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* Is 12.5 times earnings too much to pay for Growth

You are using price to challenge price


Price is what you pay, Value is what you get

You may be promoting a bubble


Hot IPO Phenomenon
The internet bubble was a chain letter and
investment bankers were the postmen

You may be trading against screeners.

* Technical screens: identify positions based on trading indicators

* Price screens
* Small stock screens
* Neglected stocks screens
* Seasonal screens
* Momentum screens
* Insider trading screens

* Fundamental screens: identify positions based on fundamental


indicators of the firms operations relative to price

* Price/Earnings (P/E) ratios


* Market/Book Value (P/B) ratios
* Price/Cash Flow (P/C) ratios
* Price/Dividend (P/d) ratios
* Any combination of these methods is possible

1.Identify a multiple on which to screen


stocks.

2.Rank stocks on that multiple, from highest


to lowest.

3.Buy stocks with the lowest multiples and


(short) sell stocks with the highest
multiples.

You are using very little information.pitted


against someone who has done the homework
Ignore information at your own peril

You may be loading up on Risk


Prices are lower relative to earnings and book
value if THERE IS MORE RISK

The P/E ratio reflects the market forecast of


growth: a higher P/E means more expected
growth
But growth is risky and risk means a lower price
relative to earnings
HOW TO CHALLENGE RISKY GROWTH IN P/E
RATIOS?

* Growth is risky so risky growth should have


lower PEG ratios

Beware of ROE

Beware of ROA too

Conceptual problems:

* Circular reasoning: Price is ascertained from price (of the


comps)

* Violates the tenet: When calculating value to challenge


price, dont let price enter the calculation

* If the market is efficient for the comparable

companies....Why is it not for the target company ?

Implementation problems:

* Finding the comparables that match precisely


* Different accounting methods for comps and
target

* Different prices from different multiples


* What about negative denominators?
Applications:

* IPOs; firms that are not traded (to approximate


price, not value)

Unlevered Price/Sales Ratio =

Unlevered Price/ebit =

Market Value of Equity + Net Debt


ebit

Unlevered Price/ebitda =

Enterprise P B =

Market Value of Equity + Net Debt


Sales

Market Value of Equity + Net Debt


ebitda

Market Value of Equity + Net Debt


Book Value of Equity + Net Debt

Trailing P/E =

Rolling P/E =

Price per share


Sum of Eps for most recent four quarters

Forward P/E =

Price per share


Last annual Eps

Price per share


Forecast of next year' s Eps

Dividend - Adjusted P/E =

Price per share + Annual Dps


Eps

Rationale : Dividend affects prices but not earnings