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Hey Armin,
This discussion ties into an earlier thread on PE levels, and how to predict future levels. I have always done studies where I made my Estimated low Price below the severe yearly low price. I have also adjusted my low PE as part of the product.
If you look at FDS, the recent market severe low Price is $34.94. 85% of that price is $29.76. With earnings of $2.48 for the TTM, the low PE is 12. (The all time low PE for the stock is 14.1) By using a low PE of 12, I am acknowledging that there is still some downside risk to the stock.
If you agree that 12 is a reasonable low PE for the stock (because it gives an estimated low Price that is 85% below the recent severe low Price), what would you use for the average PE? Do you feel that using the average PEG value the stock has traded at in the past worthwhile? That would relate the PE of the stock to it’s earnings growth, which seems somewhat more objective.
For the past 5 and 8 years, the PEG for FDS has averaged 1.3.
Year
01
02
03
04
05
06
07
08
EPS Gr
28%
20%
25%
20%
21%
13%
36%
17%
PE
36
27
23
25
24
26
27
24
PEG
1.5
1.35
.92
1.25
1.14
2.0
.75
1.4
If you agree that 1.3 seems like a reliable PEG for the stock, does it make sense to predict future PE based on that? From my SSG, I have predicted annual EPS growth of 12.3%. With an average PEG of 1.3, my future average PE will be 16. (PE/G=PEG; PE/12.3=1.3; PE=12.3 X 1.3=16) If you feel that earnings growth will be greater, the PE will rise also. (That makes sense-stocks tend to sell at a higher PE if earnings growth is high.)
I have assigned a low PE of 12 to get the Estimated low Pr that is 85% of the recent severe low. I have assigned an average PE based on the average PEG times my predicted future earnings growth from the SSG. In order for my average PE to equal 16, I will need to assign the high PE a value of 20.
I realize that are many other factors that influence a stock PE; Steve Phillips offered a very complete list in a discussion on PE values in 4-08. Establishing a low PE based on the recent severe low price, and an average PE based on average PEG levels seems more objective to me and helps avoid irrational choices. What do you think?
Pat Landers