Earnings Drive Stock Prices? International Container Terminal and Ayala Land

I picked the following charts because of the availability of charts that depict on their profit growth trends

The following is the 6 year chart of International Container Terminal [PSE: ICT]

During the three major cycles since 2006, ICT skyrocketed 410%, crashed by 78% (from peak to trough) and in the current uptrend soared by a whopping 474% from the bottom in the 1^st Quarter 2009.

Here is ICT’s profitability chart from 4-traders.com

While the growth rate for ICT’s profits did fall in conjunction with the decline in ICT share prices in 2007-2009, one should realize that profits were still strongly POSITIVE. In short, there has been no justification for the 70% decline under the premises of earnings-as-driver of stock prices.

Yet there are two notable discrepancies during the last 2 bull cycles of ICT. Profit growth had been modest in 2005-2007. Today, the same growth rate has seen a decline even as share prices continues to etch new record highs. In short, share prices have little correlation with actual earnings performance.

The next chart is Ayala Land Inc, [PSE: ALI] contemporary market leader of the Phisix since the start of the year

We see the same pattern in ALI. ALI surged 130% in the 2006 to the peak of 2007, plummeted 74% during the last bear market and is at an eye-popping 327% from the troughs of 2009.

Same story with ICT. Growth rate of profits does not justify ALI’s extreme price volatility in both directions during the last three cycles. The company exhibits steady, incremental and low volatility in earnings growth which is typical of blue chips.

Here is what I see.

-There has been a loose correlation between earnings and price values

-Considerable price volatilities do not match with the pace of earnings growth.

-Philippine stocks sink and swim in tides as discussed here and here

Looking at earnings as the main driver of prices seems like watching the Heisenberg uncertainty principle in quantum mechanics at work—“it is impossible to pin down the position and momentum of a subatomic particle beyond a certain degree of accuracy; the very attempt to determine the position of an electron (by firing light at it) will itself change its momentum” (Robert Murphy, Human Action Study Guide).

In short, using earnings as key parameter for investing in the Philippine market seems like a nebulous target, you’d never know if or when this is going to work for you, except that this serves as an excuse to piggyback on the current bullrun.

Above is the PE ratio of the Phisix according to the IMF.

Considering the huge jump in prices from the start of the year, we should be around at near the peak of 2007. So anyone who believes in this stuff ought to be shorting or selling the market. I won’t.

As a caveat, like individuals, national stock markets bear their own respective idiosyncrasies so they shouldn't be seen or valued in a one-size-fits-all dimension.

Also one should realize that as central banks around the world, including the Philippines, intervene in the financial monetary system, there will be material impacts to profitability, operating costs and leverages and other corporate matters. In short, business decisions or economic calculations will also be distorted.

Nevertheless, earnings for me, like charts, function as a secondary and or a confirmatory signal rather than the prime mover.