PE (Price-Earnings) Ratios

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Arleen Moody
6 years ago
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1 PE (Price-Earnings) Ratios Disclaimer Why are there so many different ones? The information in this presentation is for educational purposes only and is not intended to be a recommendation to purchase or sell any of the stocks, mutual funds, or other securities that may be referenced. Gary Ball Director, NAIC This webinar is being recorded What is a stock s PE ratio? A measurement of how much investors are willing to pay for each dollar of company profits. Useful for determining whether a stock is inexpensive or expensive. Similar to price-per-pound in the grocery story How is PE ratio calculated? P/E ratio = Stock price Earnings per share but.. What stock price? What earnings per share? 3 4 1

Projected PE ratio Current PE ratio Annual High PE Ratio Highest PE ratio of the year Equals highest stock price for the year divided by the year-end

2 How is PE ratio calculated? Depends on what PE you desire Annual high PE ratio Annual low PE ratio Average high PE ratio Average low PE ratio Average PE ratio Trailing PE ratio Projected PE ratio Current PE ratio Annual High PE Ratio Highest PE ratio of the year Equals highest stock price for the year divided by the year-end earnings per share Found in the 5 th column of section 3 on the SSG 5 6 Annual High PE Ratios on Online SSG tool Annual Low PE Ratio Lowest PE ratio of the year Equals lowest stock price for the year divided by the year-end earnings per share Found in the 6 th column of section 3 on the SSG 7 8 2

Average High PE Ratio Average of the previous 5-year s annual high PE ratios Found at the bottom of the 5 th column in section 3 of the SSG Tells investors what this stock traded for on average when

3 Average High PE Ratio Average of the previous 5-year s annual high PE ratios Found at the bottom of the 5 th column in section 3 of the SSG Tells investors what this stock traded for on average when the stock was up or the market was up or is was fully priced or expensive Average Low PE Ratio Average of the previous 5-year s annual low PE ratios Found at the bottom of the 6 th column in section 3 of the SSG Tells investors what this stock traded for on average when the stock was down or the market was down or it was cheap 9 10 Average PE Ratios Average PE Ratio Average of the Average High PE ratio and the Average Low PE ratio for the previous 5 years Can be thought of as the PE ratio paid by investors when investors did not overpay (Avg High PE) or underpay (Avg Low PE) Most important PE ratio in section 3 on the SSG

Significance of Average PE Ratio You should never pay more that the Average

Overpaying for stocks is biggest mistake for most BetterInvesting investors!

Is the company growth rate slowing? Is the stock market acting normally?

4 Significance of Average PE Ratio You should never pay more that the Average PE ratio for a stock! Overpaying for stocks is biggest mistake for most BetterInvesting investors! Is the historical average PE ratio a relevant ratio for the future? Is the company growth rate slowing? Is the stock market acting normally? Are there earnings outliers? 13 Is the company growth rate slowing? 14 Another example of slowing growth Is the stock market acting normally?

mirror Relative value (on SSG) = Trailing PE Average PE Investors don t buy stocks based on last year s earnings!

5 Are there any outliers? Let s pause for questions! Trailing PE ratio Equals current price divided by last (trailing) 4-quarters earnings PE ratio of a stock when looking in the rear-view mirror Relative value (on SSG) = Trailing PE Average PE Investors don t buy stocks based on last year s earnings! Projected PE Ratio Equals current price divided by projected earnings in the future Value line uses two quarters into the future and two historical quarters Analysts use estimated earnings at the end of the fiscal year For me, I look 4-quarters ahead

6 Calculating Projected EPS Assume trailing earnings are $1.08 Assume growth rate is 12% Earnings 4 quarters in the future would be 1.12 times $1.08 or $1.21 This is how Toolkit calculates it by default Another way to Calculate Projected EPS Assume we are in June 2012 Analysts estimates for earnings Dec 2012 $1.25 Dec 2013 $1.75 We want to know the earnings in June 2013, which is half way between December 2012 and December 2013 June 2013 $ Projected Relative Value Projected Relative Value = Projected PE Average PE Remember, investors buy stocks based on future earnings, not what happened last year Current PE Ratio Equals current price divided by trailing earnings for Toolkit and Online SSG On Value Line, it equals the current price divided by earnings looking two quarters into the future. You always need to know what earnings are being used in the calculation

Interest rates (inflation) Higher interest rates = lower PE Company growth rates Higher growth = higher PE 25 26 Inflation Versus PE

7 What things affect PE ratios? Example of investor enthusiasm Quality of company Higher quality = higher PE Industry Investor enthusiasm More enthusiasm = higher PE Interest rates (inflation) Higher interest rates = lower PE Company growth rates Higher growth = higher PE Inflation Versus PE Ratios Growth Rates vs. PE Ratios Measured by PEG ratio = PE ratio Growth rate Historical valuations PEG < 1 usually represents a good buy PEG > 1.5 has usually been expensive Source: Standard & Poor s, Bureau of Labor Statistics

Final Questions? Gary Ball gvball@comcast.

8 Final Questions? Gary Ball Thanks & Goodnight PEG Ratio for dividend-paying stocks A problem with using the default projected PE Ratio Measured by dividend-adjusted PEG ratio = PE ratio (Growth rate + Dividend yield) This gives a company credit for paying a dividend

4 Weighted PE averages Weighted average = (5 x 17.4 + 4 x 27.1 + 3 x 31.3 + 2 x 42.3 + 1 x 43.

9 What is the projected PE? By using the Toolkit default Next year s earnings are 1.14 x $8.88 or $10.12 Projected PE is $ $10.12 = 11.0 Using analysts estimates Projected PE is $ $6.78 = 16.4 Weighted PE averages Weighted average = (5 x x x x x 43.8) / 15 In one case the PE is very low and might be a buy, in the other it is 50% higher and might be overpriced! 33 = / 15 = Are there any outliers here? 35 9

DETERMINING A FAIR PRICE

DETERMINING A FAIR PRICE Disclaimer: All stock references are meant to be used for educational purposes. No recommendation for purchase or sale is intended or implied. Ken Kavula President Mid-Michigan