Some individual stock P/E’s
(8/2/2014)
Stock Price = earnings per share X P/E multiple
Amazon
806
Electronic Arts
148
Netflix
127
Google & Yahoo sell at 30x
,
Microsoft and Apple both sell at a16x
P&G and Campbell’s
Soup sell at 20x
Exxon
sells at
12, but Royal Dutch Shell at 20
BestBuy and Alaska Air have P/E’s of 10
What Drives P/E ratios?
Expected Future GROWTH
A stock’s P/E ratio is literally the amount that
the market is currently paying for current
earnings, it is the
price paid for a dollar of
current (or one year forward) earnings
.
Why would the market pay more for one firm’s
earnings than another firm’s earnings?
EXPECTED FUTURE GROWTH
32
Share Value and the Value of Growth
Value of
no growth
firm
•
Plowback rate = 0
•
Dividend Payout rate = 100%
•
Dividends = Earnings
•
g = 0
Value of growth embedded in firm value (or share
price) can be identified with the following construct:
E
E
r
E
g
r
D
V
1
1
0
PVGO
today)
price
(share
ies
Opportunit
Growth
of
Value
Present
1
0
1
1
0
E
E
E
r
EPS
P
or
r
E
g
r
D
V
33
Deriving the P/E ratio from the Value =
No-Growth Value + PVGO expression
E
E
E
E
E
/r
, P/E
when PVGO
r
E
PVGO
r
E
P
ce)
stock pri
when P
EPS
(where E
E
PVGO
r
E
P
PVGO
r
EPS
P
on RHS
E
r
distribute
E
or
EPS,
h sides by
divide bot
1
0
1
1
1
1
1
0
1
1
0
1
0
1
34
The P/E Ratio and Earnings Growth (g)
ES
by MULTIPL
1
Ratio
0
as
;
1
Ratio
0
if
Value
of
Portion
Growth
-
No
Current
Value
of
Portion
Growth
1
1
0
1
0
0
1
1
1
0
E
E
E
E
E
E
r
E
P
PVGO
r
E
P
r
E
P
PVGO
r
E
PVGO
r
E
PVGO
r
E
P
