500 since 2000. The Morgan Stanley Capital International Asia-Pacific Index has jumped 26 percent since 2000 and is valued at 19.2 times historical profits. The MSCI Emerging Markets Index has soared 94 percent and trades for 15.2 times past earnings.

. . . . ``Lingering nervousness'' about the market's plunge from the 2000 peak spurred many investors to reduce their holdings of U.S. stocks even as the S&P 500 rallied, said Kevin Bannon . . . .

. . . . Total hedge fund assets ballooned to $1.6 trillion last quarter from $490.6 billion in 2000. Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested.

M&A activity is still strong in the US:

Mergers and acquisitions totaled about $1.7 trillion in 2006, breaking a record set in 2000, according to data compiled by Bloomberg. Announced deals this year amount to more than $1.1 trillion, 61 percent ahead of last year's pace.

The surge in acquisitions was spurred in part by the widening gap between what companies yield in earnings and the cost of borrowing, said Sean Clark, chief investment officer at Clark Capital Management.

Estimated profit at companies in the S&P 500 represented a yield of 6.53 percent at the end of the first quarter, when 10- year U.S. Treasuries yielded 4.65 percent. The 1.88-percentage- point advantage was the biggest since at least 1986. . . . .

. . . . ``One reason why there's been so much M&A activity with the private equity firms is because valuations are so palatable right now,'' said Clark, who oversees about $1.2 billion in Philadelphia. ``The market is more reasonably priced, especially compared to bonds.''

Ultimately, there is nothing like cheap money (a lot of liquidity in the credit markets) to drive the M&A business. It is always interesting when it is cheaper to buy the profit then to make it yourself. Let's face it you would do it as well if you were in charge.

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