Forum Archive Index - October 2000

["Brian Brakenridge" <brianbrak@xtra.co.nz>]

Hi David:

 

Interesting comments re. PEs. I'm also interested to see that you rate the PEG.

 

My understanding of the PEG ( and I am keen to be corrected) is that it is a ratio arrived at by dividing the present PE by the historical annual growth rate. It uses the rule of thumb that if a company is fairly valued  the PE should equal the Growth Rate.

 

So if Cranium Corporation (CRAC:NZSE) has a PE today of 10 and for the past 5 years it's EPS have grown at 10% then PEG = 10/10 = 1 indicating it is fairly valued. If for some reason the market unfairly sells down the stock but the fundamentals are still sound then the PEG would drop. So if Mr. Market drops the PE to 7 the PEG would be 7/10 = .7 indicating a possible good buy.

 

 Again it is a rule of thumb and most important it should be used in conjunction with and in the context of other measures we have been discussing on the Buffett thread.

 

If we apply it to two companies we are considering adding to our "?? Portfolio" (we need a name) say BCH and WHS we get two quite different PEGs.

 

BCH:  PE = 59, Growth Rate = 22% so PEG = 59 / 22 = 2.68 indicating it's price is getting up there.

 

WHS: PE = 24, GR = 29% so PEG = 24 / 29 = .83 indicating slightly undervalued.

 

I would be interested to know how others interpret the PEG and how much importance they place on it as an indicator.

 

Cheers, Brian