Costly flotations:Few Wall Street flotations have been as anticipated as Facebook's. Even fewer have been as expensive, according to Florida finance professor Jay Ritter.
Ritter examined data going back to 1975 and found 76 flotations of companies which, like Facebook, had trailing 12-month revenues of at least $3 billion. Their average price-to-sales ratio was 1.
Facebook’s price/sales ratio may be 25 times that, assuming a valuation of $100 billion and 2011 revenues of $3.8 billion. The highest prior ratio was 8.9.
Many thought Google overpriced at $85 in 2004, and it quadrupled within a year. But Google's market capitalisation of $23 billion is one-quarter of Facebook's mooted price. Its price/sales ratio of 8.7 is similarly dwarfed. The endless calculations have even sparked a nice little limerick ( limericksecon.com):
“Facebook is valued at plenty
By Wall Street’s high-tech cognoscenti,
Based on one billion friends
Times $5 each, then
Times the IPO multiple, 20.”
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Great expectations :US and European market indices have enjoyed their best start to a year since 1997 and 1998 respectively, but corporate earnings haven't been the driver of those gains.
Bloomberg reports that 59 per cent of Euro Stoxx 600 firms have missed earnings expectations this quarter – way above the average “miss rate” of 39 per cent since 2006.
In the US, 59 per cent of SP 500 companies have beaten estimates. That’s much better than European figures, but it’s below historical averages and is the lowest “beat rate” since Q3, 2008. Only 43 per cent of companies are beating revenue estimates, the lowest figure since the first quarter of 2008.
Profit margins, which appeared unsustainable after hitting records in Q2, 2011, have fallen for the second quarter in a row. US earnings are still expected to be 11.5 per cent higher than a year ago. Exclude AIG and Apple and that figure falls to 1 per cent.
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Predictions:Nobel economist Paul Samuelson once joked that economists have correctly predicted nine of the last five recessions. Untrue, says the IMF's Prakash Loungani – they're far worse than that. Just two of the 60 recessions recorded during the 1990s were predicted a year in advance, says Loungani, and 40 went undetected just seven months before occurring.
Looking at 12 large economies in the 2000s, just two out of 26 recessions were predicted a year away. The great recession of 2008-2009? None of the nine recessions that started in 2008 were predicted a year in advance or even by April. Economists, he says, chase the data rather than staying a step ahead of it.
