Rory,
The Fool Ratio is actually the classic, unaltered PEG ratio. I'll break it down using Siebel's numbers as an example.
1) Siebel's trailing EPS is now $.60, not $.54. Using a stock price of $48.00, the PE is 80 (48/.54 = 80).
2) Estimated EPS for FY 2002 is $.78. That's seven quarters from now. The annualized rate of growth from the trailing EPS ($.60) to the estimated EPS is 16.17%. (That's the key figure that differs from your assumption of 50% to 100% long-term growth.)
3) Divide the PE by the growth rate and the resulting Fool Ratio is 4.95 (80/16.17 = 4.95).
Now that we've gotten through how the Fool Ratio and the classic PEG ratio are calculated, we can get to the really important part -- coming to a solid opinion about the growth and the period of time required to achieve that growth that we should plug into a ratio. Over what period of time do you feel the range of 50% to 100% should be applied?
Until I hear from you, I'll assume you're thinking that it will be five years. I'll also assume the analysts are right that the company will grow EPS only about 15% annually for the next two years. (If you think that's fundamentally wrong, explain why and what you think the assumption should be.) To achieve 50% annual growth over the five-year period, earnings will have to grow 79% annually during the last three years of the five-year period. To achieve 100% annual growth over the five-year period, those last three years must produce 189% average annual growth.
There's a world of difference between achieving 79% annual growth for three years beginning two years from now and achieving 189% annual growth, making your growth assumption critical. Now that I've put that into perspective, I look forward to learning what growth rate you feel comfortable assuming and why. (I'll eventually let you know how I arrive at my PEG assumptions as I've always done, but for now I'd rather see more dicussion generated by you and others before I mouth off. :)
By the way, there might be valid reasons to disagree with the methodology of the Fool Ratio. But if you believe as I do that being consistent in our use of a valuation ratio is more important than whether or not it might be improved upon, it's important to note that when the stock price was $120, the exact same computation explained above yielded a ratio of 5.50. Today it's 4.95.
--Mike Buckley |
