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Technology Stocks : Intel Corporation (INTC) -- Ignore unavailable to you. Want to Upgrade?

To: Harry Landsiedel who wrote (102297)	4/13/2000 3:10:00 PM
From: GVTucker	Read Replies (1) \| Respond to of 186894

Harry, RE: It would seem to me that while PEG rates can exceed 1x for some periods, in the long run, the average PE must equal the growth rate. This is only the case if the PE equals the growth rate but also equals the expected return. Look at the scenario that I painted. Let's say that the earnings growth rate is 15%, but the expected return is only 10%. If earnings grow 15%, and the stock price appreciates by only 10%, then the PE at the end of year 1 will only be 7.3. This is obviously way too low. So you need to assign a PE higher than the growth rate when that rate is clearly above the expected return. Run a few scenarios, and extend the growth rate over a number of years, and a justifiable PEG of 3 can happen. Just look at KO over the past, say, 2 decades. Key in this circumstance, as you correctly note, is predictability. The reason for the benchmark of PE=growth rate is that high rates of earnings growth rarely last in the long term. Thus, the market lowers the PE to adjust for the risk tht this earnings growth does not continue. For the rare stocks that can exhibit good rates of growth for a very long period of time, the market does indeed reward those stocks with a much higher PE than growth rate. While all the new businesses Intel is getting into could raise earnings, it doesn't necessarily follow that the earnings flow will be more predictable. The more profitable businesses a company has, the more opportunities to move around a shell here and there to manage earnings, as GE has shown. I personally cannot see why the market would reward shell games, but it does. Again, this is not just based upon the go-go 90's scenario, but has happened throughout market history. The market doesn't care how that predictability happens, as long as it happens legally and consistently. It then rewards that predictability. Also, assuming a PEG of 3x over a four-five year period can lead to some unrealistic expectations, no? Yes, it can.