Forum Archive Index - May 2000

["David Reid" <aspex@ix.net.nz>]

 

Observation only.

It is interesting to note that it is difficult to find companies that qualify for a PEG on the NZ market.

The following is a definition from REFS as generated by Hemmington Scott. PEGs are only awarded for compnies that can claim growth in four of the last five years.

In my May 2000 data in the UK market over 50 companies had a PEG of less than 0.6 and a further 50+ were under 0.8.

A total of in excess of 300 companies qualified for a PEG but of course some of these are already so highly rated in the market that the PEG is too high for comfort.

 

Price-earnings growth factor (PEG)
The PEG factor measures the relative cost of earnings growth at the current share price.  It is therefore only relevant to those shares which can truly be considered to belong to 'growth' companies.

 

The PEG factor is simply the price-earnings ratio ('norm PER') divided by the earnings growth rate ('norm EPS growth'), and is calculated as follows:

 

Year 5: (based on latest reported results)

 

     HISTORIC NORMALISED PER
   PEG = ----------------------------------
     HISTORIC NORM EPS GROWTH

 

Year 6: (based on forecast results for current year)

 

     FORECAST NORMALISED PER
   PEG = ----------------------------------
  FORECAST NORM EPS GROWTH

 

Year 7: (based on forecast results for next year)

 

     FORECAST NORMALISED PER
   PEG = -----------------------------------
     FORECAST NORM EPS GROWTH

 

The calculation of each element is explained under separate headings Norm (normalised) EPS growth and Normalised PER.

 

The REFS definition of 'growth' companies
A PEG is only calculated where a company meets all of the following criteria:

 

there must be broker forecasts available

 

 there must be continuous growth in normalised EPS for the last four consecutive
 periods, including any forecasts

 

 companies in Building & Construction, Building Materials & Merchants and
 Vehicle Distributors, which are all highly cyclical sectors, may not have incurred
 a loss or suffered an EPS reversal in any of the last five years of reported results

 each of the last five normalised results must be positive, i.e. none may show a loss

 

 where four periods of growth follow a previous setback, it must have achieved, or
 be expected to achieve, its highest normalised EPS (whether historic or forecast)
 in the latest period out of the last six.

 

For recently listed shares, the consecutive periods may include figures based on information taken from listing prospectuses.

 

 

Provisional PEG
A provisional PEG is calculated when the stringent criteria for awarding a PEG, as outlined above, are forecast to be met by the next preliminary results announcement.  This presumption rests entirely upon the next results matching brokers' current expectations.  Thus the consensus forecast for EPS growth must be met, or exceeded, by the actual results next due, otherwise a PEG will not be awarded at that time.