Peter Lynch's PEG ratio



PEG(price/earnings to growth) is a modification of PE(price/earnings) made popular by Peter Lynch. It is basically a ratio, just like the popular PE, but with growth taken into account. PEG ratio is (PE ratio) divided by (annual EPS growth). For stocks in similar sectors, you can use PEG ratio to find value. It adds another component to your analysis and makes it more complete. Below is an example:


OCBC, DBS and UOB as of today have rolling PE ratios of 10.8x, 11.213x and 11.475x respectively. If you were to judge by PE alone, OCBC looks the most attractive and UOB looks the least with DBS in between. The results may look very different if you add earnings growth into the equation.

PEG ratio(PE/EPS CAGR 5years) of OCBC, DBS and UOB are 1.46x, nil(cannot be computed when EPS growth is neg) and 1.42x respectively. With growth taken into account, UOB becomes the most attractive, followed by OCBC then DBS.

PEG explicitly inserts a value on the growth in earnings of a company. It tells you whether high PE translate to overpricing or fast growth. I think it makes for a useful component in day to day analysis.
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Posted by Scg8866t

7 comments :

  1. Anonymous5 November 2014 at 08:58

    The average CAGR 5yrs, may not be the growth next few years.
    Why do you guess the growth when it so uncertain?

    ReplyDelete
    Replies
    1. SCG8866T5 November 2014 at 10:29

      Yes i agree. You can use predicted future grow or historical growth, both is basing on some assumptions. I personally prefer to use trailing PEG as it is more factual, but then again fundamental analysis is based on the current numbers and so anything about the future we can only predict.

      Delete
  2. Anonymous6 November 2014 at 08:54

    Hi Hayden

    thank you for sharing. I am interested in this PEG. Would u be able to share your personal opinion of this tool? Example do u think this tool is a gd gauge of "undervalue" stocks? Does it make sense to divide PE by growth? Can it be revenue growth?

    ReplyDelete
    Replies
    1. SCG8866T6 November 2014 at 13:36

      Hi,
      Yes you can use it to compare undervalued low PE stocks. Do note though that PEG is not suitable for reits.

      Delete
  3. Jes6 November 2014 at 14:37

    Hi Hayden,

    I think it's quite useful as PE can be higher than the industry level yet PEG can be undervalued. It brings some quantitative perspective to it but of course, we need to look at other factors too.

    ReplyDelete
    Replies
    1. SCG8866T6 November 2014 at 14:40

      Hi Jes,

      I agree. PEG is just one component we can use to find value. Thanks for reading :)

      Delete
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