Review of Bill Miller’s Comments utilizing the SPX, QCOM & EBAY

According to Bill Miller, Large Cap stocks like XOM and KMB represent a once in a life time opportunity and have not been this cheap since 1951.  To either refute or agree with Bill’s claim we will review a simple metric Earnings Yield.

** FCF/Enterprise Value = Cash Return** E Value = Mkt. Capt + LT Debt – Cash

At the End of Q2 the SPX P/E was 15 equaling an Earnings Yield of 6.7%

At the End of Q2 the 10-Year US Treasury Yield was 2.93%

The fixed income market is signaling deflation, but their pessimism is baked into the numbers offering investors a more than adequate return over the risk free rate.

When examining the SPX, Bill’s comments becoming increasingly more convincing, but to be more stringent in our examination we will examine the earnings yield of high quality companies QCOM & EBAY.

Earnings Yield EBAY – 10.68%

Earnings Yield QCOM – 9.3%

QCOM – Is trading at 14.95x it trailing 3-year P/E (($39-$7 per share in cash)/ ($2.16)) vs. a historical multiple of 21x.  They have no debt; pay a 2% dividend yield (which has grown 18% per year over the past 5-years), an open $3 billion share repurchasing plan, and an industry leading patent protected portfolio of products.

EBAY – IS trading at 17.09x it trailing 3-year P/E vs. a historical multiple of 30x.  They have no debt, have grown the BV/per share y 26% the past 5 years and excess cash for share repurchases, investing in operations or acquisitions.

Conclusion – It is typically, very difficult to find cash returns above 10%.  In the current environment QCOMs and EBAY earning yield uncover just how reasonable high quality shares are selling for vs. a 10-year Treasury yield of 2.93%.