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Jackson:
PEG = .87 = (31.75/((1.09 - .46)+(.5*1.57))/25.8
PEG - Price/Earnings to Growth Ratio (Growth is typically a 5yr Estimate)
31.75 - Bay's Closing price today
1.09 - Fiscal Year 1998 estimate of earnings for Bay
.46 - Earnings posted after 2 quarters of FY98 Earnings
.5 - One half
1.57 - Fiscal Year 1999 estimate of earnings for Bay
25.8 - Current 5yr projected growth rate for Bay
PEG = (Curr.Price / 12mo.EPS.est) / 5yr.Growth.Rate
PEG = ($31.75 / $1.42) / 25.8%
PEG = .87
So far we have completed two quarters in FY98 (Q1 & Q2), which leaves us with two more to go (Q3 & Q4). Since earnings estimates are for $1.09 for the fiscal year ended June '98, we need to subtract the $0.46 that we have accumulated so far towards the estimate ($1.09 - $0.46 = $0.63). For the next six months we have determined that estimates are for $0.63 and now we need to get another six months to account for the full 12 months of estimated earnings that we need. In order to make the calculation simple, I just took the remaining two quarters needed (2/4 or 1/2 or .5) and multiplied it times the full fiscal year earnings for 1999 (.5 x $1.57 = $0.79). In short, with the first half of FY98 completed, we need to look into the last half of FY98 and the first half of FY99.
Therefore, the total estimated earnings for the next 12 months is $1.42 ($0.63 + $0.79 = $1.42), which gives us a forward PE of 22.4 ($31.75 / $1.42 = 22.4). Then just put that PE over the 5yr expected growth rate for Bay (22.4 / 25.8 = .87) to get the PE/G.
PEGs are used to evaluate how much of the long term growth rate of the stock is currently being eaten up. With Bay's PEG = .87, that still leaves a lot of PEG to be eaten considering that historically for tech stocks PEGs have been in the 1.10 to 1.20 range on average. Typically PEGs less than 1.00 have come near bottoms in tech stocks and PEG's over 1.40 have come near tops.
The PEG is just one of a bazillion ratios that you can use to compare companies with. Comparing the PEG of Bay with a Cisco clearly shows that, relative to PEGs, Bay is a much better value.
I hope this will clear things up for you and give you a little insight on yet another way to compare the values of stocks.
Good luck and Cheers!
Wayde. |
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