Target's chart, however, shows that the company has tracked the market and GDP fairly closely, indicating that perhaps it does not trade the way a discount retailer should.
Johnson & Johnson
JNJ is a pharmaceutical and consumer products company. It competes in pharmaceuticals, consumer products in the health and beauty segment and in medical devices. The company was founded in 1886 and today is a multinational conglomerate with operations in 57 countries and with approximately 250 subsidiaries.
To a certain extent, JNJ's product line is price inelastic. Pharmaceutical demand is tied to overall consumer demand and the state of the economy, but not to the same extent that many other consumer products are. As a result, JNJ would be expected to have less significant swings in its stock price relative to the GDP, other macroeconomic indicators, or the Dow Jones. The stock, however, has traded roughly in line with the market over the past year, hitting its lows in early March and gradually climbing back up.
Ford Motor Company
Ford was founded in 1903 and soon became the dominant automobile manufacturer in the United States. The company has always remained in the top three. Ford was, at the time, revolutionary for its approach to employees and to production management. Over time, Ford has been superceded by competitors such as General Motors and Toyota, but has always remained prominent. Ford still dominates the light truck market with its F-series. The company has struggled in recent years, a function of legacy costs and poor brand image.
The state of the economy has contributed to Ford's problems, but is certainly not the total cause of the company's struggles. Ford, with its historical emphasis on non-fuel-efficient vehicles, is susceptible to price movements of fuel, in addition to fluctuations in the general economy. The economic downturn had a strong negative impact on the company, but this impact forced Ford to make dramatic strategic moves. The result is that Ford has traded roughly in line with economic indicators over the course of this year. The company has seen its stock rise at a much faster rate than the Dow Jones or the broader economy, which would not have reasonably been predicted.
Citigroup is a major banking institution. It was founded in 1812 and is therefore one of the oldest firms on the New York Stock Exchange. Citigroup operates a nationwide network of retail banks, but also engages in corporate banking, investment banking and global wealth management. Citigroup has suffered greatly as a result of its "toxic assets," and has needed federal assistance in recent years in order to survive. As a result, Citigroup was removed from the Dow Jones Industrial Average.
As with most banks, Citigroup trades in part on the basis of interest rates. With interest rates at rock bottom, Citigroup's low cost of capital should allow it to make significant profits on its operations. However, the company has struggled as a result of bad assets on its books, relating to subprime mortgages and collateralized debt obligations. Citigroup, therefore, is not expected to trade in line with the GDP, but more in line with interest rates. Indeed, the company's stock has flatlined in recent months and trades today only slightly higher than it did in early April.
The former Phillip Morris is a cigarette manufacturer. The company formerly owned a stake in Miller Brewing, but has recently focused on its core cigarette business. This business has a low degree of price elasticity, and may even be seen as benefiting from economic downturn.
Altria is most heavily affected by cigarette tax rates, which can be set at all levels of government. Cigarette taxes have been on a long-term upward trend. The company has traded roughly in line with the broad market and the GDP, indicating that the company is more directly tied to the general economy than was perhaps believed.
Berkshire Hathaway B
Berkshire Hathaway is a conglomerate, with a number of different businesses. The main driver for Berkshire, however, is its insurance arm, Geico and General Re. Berkshire purchased Geico in 1996 and has built the brand into an insurance powerhouse since that time. General Re was added in 1998. Among Berkshire's other brands are Dairy Queen, Benjamin Moore and Fruit of the Loom.
The insurance segment of Berkshire's business is loosely affected by interest rates, but the conglomerate overall is more affected by the state off the economy, since it has a high degree of diversification. This is reflected in Berkshire's stock performance, which has traded broadly in line with the market but has flatlined in recent months in sympathy with prevailing interest rates.
Exxon Mobile is an oil and gas multinational, engaged in both the exploration and extraction phase and the retail phase. The company has its roots in Standard Oil, founded in 1870 -- both Exxon and Mobile were descended from Standard. Since combining in 1999, Exxon Mobile has become the world's largest company by market cap. The company, however, remains much smaller than many state-owned oil enterprises and only holds a 3% market share.
Exxon Mobile can be expected to trade primarily in line with prevailing oil prices. Over the past year, crude oil prices have roughly tracked the broad economy, hitting a bottom in March and rising steadily since then. While XOM bottomed in March, it is had a less steady rise and has largely been rangebound for several months, thus performing below expectations.
FedEx current has no P/E, since the company lost money last quarter. This is a relatively unique event in the history of FedEx. The implication of the company's current stock price is that FedEx will resume profitability soon and will continue to grow in the coming years. It is reasonable that FedEx will grow in line with global economic recovery. The projected price one year from now should be 3-4% higher, depending on global economic performance, so perhaps $84.25.
JetBlue has a P/E of 330.62 times, which reflects the low earning per share of $.02. JetBlue's earnings per share are likely to double or triple as the economy improves, from this low level. The P/E ratio is likely to decrease, however, since its current level is unsustainable. JetBlue's stock price therefore should not increase much more than in line with the GDP. Therefore, JetBlue's stock should be $5.55.
Microsoft has a P/E of 19.43, relatively low for a growth company. This reflects the maturation of the company's core business. The P/E should remain at this level, even as the economy grows, due to this maturation and the inability to Microsoft to turn a profit on its video game console business. Therefore, gains are unlikely to accrue and Microsoft's stock is likely to remain at roughly the same level going forward.
Target is the one company in the portfolio that has lost market value in November. As the economy improves, Target can be expected to lose customers who return to their normal shopping habits at the expense of discount stores. Target's current P/E is 16.57, reflecting its high current earnings. I feel that these earnings will decline 10% over the coming year, but the multiple will remain the same. This will give Target a stock price of $42.80.
Johnson & Johnson has a P/E of 13.80, reflecting both the maturity of its business and its strong earnings. JNJ's earnings are likely to track the GDP, and the multiple should remain the same given the firm's lack of growth. Therefore, the expected future price of JNJ is $66.38.
Ford benefited in the last quarter from the cash-for-clunkers program, but still is losing money. Thus, it has no P/E. The stock's recent runup is fuelled by quarterly profits and the expectation of future profitability. Ford's current price of $8.81 implies expectations of significant profit in the future. If the Q2 profit of two cents per share was extrapolated over a year, the P/E would be 110, which is far too high for Ford. The stock should more likely be valued in the $5 range.
Citigroup is another company that did not make money in the last year. Through three quarters this year, C had a profit of $0.36 per share. The current price, therefore, implies a P/E of 11.69. This is reasonable, so it is expected that Citigroup's stock price and multiple will change little over the next year.
Altria has a P/E of 12.64 on profits of $1.53 per share. The company's business is relatively stable and there is little reason to expect that to change, despite increases in cigarette taxes from cash-strapped governments who are trying to replace other lost sources of revenue. Altria shares, therefore should change little, as any GDP gains will be offset by the impact of higher cigarette taxes.
Berkshire Hathaway does not have P/E recorded, but the company's A shares trade at 31.13 times earnings. Interest rates are expected to remain flat for the foreseeable future, so…