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Thread: PE ratio

  1. #31
    ? steve fleming's Avatar
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    Quote Originally Posted by _Michael View Post
    Hi Steve

    Yep - my username was FG but when the new site came online i could not get in under my old sign in and no longer had my original woosh email address so had to create a new one...!

    cool....thought so.

    Good to see you back...well done on ISS!
    Share prices follow earnings....buy EPS growth!!



  2. #32
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    Quote Originally Posted by SectorSurfa View Post
    If you use a 'seven year average' figure, combining the last five years with a foreacst for the next two, that would alleviate my principal concern. I think we are getting into the realm of a modified PEG here though, which nevertheless might be a good thing.

    Yes, modified PEG, true, I was suggesting that as I am familiar with your "buffetology" from other sites and the value screen, so perhaps I was thinking of using the 'normal' PEG of 1 years forward earning projections with the 5 years of eps growth (1 down year allowed) to find a more stable trend. I am now thinking that is a very useful extension of that particular screen
    You are referring to the focus investment group on the other channel?

    What I use there is a 'growth model' where the rate of growth is determined by the 'year start' total of retained earnings each year, multiplied by a multi-year average 'ROE', derived for each particular share I am looking at. This is really just a roundabout way of doing what you are doing with your multi-year growth PEG model SectorSurfa. But while I am:

    1/ fiddling about taking retained earnings from one year,
    2/ adding those to the 'start of year' existing shareholders equity to get
    3/ the start of next year shareholders equity, THEN
    4/ multiplying the total by my long term average calculated ROE to get my annual growth,

    you have short circuited the whole process.

    You have taken the earnings from one year, divided it by the earnings from the previous year and worked out your 'growth factor' straight out. That is a much quicker and tidier way to do what I did. Well done!

    There are one or two disadvantages to doing things your way I can think of with 'multiyear PEG' though Sectorsurfa.

    While it may be true that over the long run, the earnings growth of a company approximates the historical long term earnings growth average, that is *not* the same thing as saying that for one particular year you choose, the earnings growth then will be near average. IOW by using your method over successive years, the sum of the observed growth will converge to the average growth But that doesn't stop the growth rate *in one particular year* oscillating wildly from the average.

    The other problem I see is when you want to model out into the future two or three years of rapid growth followed by some years slower growth or vica versa. With your method you are stuck with one 'average' growth rate.

    the basic principal is that if you invest in a company that has some kind of very strong franchise concept, then even if the company has a 'bad year' there is a very high chance that the underlying strength of the business will not be affected. Thus while
    1/ bad years happen and forecasting what might happen 'in any one year' might not be easy, you can be more sure that that same business will still be around and operating strongly in say 8 to 12 years time.

    addressing that particular line - would that only represent the statistical difference between franchise businesses and other businesses startup/ ongoing success, both of which have failure rates. I guess I was getting at the basic principal of still estimating/guessing, when your LT timeframes are that far out (ie 8-10 yrs), just as you have mentioned before about high PE stocks being somewhat dangerous if they are based on high forward projections and expectations. (see Frucor from early days and franchises like Georgie Pie and Burger King in NZ) SS
    Possibly I was a little tunnel visioned when I mentioned the term 'franchise' in my explanation.

    I was trying to capture Buffett's idea of looking for a business that is surrounded by a 'moat of competance' that is hard to copy - then setting yourself up as the toll bridge operator. A well honed franchise concept is one kind of 'toll bridge' - look how hard it has been for other fast food chicken sellers to get anywhere near KFC. But equally 'toll bridge like' are the natural toll bridges of the 21st century - international airports - or the collection of big box building sites that are 'The Warehouse' taking over prime real estate and forcing new competitors into less desirable locations.

    Going up against toll bridge operations like this is not a statistical 'battle it out in the warzone' market fight. A few crack commandoes will not make the difference between winning and losing. The 'toll bridge' businesses have a near unbeatable strategic advantage over any business concept you might wheel out against them. In the battlefield analogy, the new competitors crack commandoes are forced through a narrow neck of land where evening moderately competant defending riflemen can lie in wait to pick off the invading heroes. Short term you might have some wins, but long term the game is stacked against you.

    The reason I can make business projections eight to ten yours out is not because that toll bridge business has any 'statistical advantage' (although that might be true as well). It is because the rules of the business game have been so carefully carved in my favour, that anyone who takes the toll bridge operator on will not have a fair fight. In one sentence: "The game is stacked."

    SNOOPY
    Last edited by Snoopy; 11-12-2007 at 10:46 PM.
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  3. #33
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    Quote Originally Posted by steve fleming View Post
    Snoopy, maybe you are getting a bit confused here.
    That is very possible 'steve f'

    A takeover valuation is VERY different from an Enterprise value.

    A takeover valuation incorporates such things as premium for control and the impact of cost savings and synergies etc - all of which are definitely not reflected in the Enterprise value.

    Very simply, SURPLUS ASSETS + ENTERPRISE VALUE = DEBT + EQUITY VALUE.

    You can calculate the equity value from an Enterprise value and vice versa.
    OK so if :

    Enterprise value = market capitalisation + interest bearing debt

    AND if we assume that all debt in the real world is interest bearing

    THEN

    Surplus Assets + Market Capitalisation = Equity Value (?)

    That doesn't seem right does it? I am struggling a bit to find out what you mean by 'Surplus assets'

    In practice you will find the EV/EBIT & EV/EBITDA approach used in assessing value far more often than the P/E approach, for the reasons Stephen outlined.
    That is certainly true as far as Sky City is concerned. Every time the share price dipped below $4.50, former CEO Evan Davies came out saying how cheap the company was as a takeover target. The share price went up, the takeover speculation died away, the share price went down then the takeover speculation headline was rolled out again and the whole process restarts.....

    Now Evan has gone, the board is continuing on with this same process. SKC must be the most 'valued' company of the last four years. But just because it is valued so often, does that really matter if all of these 'valuations' come to nothing? IMO the typical P/E seems more important, as when the speculation dies down, that determines the price band that the share price will revert to.

    SNOOPY
    Last edited by Snoopy; 12-12-2007 at 09:37 AM.
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  4. #34
    ? steve fleming's Avatar
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    Quote Originally Posted by Snoopy View Post
    That is very possible 'steve f'



    OK so if :

    Enterprise value = market capitalisation + interest bearing debt

    AND if we assume that all debt in the real world is interest bearing

    THEN

    Surplus Assets + Market Capitalisation = Equity Value (?)

    That doesn't seem right does it? I am struggling a bit to find out what you mean by 'Surplus assets'


    SNOOPY
    SURPLUS ASSETS = Cash, investments, property etc not integral to the operations of the business

    "
    OK so if :

    Enterprise value = market capitalisation + interest bearing debt"

    NO. Thats not correct.

    By definition Enterprise Value = market cap + IBD - Surplus assets

    Refer to GDM - it has a negative enterprise value due to the value of its suplus assets (investments/cash) exceeeding its market cap.
    Share prices follow earnings....buy EPS growth!!



  5. #35
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    Quote Originally Posted by Snoopy View Post
    That is certainly true as far as Sky City is concerned. Every time the share price dipped below $4.50, former CEO Evan Davies came out saying how cheap the company was as a takeover target. The share price went up, the takeover speculation died away, the share price went down then the takeover speculation headline was rolled out again and the whole process restarts.....

    Now Evan has gone, the board is continuing on with this same process. SKC must be the most 'valued' company of the last four years. But just because it is valued so often, does that really matter if all of these 'valuations' come to nothing? IMO the typical P/E seems more important, as when the speculation dies down, that determines the price band that the share price will revert to.

    SNOOPY
    Interesting you mentioned SKC inn this thread because it does give a good example of comparing different ratios highlighting the impact of debt on those ratios

    Could say SKC and Crown are in the same business

    Current ratios (historical financials) -

    PE .... SKC 24 / Crown 26
    EV/EBITDA ..... SKC 11 / Crown 16
    EV/EBIT ..... SKC 14 / Crown 20

    Big difference between these 2 is that SKC is laden with debt while Crown is debt free (actually has cash on hand)

    Whereas the PE ratios are similar (bloody high eh) there is a significant difference in the other 2 ratios

    Not making any judgement as to whether either or both are overvalued or undervalued but that EV/EBITDA of 11 that SKC has seems to be one of the stumbling blocks in takeover activity and for SKC I feel that is the meaningful ratio to use

    Good thread though

  6. #36
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    I mentioned earlier that I was working on a screening tool based on "The Little Book That Beats The Market". To recap, that book recommends a two-stage screen:

    Pick companies, say the top 20% of the market, with a high ratio of EBIT to Net Working Capital + PPE. This is meant to be an indicator of how effectively the company generates income from its assets.

    Then rank them in descending order of EBIT/EV. This is meant to give a measure of price.

    The book suggests building an annual portfolio out of your choice of the results, selling the losers just before tax year end and the winners just after. It also suggests using the tool as a first cut list of candidates for value oriented stock-picking (which is what I intend to do with it).

    Here is that ranking as applied to the ASX All Ords. Note that these figures are based on screen-scraping various websites, so there are bound to be anomalies. Perhaps I should do another run that excludes property trusts and investment companies...

    code return yield
    PMV 108% 80%
    AAH 67% 48%
    TSO 473% 35%
    MOF 351% 24%
    MDT 722% 24%
    MIG 77% 23%
    IOF 509% 22%
    PEM 71% 21%
    MCW 124% 21%
    CPK 457% 19%
    SMY 61% 16%
    LEP 378% 15%
    DRT 496% 15%
    CND 63% 15%
    IGO 197% 14%
    CNP 93% 14%
    AIX 367% 13%
    MAFCA 98% 13%
    AEZ 1508% 13%
    TGP 109% 13%
    PSA 90% 13%
    RAT 375% 13%
    MIX 255% 12%
    IFM 79% 11%
    APZ 138% 11%
    IIF 212% 11%
    BJT 228% 11%
    DVN 62% 11%
    MIR 809% 11%
    TRG 102% 11%
    GOW 66% 10%
    MPF 278% 10%
    JST 100% 10%
    CMW 286% 10%
    CWP 189% 10%
    RRT 1541% 9%
    EZL 95% 9%
    DJW 2614% 9%
    VGH 67% 9%
    CXP 74% 9%
    SGN 139% 9%
    MGR 64% 8%
    ABP 73% 8%
    LNN 66% 8%
    TPX 63% 8%
    AEU 240% 8%
    REF 196% 8%
    NOD 62% 7%
    LLC 70% 7%
    AEO 162% 7%
    RJT 96% 7%
    MND 60% 7%
    NCK 66% 7%
    MMS 148% 7%
    GPT 68% 7%
    WHF 140% 7%
    CPU 106% 7%
    PPT 92% 7%
    HHL 110% 7%
    ALL 92% 6%
    GJT 69% 6%
    PFG 243% 6%
    PGA 90% 6%
    PPC 75% 6%
    AUW 131% 6%
    PMC 63% 6%
    RKN 70% 6%
    CAB 69% 5%
    SSM 113% 5%
    DWS 88% 5%
    SKI 566% 5%
    WTP 64% 5%
    AUI 974% 5%
    SHL 4836% 5%
    DUI 741% 5%
    TGG 107% 5%
    AFI 262% 5%
    COU 122% 5%
    TCQ 74% 5%
    VPG 270% 5%
    HFA 211% 5%
    EQT 82% 4%
    CHO 101% 4%
    WES 80% 4%
    NXS 80% 4%
    IPN 84% 4%
    MLT 85% 4%
    ASX 86% 4%
    CHC 168% 4%
    COH 115% 4%
    SEK 246% 3%
    EBB 95% 3%
    BVA 122% 3%
    IDL 110% 3%
    WTF 115% 3%
    WOR 71% 3%
    NCM 188% 2%
    REA 15442% 2%
    AAX 59% 1%

  7. #37
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    Nice work Stephen - but going to take a few hours to work through that list - perhaps we should see if we can find 5 volunteers to look at 20 stocks each and come back with comments as to whether the tool seemed helpful in finding good stocks? Or maybe just track progress for a year using the top 20-40 (the most I think any one person is likely to feasibly buy).
    Last edited by Lizard; 05-01-2008 at 08:35 AM.

  8. #38
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    Stephen:
    I am sure your method will find some good investments, as well removing
    LPT's, LIC's and similar would make the size much more manageable.

    I wrote some years ago about the CGVI filter I use without eliciting much interest, interestingly your list and mine both have a number of the same companies, with roughly the same order. I wonder why WOW did not make your list?

    Try a google search on CGVI, there is a lot of information about this filtering formula to be found, including a small web site which has a database covering the entire ASX with fundamental data and calculated values including CVGI. It is useful though only updated erratically.

    I have found this filter of great value as an initial filter, and over the years it has winkled out a number of small cap companies that have grown rapidly, or become takeover targets, and has made a considerable return for me.

    If you or others are interested, the formula is not complex, I use it in a spreadsheet and would pass it on.

  9. #39
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    OldRider, actually I followed your CGVI posts with considerable interest, and I'm not surprised that it yields good results.

    My take on CGVI is that you're looking at a price measure in the numerator and a return on assets in the denominator.

    All the FA screening tools that are more sophisticated than buying for less than NTA seem to share these elements: how good is the company (return) and how cheaply can we buy it (price).

    The reason WOW didn't make the cut is that I arbitrarily restricted the first screening pass to the the top 100 or so on return (defined as EBIT/(NWC + PP&E) ). Even if it did, it's still very expensive. Maybe if I took all the LPTs and LICs out it would make the cut again. I will have a crack later in the weekend.

  10. #40
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    Have made my way down that list as far as ezl They nearly all property or investment trusts.

    Only stock of note found so far is ckp which is interesting as we have been discussing that lately on the aussie forum . I hold colorpak , having only recently bought and providing they can keep the work coming in they should be a good investment

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