Forum Archive Index - July 2001

["Bruce Harris" <bruce99@freemessage.com>]

Have no particular interest in Newmarket Property, but its a quiet Friday here. 
I share one view that media reporting of PEs and other data is notoriously 
slack- would be helpful if they at least added the period they were referring 
to; also as a rule whether they included abnormals or not. I note from the last 
annual statement- Sept 00- that Met Life indeed had guaranteed the dividend at 
15%. That guarantee ran out in September last year so have to assume the 
dividend may well drop from this year. Also the revenue was down 20% plus in 
the first six months of this year, and yet reportedly vacancies were close to 
nil. Therefore rents presumably have declined significantly, something that can 
be hard to reverse. Nevertheless the EPS was 3 cents for the six months, and no 
abnormals reported either way, so assume that is annualised (always a bit 
dangerous), would be 6 cents per annum- giving a 12% return annually on current 
50 cent price. That is probably a fair price and fair return for what still 
seems a risky proposition- most stocks are risky.

On whether high PEs are ever good or justifiable, they clearly are where there 
is a good prospect of profit growth over a sustained period. This can be in a 
high growth company; or in a company where profits have been depressed for the 
last period for whatever reason, but are likely to bounce back. In a look at 
the detail of NMP it is possibly at least partly in this category. Its last 
full year had an abnormal writedown of property valuations, which reduced its 
profit by two thirds; and so assuming that does not happen this year could 
triple profits- but still only back to the 12% return.
There is something of a benchmark for reasonable growth companies that their 
PEG- or price earnings relative to annual growth is ideally lower than 1. In 
other words a company with a PE of 20 should have annual profit growth of 20% 
for the foreseeable future. A PE of 50 would require annual growth of 50% and 
so on. Am not sure at what point the arithmetic falls over but is a useful 
benchmark for medium growth companies. For low growth companies it is too 
tough, as a company with say 5% annual growth is still attractive and would no 
doubt command a PE of higher than 5 (or 20% return)in most circumstances. In 
the bull tech run, many (overseas)companies with some profit ( remembering many 
did not have profit at all) had stupid PEGs of 10 or 20. Many still have very 
high PEGs and have run into a period of negative growth, so will be double hit, 
again in my view.
The New Zealand market seems on the whole to be more rational and so easier to 
follow, albeit it has also been hit with many earnings shocks at times- As an 
example I personally bought Air NZ at 2.00 with a PE of about 5 and thought the 
risk was very low. Have learnt that the airline business with very high fixed 
costs, and debt is very vulnerable to a drop in margins, so that at $1.09 Air 
NZ looks somewhat riskier than it did at $2.00. (Will hang in there though as 
the risk to the upside also looks very good). 
If there's a moral to the story it is that PEs are a very good starting point, 
but need some homework and judgement as to what is behind them and what is 
likely to happen in that company/ industry. Also the argument supports 
diversification into a number of stocks unless your appetite for risk is high. 
If this is useful, good luck, Bruce

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