Hi all,
This is my first post after some time spent reading this great forum.
I've decided to register and make some questions to people more expert than me on financial matters.
I would like to play Maths with stocks, but not in terms of Moving Averages et simila, but working on fundamentals, instead.
First question is related to the Price-to-Earnings ratio, P/E. It can be calculated on past performance or future expectations.
P/E = Price / Earnings per share
Price = $540.67
EPS = $39.75
P/E = 540.67 / 39.75 = 13.6
A P/E of 13.6 seems a bargain for a big company like Apple.
Question 1: Would you agree on the above statement?
Question 2: How you pick stocks based on P/E ratios?
The P/E/G ratio is similar but takes into account the growth rate estimated for the next 5 years.
P/E/G = Price to earnings ratio / growth rate next 5 years
P/E = 13.60
Growth rate for EPS in next 5 years = +12.10%
P/E/G = 13.60 / 12.10 = 1.12
When referring to EPS in next 5 years, it seems that Apple isn't a good buy. P/E is bigger than growth, meaning it is overvalued.
Question 3: would you agree with the above statement?
If the above outcome seems unfair for Apple, let's what happens if we refer to the past performance (+41.52%):
13.60 / 41.52 = 0.33
In this case, if we refer to past performances of growth rate, the actual P/E seems to be a great bargain.
Question 4: would you agree with the above statement?
Next analysis is related to regarding the stock price as the discounted value of expected future dividends, that is:
P = D / K
Where:
P = Current stock price;
D = Current dividend rate;
K = Required rate of return.
We get:
D = $3.05 (declared on 28th of October 2013)
K = 10%
P = 3.05 / 0.10 = $30.50
Now, to get a decent return based on future dividends, the fair price for Apple should be $30.50. In terms of dividends, Apple is 17.7 times overvalued.
Question 5: would you agree with the above statement?
The return rate I get from Apple in terms of dividends is:
K = 3.05 / 540.67 = 0.6%
The return I get from dividends investing in Apple is an absolute "stay away".
Question 6: would you agree with the above statement?
The last analysis is fair for a no-growth company that gives satisfactions to its shareholders through dividends, but Apple is a growth-company, even a fast-growing one if we refer to past performance. Something different should be used, in this case:
P = D / (K - g)
Where:
P = Current stock price;
D = Current dividend rate;
K = Required rate of return;
g = growth rate in earning per share = 9.50% (estimates for next year)
We get:
P = 3.05 / (0.10 - 0.0.95) = $610.00
If we take into account the growth rate in earning per share, a fair price for Apple would be $610.0 versus the actual $540.67. In these terms, the actual stock price is slightly underestimated.
Question 7: would you agree with the above statement?
Let's stop here to avoid to make it too long.
You can decide to answer also to just some of the above 7 questions.
Best regards,
OFS
This is my first post after some time spent reading this great forum.
I've decided to register and make some questions to people more expert than me on financial matters.
I would like to play Maths with stocks, but not in terms of Moving Averages et simila, but working on fundamentals, instead.
First question is related to the Price-to-Earnings ratio, P/E. It can be calculated on past performance or future expectations.
P/E = Price / Earnings per share
Price = $540.67
EPS = $39.75
P/E = 540.67 / 39.75 = 13.6
A P/E of 13.6 seems a bargain for a big company like Apple.
Question 1: Would you agree on the above statement?
Question 2: How you pick stocks based on P/E ratios?
The P/E/G ratio is similar but takes into account the growth rate estimated for the next 5 years.
P/E/G = Price to earnings ratio / growth rate next 5 years
P/E = 13.60
Growth rate for EPS in next 5 years = +12.10%
P/E/G = 13.60 / 12.10 = 1.12
When referring to EPS in next 5 years, it seems that Apple isn't a good buy. P/E is bigger than growth, meaning it is overvalued.
Question 3: would you agree with the above statement?
If the above outcome seems unfair for Apple, let's what happens if we refer to the past performance (+41.52%):
13.60 / 41.52 = 0.33
In this case, if we refer to past performances of growth rate, the actual P/E seems to be a great bargain.
Question 4: would you agree with the above statement?
Next analysis is related to regarding the stock price as the discounted value of expected future dividends, that is:
P = D / K
Where:
P = Current stock price;
D = Current dividend rate;
K = Required rate of return.
We get:
D = $3.05 (declared on 28th of October 2013)
K = 10%
P = 3.05 / 0.10 = $30.50
Now, to get a decent return based on future dividends, the fair price for Apple should be $30.50. In terms of dividends, Apple is 17.7 times overvalued.
Question 5: would you agree with the above statement?
The return rate I get from Apple in terms of dividends is:
K = 3.05 / 540.67 = 0.6%
The return I get from dividends investing in Apple is an absolute "stay away".
Question 6: would you agree with the above statement?
The last analysis is fair for a no-growth company that gives satisfactions to its shareholders through dividends, but Apple is a growth-company, even a fast-growing one if we refer to past performance. Something different should be used, in this case:
P = D / (K - g)
Where:
P = Current stock price;
D = Current dividend rate;
K = Required rate of return;
g = growth rate in earning per share = 9.50% (estimates for next year)
We get:
P = 3.05 / (0.10 - 0.0.95) = $610.00
If we take into account the growth rate in earning per share, a fair price for Apple would be $610.0 versus the actual $540.67. In these terms, the actual stock price is slightly underestimated.
Question 7: would you agree with the above statement?
Let's stop here to avoid to make it too long.
You can decide to answer also to just some of the above 7 questions.
Best regards,
OFS