Mergers & Acquisitions Advisory

A Neumann & Associates, LLC

March 4, 2009

To P/E or Not to P/E

By Joseph Eneldas

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ATLANTIC HIGHLANDS, NJ – March – A look at the Dow industrials shows that the entire late-1990s bubble, not to mention the rally from 2003 to 2007, has been completely washed away. With the Dow closing below 7000 for the first time in more than 11 years, one can’t help but wonder, using traditional valuation metrics, whether stocks are finally falling to appropriate levels. It mightn’t be the right question to ask. “Valuation is the wrong concept in a secular bear market,” says John Mauldin, president of Millennium Wave Investments in Dallas. “If we continue to see earnings drop from forecasted levels, as we have for over a year, then it is possible we could see more pain. Valuation is subjective in such a climate. When earnings start to stabilize, and we can get some visibility, then we can talk about fair value.” The current market climate has drawn comparisons to the mid-1970s, when investors dreaded coming into work, knowing the markets were in for a rough time. With that kind of despair ruling the market, “what’s the difference between 12 times or eight times or 10 times earnings? There isn’t demand for equities, because people can’t see any signs of recovery soon,” says Peter Boockvar, equity market strategist at Miller Tabak. He contrasted this with the late 1990s, when “expensive got more expensive.” The problem, according to investors, is that S&P 500 earnings expectations are constantly changing, as analysts reduce their expectations for per-share earnings. As of a few weeks ago, analysts anticipated per-share operating earnings to come in around $69 in 2009, according to Thomson Reuters, but that figure (already reduced from some kind of previously ridiculous estimate) has come down in the last few weeks, and now the expectation is for earnings of about $50 to $55 a share for the year. Using a typical valuation at the market’s nadir — a price-to-earnings ratio of anywhere from eight to 12 times earnings — that puts the S&P 500, optimistically, at 660. It only broke through 700 Monday. So even a more optimistic outlook still suggests more pain. Market strategists, until recently, were quick to dismiss the consensus, knowing it was too high — but now they are concerned that even the reduced revisions mightn’t capture the depth of the economic decline. “The risk is to the downside if the economy substantially worsens from the levels we currently see,” says Fred Dickson, director of private client research at D.A. Davidson. “It’s a downward moving target at the moment, and the valuation metric has just been very tough to put one’s finger on.” By DAVID GAFFEN, WSJ

About A Neumann & Associates, LLC

A Neumann & Associates, LLC is a professional mergers & acquisitions and business brokerage firm having assisted business owners and buyers in the business valuation and business transfer process through its affiliations for the past 30 years. With an A+ Better Business Bureau rating, the company has senior trusted professionals with a deep knowledge based in multiple field offices along the East Coast and has performed hundreds of business valuations in its history. The firm’s competitive transaction fees are based on successfully completing transactions. For more information, please contact A Neumann & Associates at 732-872-6777 or info@neumannassociates.com

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“I recently contacted A. Neumann and Associates about getting a valuation of my business done. I spoke with Marc, who explained the process in detail. After meeting with Marc in order to get a clear understanding of my business, and what I was hoping to accomplish. His patience in answering all my questions and his knowledge of the proper way to market my business gave me great confidence that this is the firm I will be using to sell my business for max value. Working with Marc at A Neumann & Associates was very easy and professional. I did not know all that was going to be involved in selling my business but they helped me through the process. What I thought was going to be a just another one of those pushy sales companies was just the opposite. Polite, knowledgeable, and a pleasure to talk to and deal with. I highly recommend this firm to anybody who wants to sell now or down the road. Marc not only knows his stuff, but actually is a real nice guy.”

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Dennis Frazier

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Srini Mudambi

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Colby Harris, Co-Owner, Del Mar Designs

“Claus Madsen thoroughly helped us with selling our company. From the 1st introductory meeting explaining to us what was possible, to providing us with resources to assist with the sale. Claus was invaluable throughout the whole sales process. Claus was with us every step of the journey and always made himself available for any questions or issues that came up along the way. If you are interested in selling your business, I encourage you to reach out to Claus and the ANA team so that they can let you know what’s achievable. These guys will make it happen!”

Ron Harris, Co-Owner and Vice President, Del Mar Designs

“A Neumann & Associates is the only business broker I would use or consult with. They have assisted with 3 business sales over the past 15 years with me. They are honest and sincere and have always performed better than my expectations. They are the only one i would use for the sales of my businesses.”

James Belanger, Business Owner

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Andrew G., Investor

“We worked with Neumann & Associates to investigate the purchase of a research company in 2010 and found Achim to be capable, forthright and realistic. His depth of experience enabled us to fully understand our options, offering creative options that might enable the acquisition. While we didn’t acquire that particular company at that time, we know exactly who to call whenever we’re looking to buy or sell a business.”

Daniel Coates, Buyer

“Purchasing a business through this firm was a pleasure. Gary was very professional and transparent throughout the entire process. I look forward to working with A Neumann & Associates in the future.”

William Klemens, Buyer
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