8/4/2019 PEG RATIO (1)

1/12

By

Rituraj laad(40)Yogesh Kumar(16)Sushil Kumar(50)Sandhya S(24)Sunny Jain(63)

8/4/2019 PEG RATIO (1)

2/12

The P/E shows how much investors are willingto pay per rupee of earnings.

If we assume that all firms within a sector havesimilar growth rates and risk, a strategy ofpicking the lowest PE ratio stock in each sectorwill yield undervalued stocks.

8/4/2019 PEG RATIO (1)

3/12

In its simple form, there is no basis forbelieving that a firm is undervalued justbecause it has a PE ratio less than expected

growth.

As interest rate decrease (increase), fewer(more) stocks will emerge as undervaluedusing this approach.

8/4/2019 PEG RATIO (1)

4/12

The PEG ratio is the ratio of P.E to the expectedgrowth in earnings per share.

PEG = PE / Expected Growth Rate in Earnings.

PEG ratios will be lower for high growthcompanies.

PEG ratios will be lower for high risk

companies.

8/4/2019 PEG RATIO (1)

5/12

High risk companies will trade at much lower PEGratios than low risk companies with the sameexpected growth rate.

Companies that can attain growth more efficientlyby investing less in better return projects will havehigher PEG ratios than companies that grow at thesame rate less efficiently.

Companies with very low or very high growthrates will tend to have higher PEG ratios thanfirms with average growth rates. This bias is worsefor low growth stocks.

8/4/2019 PEG RATIO (1)

6/12

PARTICULARS abc xyz

EPS 2.05 3.15

PRICE P/SH 31.48 26

GROWTH 15% 9%

INDUSRY P.E 12.4

INDUSTRY GROWH 11

INDUSTRY PEG RATIO 1.13

IMPLIED SHAREPRICE 34.66 31.96

VARIATION IN PRICE -3.18 -5.96

8/4/2019 PEG RATIO (1)

7/12

(as on 1/4/2011)SUN TV

PE (X) = 19.5

Estimated earnings growth = 14.8% over next five

years (Consensus analyst) PEG ratio = 19.5 / 14.8 = 1.32

Eros International PE (X) = 12.4

Estimated earnings growth = 28.1% over next fiveyears (Consensus analyst)

PEG ratio = 12.4 / 28.1 =0.44

8/4/2019 PEG RATIO (1)

8/12

More than 1.0 is poor;

Less than 1.0 is good;

Less than 0.5 is excellent

Hence as per our last calculation ErosInternational has PEG of 0.44 which is

excellent.

8/4/2019 PEG RATIO (1)

9/12

The consensus analyst estimate of EPS growthmay not be accurate

The PEG ratio is best suited to the stocks with

little or no dividend yield. Because the PEG ratio doesn't incorporate

income received by the investor in itspresentation of valuation, the metric may giveunfairly inaccurate results for a stock that paysa high dividend.

8/4/2019 PEG RATIO (1)

10/12

For example if Sun TV is a high dividendpaying stock has dividend yield of 5%

Hence new PEG for this stock will be PE/

(Growth estimate + Dividend yield) = 19.5 /(14.8+ 5) = 0.9

Thus if the stock is paying dividend PEG ratioimproves to good from poor.

8/4/2019 PEG RATIO (1)

11/12

Given that the PEG ratio is still determined bythe expected growth rates, risk and cash flowpatterns, it is necessary that we control for

differences in these variables.

8/4/2019 PEG RATIO (1)

12/12