In Their View, Blue Chips Have Nowhere to Go but Higher Still

Caution and skepticism usually aren’t bad things to bring to the table when you’re looking to make an investment.

But with one particular class of asset--U.S. blue-chip multinational stocks--caution and skepticism since 1994 actually have been severely detrimental to investors’ financial health.

Basically, you should have just owned a basket of blue chips, and ignored every bad thing any critic had to say about them.

The numbers go like this: In 1995 the Dow Jones industrial average, the premier blue-chip stock index, leaped 33.5%. It followed that performance with a gain of 26% in 1996. And so far this year the 30-stock Dow is up 21%, to a record 7,796.51 as of Friday.

Sheer nuttiness? Plenty of people think so, of course. Anyone nervous about the market’s heights will typically point to the Dow’s astounding surge as proof that many investors are simply throwing money at stocks, without regard to companies’ underlying fundamentals.

Meanwhile, a few Wall Street pros have all along argued that the “mania” for blue chips wasn’t that at all. Instead, these few argued, the rising prices of blue chips were entirely defensible based on a handful of key facts: These companies were generating strong earnings growth; they were (and are) global leaders in their industries; and historically, in times of relatively low interest rates and inflation, household-name stocks have sold for premium prices versus the rest of the market.

So here we stand, with the Dow knocking on the door of the 7,800 mark, and just a 2.6% rise away from 8,000. The blue-chip bulls have been right. The doubters are eating humble pie.

Now what? How about a “melt-up”?

That’s essentially what Prudential Securities analyst Ralph Acampora, one of the few market super-bulls, forecast last week.

He predicted the Dow could rocket to 10,000 within the next 12 months, which would be a 28% gain from current levels.

If interest rates stay relatively tame, Acampora said, there’s no reason why a “buying panic” in stocks shouldn’t ensue.

More sheer nuttiness? Not if you consider how voracious investors have been for stocks, especially blue chips, just since the spring market downturn. Given continued low inflation, a moderation of economic growth and the likelihood that the Federal Reserve will leave interest rates alone for the foreseeable future, many people clearly saw the greater risk as being out of stocks than being in them.

Thus, if the current environment persists, there may be little to stop a torrent of fresh cash from pouring into the stock market, for lack of better alternatives.

“Fine,” say the bears. “Let others overpay for stocks. They’ll regret it!” But that assumes that current U.S. share prices really are outlandish. Are they?

The chart at right looks at the 30 Dow issues. In the market as a whole, the average stock is priced at about 20 times estimated 1997 earnings per share. Against that yardstick, the bulls argue that many blue chips aren’t grossly overvalued.

Coca-Cola surely isn’t cheap, selling at 43 times expected 1997 earnings. But if you believe that the current global economic expansion will continue, with low inflation, rising worker productivity and--most important--increasing opportunity for American companies to generate significant profits from abroad, is it too much to pay a price-to-earnings (P/E) ratio in the low 20s or upper teens for the rest of these blue chips?

True, many may be priced above their growth rates. But that’s the nature of a bull market. You pay to play, or you wait to buy cheaper--and you may wait a long time.

Jeremy Siegel, the Wharton School finance professor and author of the celebrated bullish book “Stocks for the Long Run,” contends that at most, blue-chip stocks may be 15% overvalued relative to inflation and interest rates. So this is not 1929, he says, nor 1972. The risk of making a long-term investment in a diversified portfolio of big-name stocks today isn’t excessive, he argues.

“The multinationals are uniquely positioned to capture [the benefits of] the world’s transition to a market economy,” Siegel says. “I believe there are enough favorable factors at work to justify a 15% premium” for those stocks.

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Scoring the Dow 30

Here’s a look at the 30 blue-chip stocks in the Dow Jones industrial average, including price change so far in 1997, estimated 1997 earnings per share (EPS) and earnings growth from 1996, each stock’s price-to-earnings (P/E) ratio based on the 1997 estimate, and a brief commentary on each company.

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Alcoa

Fri. close: $76.00

Chng. since Dec. 31: +19%

Est. ’97 EPS: $4.89

‘97 P/E: 16

Est. ’97 EPS growth: +66%

Est. ’97 sales (bilns.): $14.3

Dividend yield: 1.3%

Expected to ride aluminum price recovery this year; pushing hard into Europe, where most cans still are steel

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AlliedSignal

Fri. close: $83.75

Chng. since Dec. 31: +25%

Est. ’97 EPS: 4.18

‘97 P/E: 20

Est. ’97 EPS growth: +16%

Est. ’97 sales (bilns.): 14.5

Dividend yield: 1.2%

Major player in aerospace, auto parts, chemicals; emphasizing higher-margin products and productivity gains

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American Express

Fri. close: 78.63

Chng. since Dec. 31: +39%

Est. ’97 EPS: 4.09

‘97 P/E: 19

Est. ’97 EPS growth: +15%

Est. ’97 sales (bilns.): 17.1

Dividend yield: 1.1%

Card biz is back on track; financial planning a growth area; pushing overseas with Tiger Woods as spokesman

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AT&T;

Fri. close: 37.25

Chng. since Dec. 31: --10%

Est. ’97 EPS: 2.59

‘97 P/E: 14

Est. ’97 EPS growth: --25%

Est. ’97 sales (bilns.): 53.8

Dividend yield: 3.5%

Spending heavily to regain market share; profit growth uncertain; is a merger with a Baby Bell the best hope ?

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Boeing

Fri. close: 56.88

Chng. since Dec. 31: +7%

Est. ’97 EPS: 2.51

‘97 P/E: 23

Est. ’97 EPS growth: +57%

Est. ’97 sales (bilns.): 34.0

Dividend yield: 1.0%

Airline traffic boom is boom for Boeing; McDonnell Douglas purchase looms; great growth unless recession hits

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Caterpillar

Fri. close: 107.13

Chng. since Dec. 31: +42%

Est. ’97 EPS: 7.96

‘97 P/E: 13

Est. ’97 EPS growth: +13%

Est. ’97 sales (bilns.): 18.3

Dividend yield: 1.9%

Broke union and modernized to boost 1994-96 earnings sharply; now a play on continued cap-spending boom

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Chevron

Fri. close: 74.50

Chng. since Dec. 31: +15%

Est. ’97 EPS: 4.12

‘97 P/E: 18

Est. ’97 EPS growth: +3%

Est. ’97 sales (bilns.): 36.9

Dividend yield: 3.1%

New production coming on-stream overseas, but thin refining margins a drag; slow growth at best

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Coca-Cola

Fri. close: 71.38

Chng. since Dec. 31: +36%

Est. ’97 EPS: 1.65

‘97 P/E: 43

Est. ’97 EPS growth: +18%

Est. ’97 sales (bilns.): 19.6

Dividend yield: 0.8%

Poster child for expensive stocks, but management promises 15-20% annual profit growth; a Buffett holding

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DuPont

Fri. close: 60.88

Chng. since Dec. 31: +29%

Est. ’97 EPS: 3.58

‘97 P/E: 17

Est. ’97 EPS growth: +10%

Est. ’97 sales (bilns.): 46.5

Dividend yield: 2.1%

Chemicals and oil; trying to stress value-added products to reduce cyclicality; a big play on European economy

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Eastman Kodak

Fri. close: 78.88

Chng. since Dec. 31: --2%

Est. ’97 EPS: 4.89

‘97 P/E: 16

Est. ’97 EPS growth: +28%

Est. ’97 sales (bilns.): 15.5

Dividend yield: 2.2%

Film sales growth still a question mark; battling with Fuji; will Kodak lead transition to electronic camera?

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Exxon

Fri. close: 63.50

Chng. since Dec. 31: +30%

Est. ’97 EPS: 2.92

‘97 P/E: 22

Est. ’97 EPS growth: --3%

Est. ’97 sales (bilns.): 120.0

Dividend yield: 2.6%

Slow grower given huge size, but cost-cutting and firm oil price should help; dependable dividend booster

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General Electric

Fri. close: 67.63

Chng. since Dec. 31: +37%

Est. ’97 EPS: 2.49

‘97 P/E: 27

Est. ’97 EPS growth: +13%

Est. ’97 sales (bilns.): 49.8

Dividend yield: 1.5%

CEO Jack Welch has built powerhouse conglomerate; pushing hard overseas; just 42% of sales now foreign

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General Motors

Fri. close: 55.63

Chng. since Dec. 31: nil

Est. ’97 EPS: 7.73

‘97 P/E: 7

Est. ’97 EPS growth: +28%

Est. ’97 sales (bilns.): 154.0

Dividend yield: 3.6%

Patience hasn’t been a virtue with GM, but first-quarter profit was strong; is management finally in the zone?

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Goodyear

Fri. close: 62.38

Chng. since Dec. 31: +21%

Est. ’97 EPS: 4.82

‘97 P/E: 13

Est. ’97 EPS growth: +11%

Est. ’97 sales (bilns.): 13.9

Dividend yield: 1.8%

World’s biggest tire maker already derives 50% of sales overseas, and wants more; continuing to cut costs

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Hewlett-Packard

Fri. close: 55.00

Chng. since Dec. 31: +10%

Est. ’97 EPS: 3.12

‘97 P/E: 18

Est. ’97 EPS growth: +27%

Est. ’97 sales (bilns.): 45.0

Dividend yield: 1.0%

Dynamic long-term prospects, but stumble last summer showed electronics biz can be cyclical short-term

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IBM

Fri. close: 89.88

Chng. since Dec. 31: +19%

Est. ’97 EPS: 6.18

‘97 P/E: 15

Est. ’97 EPS growth: +12%

Est. ’97 sales (bilns.): 79.0

Dividend yield: 0.9%

CEO Lou Gerstner pulled off big turnaround since ‘94, slashing costs; new mainframes will be key to success

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International Paper

Fri. close: 50.25

Chng. since Dec. 31: +24%

Est. ’97 EPS: 1.07

‘97 P/E: 47

Est. ’97 EPS growth: +3%

Est. ’97 sales (bilns.): 20.0

Dividend yield: 2.0%

Plunge in paper prices has zapped earnings, but stock has held up anyway; still a classic boom/bust business

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Johnson & Johnson

Fri. close: 65.88

Chng. since Dec. 31: +32%

Est. ’97 EPS: 2.48

‘97 P/E: 27

Est. ’97 EPS growth: +14%

Est. ’97 sales (bilns.): 23.5

Dividend yield: 1.3%

Health-care dynamo, though sales are slowing a bit; boosting R&D; to maintain low-teens profit growth long term

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McDonald’s

Fri. close: 50.00

Chng. since Dec. 31: +10%

Est. ’97 EPS: 2.46

‘97 P/E: 20

Est. ’97 EPS growth: +11%

Est. ’97 sales (bilns.): 10.7

Dividend yield: 0.7%

Struggling to revive growth in U.S. business, but plenty of opportunity overseas; good bet to buy on dips?

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Merck

Fri. close: 100.00

Chng. since Dec. 31: +26%

Est. ’97 EPS: 3.80

‘97 P/E: 26

Est. ’97 EPS growth: +19%

Est. ’97 sales (bilns.): 23.5

Dividend yield: 1.7%

Drug giant shows surprising new profit momentum; long-term, though, concerns remain about product pipeline

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3M Co.

Fri. close: 102.13

Chng. since Dec. 31: +23%

Est. ’97 EPS: 4.10

‘97 P/E: 25

Est. ’97 EPS growth: +13%

Est. ’97 sales (bilns.): 15.4

Dividend yield: 2.1%

What don’t they make? Diversified global manufacturer with many new products; dependable dividend booster

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J.P. Morgan

Fri. close: 109.13

Chng. since Dec. 31: +12%

Est. ’97 EPS: 7.86

‘97 P/E: 14

Est. ’97 EPS growth: +3%

Est. ’97 sales (bilns.): 2.0

Dividend yield: 3.2%

Profit growth is more erratic as investment banking is emphasized, but strong global franchise is long-term plus

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Philip Morris

Fri. close: 45.50

Chng. since Dec. 31: +21%

Est. ’97 EPS: 2.98

‘97 P/E: 15

Est. ’97 EPS growth: +16%

Est. ’97 sales (bilns.): 73.5

Dividend yield: 3.5%

Tobacco suit settlement still a cloud, but look at the giant food biz; and is there a more tested management?

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Procter & Gamble

Fri. close: 140.13

Chng. since Dec. 31: +30%

Est. ’97 EPS: 5.16

‘97 P/E: 27

Est. ’97 EPS growth: +13%

Est. ’97 sales (bilns.): 37.0

Dividend yield: 1.3%

Brand-name juggernaut, even with some products in decline; everyday-low-price strategy builds brand loyalty

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Sears

Fri. close: 54.38

Chng. since Dec. 31: +18%

Est. ’97 EPS: 3.59

‘97 P/E: 15

Est. ’97 EPS growth: +14%

Est. ’97 sales (bilns.): 41.3

Dividend yield: 1.7%

Focused on rejuvenated retail biz, after spinning off non-retail units; Wall St. still worries about long-term growth

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Travelers

Fri. close: 66.00

Chng. since Dec. 31: +46%

Est. ’97 EPS: 3.78

‘97 P/E: 17

Est. ’97 EPS growth: +10%

Est. ’97 sales (bilns.): 23.8

Dividend yield: 0.9%

CEO Sandy Weill has built a major contender in brokerage, insurance, lending; but beware a bear market

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Union Carbide

Fri. close: 47.75

Chng. since Dec. 31: +17%

Est. ’97 EPS: 4.46

‘97 P/E: 11

Est. ’97 EPS growth: +14%

Est. ’97 sales (bilns.): 6.5

Dividend yield: 1.6%

Specialty and basic chemicals; good bet if world economy continues to strengthen; stingy with dividends though

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United Technologies

Fri. close: 87.25

Chng. since Dec. 31: +32%

Est. ’97 EPS: 4.04

‘97 P/E: 22

Est. ’97 EPS growth: +17%

Est. ’97 sales (bilns.): 25.0

Dividend yield: 1.4%

Jet engines, Otis elevators, auto parts and more in a global player, but no getting around cyclical nature

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Wal-Mart

Fri. close: 33.75

Chng. since Dec. 31: +48%

Est. ’97 EPS: 1.53

‘97 P/E: 22

Est. ’97 EPS growth: +15%

Est. ’97 sales (bilns.): 117.2

Dividend yield: 0.8%

Back on track after profit slowdown, but U.S. market is saturated; stressing super-store concept to fuel growth

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Walt Disney

82.25 +18% 2.75 30 +23% 23.5 0.6%

Fri. close: 82.25

Chng. since Dec. 31: +18%

Est. ’97 EPS: 2.75

‘97 P/E: 30

Est. ’97 EPS growth: +23%

Est. ’97 sales (bilns.): 23.5

Dividend yield: 0.6%

Jury still out on ABC purchase, and now Baptists are angry; but “Hercules” may symbolize long-term prospects

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Notes: Earnings estimates from IBES Intl.; sales estimates from Value Line Investment Survey; J.P. Morgan sales estimate is net interest income; for earnings-growth estimate purposes, the 1996 earnings used for comparison generally were operating earnings before any major one-time charges or gains.

Sources: IBES Intl.; Value Line Investment Survey; Bloomberg News