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Margin Squeeze

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December 10, 2007 – Comments (2)

I'll post my part III on leverage later, but this interested me.  Revenue growth for the last quarter was up, by 7.4%. 

 That should be a good thing, but here's the problem, earnings were down 2.5% from the same quarter last year.  Effectively, business are 10% less efficient, or basically they are seeing their margins squeezed.  Revenue up, earnings down is a squeeze and it results in the P/E trending upwards without the share prices increasing.  If the share prices are going up, the P/E is going up even faster.

This is bad for investors and the market is ignoring it.

2 Comments – Post Your Own

#1) On December 10, 2007 at 8:33 PM, Imperial1964 (97.84) wrote:

The market is ignoring a lot of things.

Margins are at historical highs.  At some point they have to revert to the mean.  This is likely to happen when you combine rising inflation with a softening consumer.

How the market still has its head in the sand astounds me. 

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#2) On December 11, 2007 at 12:02 AM, dwot (37.11) wrote:

I guess I wasn't thinking about margin as per book value on the balance sheet, but more that the earnings per share are being squeezed.

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