(Bloomberg News) The five-week drop in U.S. stocks has driven technology company valuations to the lowest level in more than a decade, making them too cheap to pass up for some of the nation's biggest money managers.
The largest group in the benchmark gauge for American equities lost 7 percent, or about $190 billion in value, since the market peaked on Feb. 18, falling more than any industry outside financials. Computer stocks trade for 9.3 times reported earnings before interest, taxes, depreciation and amortization, 1.3 times the index's multiple, data compiled by Bloomberg show. The ratio is the smallest since at least 1998.
While signs of a slowing recovery and the initial public offering of LinkedIn Corp. have spurred concern the industry has entered a speculative bubble, the numbers show something different. Profits will rise 35 percent faster than the Standard & Poor's 500 Index in 2011, and executives are boosting computer and software spending, data from Bank of America Corp. and Bloomberg show.
"We see the best supply-demand trend in technology," said Michael Sansoterra, a money manager at RidgeWorth Capital Management in Atlanta, which oversees $48.5 billion including Broadcom Corp. and Google Inc. shares. "You can measure it pretty much every way you want and it looks attractive."
Computer-Industry Earnings
Computer-industry earnings are almost double the level at the peak of the Internet bubble. Profits for technology makers in the S&P 500 totaled $135.6 billion last year, compared with $72.9 billion in 2000, when the S&P 500 Information Technology Index reached an all-time high, according to data compiled by Bloomberg. Bank of America says corporate expenditures on equipment and software will increase 10 percent this year, about four times faster than U.S. gross domestic product.
Per-share earnings at computer and software makers will climb 24 percent in 2011, outpacing the 17 percent increase for the S&P 500, according to projections from analysts surveyed by Bloomberg. Based on those estimates, technology companies trade for 12.8 times profit, compared with 13.1 for the S&P 500, data compiled by Bloomberg show.
U.S. stocks fell last week, the fifth straight decline, after the government said employers added 54,000 jobs in May, making it the worst report in eight months, and manufacturing trailed economists' estimates. The S&P 500 slipped 2.3 percent to 1,300.16 as a group of computer and software makers including Redmond, Washington-based Microsoft Corp. and Hewlett-Packard Co. in Palo Alto, California, lost 1.9 percent, widening the decline since Feb. 17 to 7 percent. Futures on the S&P 500 slipped less than 0.1 percent at 8:39 a.m. in London today.
Biggest Retreats
The retreat was exceeded only by financial companies, which have dropped 11 percent since Feb. 18. Technology stocks' price-to-Ebitda ratio of 9.3 compares with an average of 14.5 times since 1992 and is 76 percent below the record 38.3 multiple reached on March 27, 2000, data compiled by Bloomberg show.
Economic growth slipped to a 1.8 percent annual rate in the first three months of this year from 3.1 percent in the fourth quarter, according to the U.S. Commerce Department. Technology shares rose 54 percent during the last nine months of 2009, trailing only financial stocks, as gross domestic product posted its biggest two-quarter expansion in six years.