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Strategies & Market Trends : Buffettology -- Ignore unavailable to you. Want to Upgrade?

To: Tomato who wrote (573)	11/20/1998 4:56:00 PM
From: Bob Martin	Read Replies (2) \| Respond to of 4691

I'm afraid I'm lost....If an IBM (for example)that is trading at 24 times earnings and growing per your assumptions is undervalued by 25%, than does that mean that the PEG ratio theory, i.e. buy a stock that has a smaller p/e than its growth rate, isn't worth looking at? Using PEG ratios makes IBM look very overpriced. I guess a better question is how do you figure the fair value? If KO grows at say 15% into infinity, is a p/e of 40+ warranted for it? What's its fair value? Is there any place on the net to plug in projected growth rates and p/e ratios and get future estimated fair values? That would be a great tool to have. Thanks in advance. --- Persoanlly, I think PEG is useless. How do you value a company that grows at 1%? Give it a PE of 1? I don't think so. I constructed my own table using excel which shows various growth rates and various discounting values, to give some representative PEs (again, using cash earnings, not reported earnings, and ignoring 1-time items). For instance, a company growing cash earnings at 1% forever has a fair value of about 11 times cash earnings, using a 9% discount factor. PEG is also useless for higher growth rate companies, because obviously they won't grow at that rate forever, so how do we come up with a fair value? We have to crunch the numbers. See the appendix of "The Warren Buffet Way" for examples. Your KO example also is faulty, because if you assume a growth rate that continues forever which is higher than your discount rate, the "fair" valuation is infinite! (Think about it). Warren Buffet assumes (according to TWBW) a particular (higher) growth rate for a fixed number of years (usually 10), followed by 5% growth. My advice is to read TWBW (especially the appendix) and then use a spreadsheet such as Excel to crunch your numbers. Bob