Course 408: Cyclical Stocks
How Expensive Is the Company Based on Normalized Earnings?
In this course
1 Introduction
2 How Is the Company Doing Now?
3 How Wildly Do Sales and Profits Fluctuate?
4 How Leveraged Is the Balance Sheet?
5 Does the Company Consistently Generate Positive Cash Flow?
6 How Steady Are the Company's Dividends over a Cycle?
7 Is the Firm Diversified Geographically and by Product Line?
8 Is the Long-Term Trend in Sales and Profits Upward?
9 How Has the Stock Performed?
10 How Expensive Is It?
11 How Expensive Is the Company Based on Normalized Earnings?
12 How Does the Price/Sales Ratio Compare with Historical Levels?
13 Conclusion: Get 'Em while They're Cold

For a cyclical, earnings in any given year are not a reliable measure of a company's true earning power. To avoid overreliance on a single year's results, look at United Technologies' "normalized" earnings: the average of the company's earnings from the past five years. Normalized earnings give a smoother valuation picture, especially for companies with erratic earnings. United Technologies earned an average of $2.17 per share annually between 1995 and 1999. At its share price of $65 at the end of 1999, that works out to a normalized P/E ratio of 30. If the future turns out anything like the past, United Technologies' shares are pretty darn expensive for this type of stock.

Next: How Does the Price/Sales Ratio Compare with Historical Levels? >>


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