How
useful is the P/E ratio as a yardstick to the price worthiness of
different shares
In many cases it is a reasonable yardstick but in some it seems
useless because of abstract factors.
For example, looking at the NZSE Top 40. The mean P/E is approx
16
The lowest P/E belongs to AIRNZ (A) at 3.9
The 2nd highest is BCH at 50.8 (highest is INL at 55.4)
Why the great difference between these two Companies ? Why is AIRNZ
12 below the mean and BCH 35 above. Using the P/E yardstick AIRNZ
is greatly underpriced and BCH is greatly overpriced.
AIRNZ should be the best share to buy and BCH & INL the worst. In
other words the low P/E Coy should have the potential to rise and the
high P/E Coy the potential to fall.
To be logical, prices should be related to expectations of improved
earnings. How can this be related to AIRNZ and BCH ? Is the future
potential of AIRNZ so bad that their future earnings will fall to 25% of
their current earnings and is the future potential of BCH so good that
their earnings will be 200% above their current level. One would
hardly think so.
So what are the factors that make these highly different P/E ratios ? It
would seem that a major factor must be popularity. But the risk factor
for BCH is surely very high and the converse for AIRNZ..
Look forward to your comments
BG (Discl. Hold neither but have had AIRNZ a couple of times
to my regret)
See IRG research reports
