Aswath Damodaran 21 PE and Growth Firm grows at x for 5 years 8 thereafter PE

Aswath damodaran 21 pe and growth firm grows at x for

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Aswath Damodaran 21 PE and Growth: Firm grows at x% for 5 years, 8% thereafter PE Ratios and Expected Growth: Interest Rate Scenarios 0 20 40 60 80 100 120 140 160 180 5 % 10% 15% 20% 25% 30% 35% 40% 45% 50% Expected Growth Rate PE Ratio r=4 % r=6 % r=8 % r=10%
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Aswath Damodaran 22 PE Ratios and Length of High Growth: 25% growth for n  years; 8% thereafter
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Aswath Damodaran 23 PE and Risk: Effects of Changing Betas on PE Ratio:   Firm with x% growth for 5 years; 8% thereafter PE Ratios and Beta: Growth Scenarios 0 5 10 15 20 25 30 35 40 45 50 0.75 1.00 1.25 1.50 1.75 2.00 Beta PE Ratio g=25% g=20% g=15% g=8%
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Aswath Damodaran 24 PE and Payout/ ROE
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Aswath Damodaran 25 The perfect under valued company… If you were looking for the perfect undervalued asset, it would be one With a low PE ratio (it is cheap) With high expected growth in earnings  With low risk (and a low cost of equity) And with high ROE In other words, it would be cheap with no good reason for being cheap. In the real world, most assets that look cheap on a multiple of earnings basis  deserve to be cheap. In other words, one or more of these variables works  against the company (It has low growth, high risk or a low ROE).  When presented with a cheap stock (low PE), here are the key questions: What is the expected growth in earnings? What is the risk in the stock? How efficiently does this company generate its growth?
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Aswath Damodaran 26 I. Comparing PE ratios across Emerging Markets
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Aswath Damodaran 27 II. An Old Example with Emerging Markets: June 2000 Country PE Ratio Interest Rates GDP Real Growth Country Risk Argentina 14 18.00% 2.50% 45 Brazil 21 14.00% 4.80% 35 Chile 25 9.50% 5.50% 15 Hong Kong 20 8.00% 6.00% 15 India 17 11.48% 4.20% 25 Indonesia 15 21.00% 4.00% 50 Malaysia 14 5.67% 3.00% 40 Mexico 19 11.50% 5.50% 30 Pakistan 14 19.00% 3.00% 45 Peru 15 18.00% 4.90% 50 Phillipines 15 17.00% 3.80% 45 Singapore 24 6.50% 5.20% 5 South Korea 21 10.00% 4.80% 25 Thailand 21 12.75% 5.50% 25 Turkey 12 25.00% 2.00% 35 Venezuela 20 15.00% 3.50% 45
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Aswath Damodaran 28 Regression Results The regression of PE ratios on these variables provides the following – PE = 16.16  - 7.94 Interest Rates  + 154.40 Growth in GDP  - 0.1116 Country Risk  R Squared = 73%
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Aswath Damodaran 29 Predicted PE Ratios
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Aswath Damodaran 30 III. Comparisons of PE across time: PE Ratio for the S&P  500
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Aswath Damodaran 31 Is low (high) PE cheap (expensive)? A market strategist argues that stocks are cheap  because the PE ratio today is  low relative to the average PE ratio across time. Do you agree? Yes  No If you do not agree, what factors might explain the lower PE ratio today?
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Aswath Damodaran 32 E/P Ratios , T.Bond Rates and Term Structure
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Aswath Damodaran 33 Regression Results There is a strong positive relationship between E/P ratios and T.Bond rates, as  evidenced by the correlation of  0.69 between the two variables., In addition, there is evidence that the term structure also affects the PE ratio. 
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  • Spring '11
  • RichardM.Levine
  • Valuation, Financial Ratio, P/E ratio, PEG ratio, Aswath Damodaran

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