A new statistic – The 1YPEG

A new statistic – The 1YPEG

Normally a PEG ratio is the PE ratio divided by the estimated average earnings growth rate for the next five years (lower is better, of course) . But that’s a total guess! No one knows what a company’s average earnings growth rate will be for five years.

I think a more useful ratio would be a One Year PEG looking backward. In other words, the one year trailing PE divided by the one year trailing earnings growth rate. It has the disadvantage or flaw that you are looking backward, but at least you are using a real number, NOT A GUESS. Who would have dreamed at the end of 2012 that ELLI would have an essentially zero earnings growth rate over the next two years? Or that SKX would have 1500% earnings growth in the next two years? I guarantee you, no one! A five year estimate is nonsense.

Here are some examples. (A growth rate the same as the PE gives a PEG of 1.0. A faster growth rate gives a lower PEG. A slower growth rate gives a higher PEG).

AMBA has a current PE of 37.8 divided by earnings growth last year of 80%, so its 1YPEG is 37.8/80 = .47
BOFI has a PE of 21.2 divided by an earnings growth of 39% so its 1YPEG is .54
EPAM has a PE of 30.5 divided by an earnings growth of 34% so its 1YPEG is .90
SWKS has a PE of 25.1 divided by an earnings growth of 64% so its 1YPEG is .39
FB has a PE of 47.8 divided by an earnings growth of 94% so its 1YPEG is .51
MIDD has a PE of 30.9 divided by an earnings growth of 24.5% so its 1YPEG is 1.26

SKX has a PE of 24.4 and earnings growth of 158% so a 1YPEG of .15
UA has a PE of 88.6 and earnings growth of 27% so a 1YPEG of 3.28 (huge).

This is important because you can see that for every dollar invested SKX gave 21 times as much growth of earnings as UA (3.28/0.15). (Or you can think of it as 6 times the earnings growth times 3.6 times smaller PE (dollars paid per earnings dollar) gives 21 times more growth per dollar invested).

Saul

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Saul,

This gives you a great way to compare companies based on their P/E and recent earnings growth. These are two very important metrics in deciding whether to buy, sell, or hold shares. I think the link between P/E and earnings growth is the primary screen for your investing method. Two additional metrics are:

  1. earnings growth acceleration

  2. project adjusted EPS growth going forward

For #1, you can track your 1YPEG for the past several (maybe 4) quarters to see if the earnings growth is outpacing the stock price growth.

For #2, you can make EPS predictions for the coming year. This is important because for the stock to be a good (or better) investment, the growth in EPS should continue going forward. One year forward is easier and more reliable than 5 years forward. You can factor in guidance, your view of growth in the market, etc.

Chris

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This gives you a great way to compare companies based on their P/E and recent earnings growth. These are two very important metrics in deciding whether to buy, sell, or hold shares. I think the link between P/E and earnings growth is the primary screen for your investing method. Two additional metrics are:
1) earnings growth acceleration
2) project adjusted EPS growth going forward

For #1, you can track your 1YPEG for the past several (maybe 4) quarters to see if the earnings growth is outpacing the stock price growth.
For #2, you can make EPS predictions for the coming year. This is important because for the stock to be a good (or better) investment, the growth in EPS should continue going forward. One year forward is easier and more reliable than 5 years forward. You can factor in guidance, your view of growth in the market, etc.

Great suggestions Chris. Thanks.
Saul

A new statistic – The 1YPEG

Hi Saul,

You and the others contributors to this board (Anirban, Chris, Denny, Brittlerock, Jim, and others that I cannot remember at the moment - my apologies) never cease to amaze me with your thought provoking posts that help me to look at revenues, earnings, and other information in ways I had not previously knew of, let alone considered. This is another example!

Thank you everyone for helping to make me a better investor!

Cheers,
Chris

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Thank you Saul, this looks like a great ratio to use for analysis.

Where do you recommend getting the numbers to compile this? I’ve heard here that yahoo numbers may be off. Should I go to quarterly reports, orr is there an simpler solution?

Thanks,
Iain

Where do you recommend getting the numbers to compile this? I’ve heard here that yahoo numbers may be off. Should I go to quarterly reports, orr is there an simpler solution?

Hi Iain, I go to quarterly reports. Say you want to do it for any company… say CGNX. So you google Cognex Investor Relations. Then you’ll usually find Quarterly Reports, or Press Releases, or something similar.

You click on each of the last four quarterly reports and get the earnings (GAAP or adjusted, depending on your taste), and add them up, and you’ve got your trailing earnings. Shouldn’t take much more than 5 minutes. (If the last quarter happens to be the fourth quarter, as it is now, you only have to look at the yearly earnings, but you only get that lucky one quarter per year).

Then you divide your trailing earnings into today’s stock price and you have your current PE.

I didn’t mention it before because I was keeping it simple, but when you looked at those four quarterly earnings reports, you also wrote down what the earnings were the year before. They ALWAYS give that in the earnings report. You add those four up and you have the trailing earnings a year ago.

You divide the increase in earnings this year over last year by last years earnings and you have the rate of growth of earnings. (That sounds complicated so here’s an example: a year ago ABC made 75 cents in trailing earnings, this year $1.00. The difference is 25 cents. You divide 25 cents by 75 cents and you get .33, so the rate of growth is 33%).

You divide your PE by the rate of growth of earnings and you have your 1YPEG.

Once you’ve done it a time or two the whole thing, beginning to end, will take you less than 10 minutes, and even less if you are following the stock and already have their investor relations site, etc.

Saul

For FAQ’s and Knowledgebase
please go to Post #7062

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Thanks Saul. I’ll practice this tonight with the stocks you listed, to see if I can replicate.

I was experimenting withe sketchers annual report. Got so excited, I had to go open a position with Skx.

Great stuff,
Iain

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when projecting forward earnings, I think it is very rare for you to have any edge over multiple professional analysts. Thus it is likely it is already in the market price.

The exception might be when you have some inside information. Which might consist of nothing more than actually having used the product or service itself, seeing what it offered and how it compares to competitors, and importantly how fast it can get better.

Buying the first IBM PC on the market (I think it cost $5000 in un-inflated money) allowed me to see what it could become in time. Even though I knew nothing about software and had no tutors it didn’t take long to learn enough primitive programming to figure out that the software being sold for several hundred dollars was in fact often very simple. So I knew software prices would plummet.

The resulting investments permitted early retirement.
Even though I didn’t anticipate the speed at which improvements would take place.Something like the iPhone was in the Future, maybe 70 or 80 years away, even if one could imagine it.

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I’ve been thinking on this a bit already. Then, I read all the posts on Under Armour and Skechers and then this post on 1YPEG.

I try to buy companies that I can hold for a long time. Under Armour has gone up for me quite well in the time I’ve held my shares.

I didn’t cash completely out of UA, but I did sell some shares. Then, with the proceeds from those shares, I opened an initial position in Skechers.

It’ll be fun and educational to watch how these companies do over time.

Thanks Saul and everyone else for all the help you give all of us who lurk on these boards.

mazske

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Saul,

I was about to post a separate thread, but then I saw your example on to gather 1YPEG and thought I would piggyback. I have been a silent follower since you started this board (my favorite board) and have learned a lot from your posts and everybody’s dedication to teaching/discussion.

In regards to gathering Non GAAP EPS/Adjusted EPS, how do you go about gathering this information if the company only reports GAAP information. Lets use SKX for an example since there has been good discussion between UA/SKX. SKX only provides GAAP data. In their most recent 10Q (skipped the 10K) Q3 showed a diluted EPS of 1.00. In post #4982, you show EPS 113 for the same quarter. Help me understand where you see 113 or got to 113 from the Q10 report. In post #7427, you calculated TTM earnings of 2.99 vs 10K diluted 2.72. I have tried comparing other companies, like SWKS, with your numbers and the 10Q, but I am struggling.

The way I have been going about it is 1)look at the summary that the company writes up on earnings day, 2)pull 10Q and look for adjusted or Non GAAP EPS. If I fail with #1 and 2, then I am completely lost and not sure what to do next. I am in no way questioning your #, just trying to learn how to get the same adjusted earnings #'s you did if they don’t provide them to you.

Andrew

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Thanks Saul. I’ll practice this tonight with the stocks you listed, to see if I can replicate. I was experimenting withe sketchers annual report. Got so excited, I had to go open a position with Skx. Great stuff, Iain

Hi Iain, if you have any trouble replicating, remember that I usually use adjusted (non-GAAP) figures.

Saul

In regards to gathering Non GAAP EPS/Adjusted EPS, how do you go about gathering this information if the company only reports GAAP information. Lets use SKX for an example since there has been good discussion between UA/SKX. SKX only provides GAAP data. In their most recent 10Q (skipped the 10K) Q3 showed a diluted EPS of 1.00. In post #4982, you show EPS 113 for the same quarter. Help me understand where you see 113 or got to 113 from the Q10 report. In post #7427, you calculated TTM earnings of 2.99 vs 10K diluted 2.72.

Hi Andrew, Thanks for your question. In figuring adjusted earnings, first off, I think it’s most important to be consistent quarter to quarter.

Okay! For Q3, in the press release, they said:

(Our EPS was negatively impacted by foreign currency exchange losses of 5 cents per share, as well as 8 cents per share attributable to warehousing costs related to completing the first phase of the automation upgrade of the our European Distribution Facility and transitioning from a third-party warehouse to a Company-owned facility in Chile. In total, these expenses reduced EPS by 13 cents during the quarter.)

I added the 13 cents back. (I usually take out foreign exchange gains or losses as they don’t reflect how the actual business is going. Note well that I also remove foreign exchange gains when they occur, also gains from sales of property, or from settling a law suit, and gains or losses from repricing of warrants, etc. I try to track the underlying business, not the noise).

As for the one-time warehouse costs, in the conference call they were asked extensively about it. While changing the warehouse in Chile to in-house, they had to keep both of the warehouses open for most of the quarter while changing over, and pay salaries in both. That was all finished just before the end of the quarter. That was clearly a one-time extraordinary expense that didn’t reflect how the actual business was running.

As for the automation of the plant in Belgium, they had to close part of the plant while they were doing it, and then run three shifts in the other part, with lots of overtime, to keep up with demand and they had to outsource part of the shipping too, as I remember.

I think that all of these are clearly costs that don’t reflect the ongoing business and I feel comfortable in eliminating all of them and in accepting the companies 13 cent estimate for the whole thing, (which doesn’t seem excessive in a quarter they were making $1.00 after including these costs).

Hope this helps,

Saul

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This makes a lot of sense. I have never liked PEG because it is really a derivative of projected growth rates that multiplies any modelling error by whoever created the estimates.

With real numbers it is actually a useful metric. Thanks for posting

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Saul,

I also have a problem with PEG calculations that use a 5-year expected growth rate, i.e., YAHOO FINANCE and others.

That’s why I take a look at the 1-year PEG ratios readily available at the Nasdaq site.
http://www.nasdaq.com
(enter your stock symbol, then click “Analysis Research” in left column, then click PEG ratio)

Nasdaq uses the forecasted growth rate (based on the consensus of professional analysts) and forecasted earnings over the next 12 months. The data provider is Zachs Investment Research.

Here’s the PEG Ratio display for SWKS.
http://www.nasdaq.com/symbol/swks/peg-ratio

For me, a PEG ratio based on 1-year forecasting is okay, since it’s nice-to-know information, but not a critical metric for my due diligence.

Regards,
Ray

With real numbers it is actually a useful metric.

Still, it is about the past and investing is ultimately about the future.

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To be honest, I never paid any attention to PEG because I never understood it - I mean, it never made any sense to me, there’s a subtle difference there.

Thanks Saul for the help. Hopefully I will have time today, if not this weekend go over the numbers and see what else the companies took out as one time write offs in the other quarters. I will use your numbers that you have provided in the past on variety of stocks as my reference point and for a way for me to practice.

Thanks again.

Andrew

Chris - Wow! You have placed me among some very good company. I thank you for the vote of confidence, but I caution you to read my posts with a lot of reservation.

I am not nearly as knowledgeable as the other contributors you cited. Like many who visit here, I sit near the foot of the table to feast on the rich experience and wisdom of Saul, our very generous host, and a few others who are worthy of sitting near the head of the table.

I am not nearly as knowledgeable as the other contributors you cited. Like many who visit here, I sit near the foot of the table to feast on the rich experience and wisdom of Saul, our very generous host, and a few others who are worthy of sitting near the head of the table.

Hi BrittleRock, We’re all learning here, all the time.
Best,
Saul

Still, it is about the past and investing is ultimately about the future.

Is this not the conundrum facing every investor? What are our analytical alternatives?

It always boils down to the same process. We examine various aspects of past performance - chose the ones we believe to be significant and indicative of future performance and, while holding everything else constant, extrapolate into the future.

Standard PEG is really no different than Saul’s proposed 1YPEG in this respect. The key difference is that rather than speculating 5 years into the future, Saul has proposed that we look at factual data from the recent past.

Saul speaks for himself much better than I can. But, I’ll give you my take on his investing strategy.

First. in case you’ve not noticed, Saul has a strong bias for facts. Saul has strongly urged that we look at earnings history (generally about 3 years worth) and the ratio of recent stock price to those earnings (TTM). The intent is to not pay too much for the potential growth as indicated by the earnings. These numbers are facts. OK, we can argue about GAAP vs non-GAAP earnings, but I think Saul has made a pretty convincing argument for non-GAAP so long as we can be reasonably confident that management is attempting to be honest and consistent with respect to their financial reporting. If management does not provide non-GAAP, it’s incumbent on us as investors to perform the exercise for ourselves. The point is to understand as best we can the actual performance of the business operations by removing the noise of extraordinary events. The trick here is to identify the appropriate events. Something that might be extraordinary for one company may be a regular part of the operations of a different company.

The next thing is to look for a big, long, wide runway. If the company already owns most of the market (e.g. Nike) how’s it going to double, and double again, and maybe double a few more times?

This is not the whole ball of wax, but it’s usually taken as the primary gates - but even here, Saul is willing to make exceptions. Take XPO for example, so far they’ve not earned a dime, but Saul likes this company enough to put something like 6% of his money into it. In this case the primary factor is the historical performance of the management, not the company. That’s placing a lot of confidence in Brad Jacobs (CEO). The thesis being that Mr. Jacobs has successfully identified another business (domestic logistics) similar to the businesses where he has had previous success (a splintered field that will benefit from efficiency gained via consolidation and scale). And that Mr. Jacobs will be able to execute in a similar fashion as he has in the past.

As you noted, investing is all about the future, but in the absence of an unfailing crystal ball, all we ever have at our disposal for investing decisions is history. The history of the company. The history of the management. The history of market behavior. The history of the economy. And the history of our own success and failures - our personal experience.

Saul recently reported that since he started investing, his portfolio has expanded something a bit shy of 300 times. That’s the main reason I try to pay close attention to what he says.

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