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

To: Bob Martin who wrote (574)	11/20/1998 6:09:00 PM
From: Tomato	Read Replies (1) \| Respond to of 4691

My math and accounting skills are suspect, but my instincts tell me that KO's p/e ratio is suspect too. Are you saying that p/e ratios don't matter at all? Or that if KO keeps growing at 15% for the forseeable future that it's ok to ignore its p/e ratio? Seems to me that given markets tend to have a given p/e ratio that provides a ceiling or yardstick for investors. We're at historically high p/e ratios, and I don't see IBM trading at a p/e of 24 (absent revolutionary new products) if the market p/e reverts to the mean, which a lot of people see happening. Do you think there's a margin of safety with IBM at a p/e of 24? If you have a minute, I'm curious to see what your spreadsheet would give as a fair market price for KO. TIA.

To: Bob Martin who wrote (574)	11/20/1998 6:28:00 PM
From: Shane M	Respond to of 4691

Bob, Persoanlly, I think PEG is useless I use a similar rule of thumb that you discuss. Companies with under 10% growth I tend to assign a default long run PE of 12 or so. As growth rates increase above 10% I'll incrementally adjust the expected long run PE upward. Based on an empirical study I saw somewhere on the web where a company growing at 50% tends to be rewarded with an average PE of around 38. The relationship between could be expressed linearly for companies growing over 10% as PE = (0.65*(gro rate - 10)) + 12 This produces PEs as follows: gro rate PE 10 12 20 18.5 30 25 40 31.5 50 38 100 70.5 This is just a rule of thumb I use, because I do look into some very high growth companies. With many of the high growth companies current earnings are not reflective of future earnings so it's not always applicable, but for more established co's w/ established margins this is a decent guage IMO. For Buffet type companies I still like the method of projecting growth in book value, and applying a reasonable PE based on historical levels. Shane