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bransm
17-11-2006, 09:54 AM
Hi,...
Reading the Zulu Principle by Jim Slater,I've come across his use of PEG to measure the value of shares,though I'm not quite sure how he works it out.So if anyone has a copy of his book or know's about this please reply,...(on page 31)he says "By dividing the growth rate INTO the P/E ratio a price earning growth factor (PEG) is established,the aim being to find shares which have a PEG of well under one."

Thats ok,..for example if a company grows at 15% and P/E is 25,...15 into 25 is 0.6,which is good.
He then goes on to give a few examples of his own quote
"Another share might be on a mulitple of 30 with a growth rate of
only 20% per annum.The PEG would then be obviously significantly over one at 1.5,and the share would be obviously expensive"

So thats dividing the P/E in to the growth rate 30P/E into 20% = 1.5,which is the oppsite to what he said at the top of the page?
Or am I just to confused and missing something obvious?

Thank you in advance for your time and help on this...

Bryan

wns
17-11-2006, 10:35 AM
Hi bransm,

The PEG ratio = PE ratio / growth rate of earnings.

PE ratio = share price / EPS.

So the PEG ratio = (share price / EPS) / rate of earnings growth.

In the first example it looks like he’s made a mistake. The PE = 25 and the rate of earnings growth = 15, so the PEG = 1.66, not 0.6.
I haven’t seen the book, so I’m only going on what you’ve written.

In the second example, the PE = 30 and the rate of earnings growth = 20, so the PEG = 30 / 20 = 1.5.

You are ideally looking for a PEG less than one.

When I first started out, I paid quite a bit of attention to the PEG ratio and that’s why I bought SDG (Sunland) a few years ago because it had a PEG of 0.2 and a lot of other factors were attractive as well. I don’t tend to use the PEG itself too much though now, other than a cursory glance.

BTW I think the guys at www.fool.com might have came up with the idea of the PEG. From memory that’s what they claim anyway. You can read more about the PEG ratio on their site.

I hope this helps and clears it up for you.

bransm
17-11-2006, 01:13 PM
Hi Wns,thanks for that.

The first example was mine based on what I thought he was saying in to quote "By dividing the growth rate INTO the P/E ratio a price earning growth factor (PEG) is established,the aim being to find shares which have a PEG of well under one.".

Which I took as you put the growth rate first and then divide on the PE,...though it looks as if its the other way around,...

I'll have a look at the web site,...Thanks again for your help:)

Deev8
18-11-2006, 04:30 PM
quote:Originally posted by bransm

Or am I just to confused and missing something obvious?

I think that you were just confused by the terminology that Slater uses. He uses the terminology that is much more common in the US than here.

Given the formula x/y Slater says get the answer by dividing y into x, whereas we would more likely say get the answer diving x by y.

The saying "Two nations divided by a common language" seems particularly appropriate in this instance.

ratkin
19-11-2006, 05:12 AM
If you trade using ASB then the research page has all those ratios on the maiin view page

For example ABC learning (abs) is considered by many to be very expensive. However the growth expected is massive.

The PEG for this stock is only 0.72 showing it not expensive at all assuming the forecast growth occurs

Deev8
19-11-2006, 11:43 AM
quote:Originally posted by ratkin

The PEG for this stock is only 0.72 showing it not expensive at all assuming the forecast growth occurs

Of course it is a big assumption that the growth forecast for any company will actually occur.

ratkin
19-11-2006, 01:34 PM
It based on a consensus of growth prospects by analysts, they not always right either of course.

kittydashwood
19-11-2006, 03:55 PM
Low PEG stocks for a stateside portfolio

CAUTION.
PEG can indicate value but it can also indicate slowing earnings for the future and remember satan eats investors who don't do their own research for breakfast.



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ratkin
20-11-2006, 03:56 AM
I have looked on the net for slaters requirements and have applied them to ABC learning which is recognised as one of the best growth prospects in oz Lets see how it matches up to Slaters requirements


[u]mandatory</u>

* A PEG with a relatively low cut-off such as 0.75;

0.72 so good peg

* A prospective price to earnings (P/E) ratio of not more than 20. The preferred range for a P/E is 10-20 with forecast growth rates of 15-30%;

19.9 pe 34.0% growth

* Cash flow per share in excess of earnings per share (EPS), both for the last reported year and for the five-year average;

4.9 9.4 13.9 16.2 17.8 27.7 earnings per share v good

7.0 6.6 13.0 15.1 24.7 30.4 cash flow per share v good

* Positive cash or gearing below 50%;

13% very good

* High relative strength for the previous twelve months;

YES*

A competitive advantage, which will be usually evidenced by a high return on capital employed (ROCE) and good operating margins

Have a competitive advantage in a fragmented industry. So dominant are they that many are complaining they a monopoly in australia

The jury still out on (ROCE) 18 9 11 4 5 %

48.9 49.1 43.1 29.3 25.5 operating margins good but declining with size

* No selling of shares by a cluster of directors.

No selling

[u]Highly desirable</u>

* Accelerating EPS, especially if it is a result of activities being cloned;

YES

* A cluster of directors buying shares;

DONT KNOW

* A small market capitalisation in the £30m-250m range,

2926M so bigger thatn slater likes

* A dividend yield.

YES

[u]Bonus</u>

* A low price to sales ratio (PSR);

3.62 FAIRLY HIGH

* Something new;

In a way yes

* A low price to research ratio (PRR),

I Imagine so but no figures

* A reasonable asset position.

current ratio of asset to debt =1.81 reasonable

To sum up it looks like ABC Learning centres meets all the requirements of an investment, return of equity has dropped from a very high level as size has increased but picked up slightly last year.
The company dosent meet the highly desirable requirement on size as is too big.

Very strong earnings and cashflow growth with big competitive advantage. Gets a thumbs up

Forecasts for next few years are as follows

.......CURRENT....2007.....2008

P/E....26.7.......19.9......15.1

EPS.....27.7......37.1......48.9

YIELD...2.00......2.6.......3.3