so i picked up a paint and coatings manufacturer as my first stock pick for learning equity research- its trading at a pe of 55 and 14 times its book value…how to i get a reasonable value of its “should be pe ratio”. its the largest decorative paints manufacturer in india and its stock has grown 40 folds in the last 15 years. comparing it with two other competitors- one of it trades at pe of 55 and other trades at a pe of 30 but it is dominantly an industrial paint manufacturer-margines being higher in decorative paints. also a debt free company and has shown a good CAGR since inception. now although everything about the company seems great isnt it trading at a pe of 55 and book value times of 14 kinda scary?
The market as a whole is kinda scary. I assume India is in a similar boat
And a 55x PE isn’t bad if that CAGR is strong. Is it forward earnings or current earnings for the PE? With high growth rates, that can be a material difference.
As rawraw said, 55x PE isn’t bad if CAGR is strong. It might be a growth stock. From what I understand, 55x is a trailing PE and you would like to find the forward PE.
But, to ensure better clarity about growth and the scary PE as you believe, I suggest that you could calculate the PEG ratio thus accounting for growth too and then compare it with the other players in the industry. PEG is better for valuation since it is forward looking in nature as you want and perhaps, is also a better metric for comparison. Caveat: All of the above is subject to your valuation practice. You might be willing to take a trailing PE and an annual growth rate for the last 5 yrs, or a forward PE instead. All methods have their own flaws. It is all subject to your valuation practice, but at the same time don’t just go by the numbers. Ofcourse, you can see the market scenario etc. and also make reasonable conclusions if it doesn’t make sense with the numbers. Hope it helped!!
it is trailing pe guys…will update more info tommorow though
What’s the name of this stock?
In my experience of trading indian stocks - you cannot look at individual companies and be successful (i.e. on average). You have too weigh in the macro climate more strongly - especially if you’re a foreign investor.
you might make money on the stock but if you end up loosing with INR depreciation - then you’re screwed. Especially now when all FI’s are putting on bets against EM currencies.
I traded a few cement stocks which had 2xP/E of it’s peers quite successfully but made a mistake in converting back to GBP, which took away about 10-15% of my profit.
When PE is high, everybody assumes that it’s the P part that is high.
Is it possible that the E is just temporarily too low?
@Greenman72: But how do you define temporary since Earnings are found in the books and is a thing of the past? It could range from a quarter to a year’s earnings. I don’t consider that as a temporary figure!!
That’s why I don’t do growth.
asian paints.
umm so u dnt hedge your currency exposure?
no the E is alright because its been growing steadily atleast for the last 4 years FS i have been through.
and umm isnt it quite easy to figure out whether the p is high or the e is high if u look at the company’s growth history,market levels and a few other factors?
its my first stock…i wanted to start ER on my own and some1 on here suggested me paints and coatings business would be easier…should i remain away from growth stock untill am a bit experienced??
My recommendation would be to stick with one industry/company until you have a good grasp of all the dynamics. This is what research is all about.
It sounds like you are focusing on very high-level data like P/E and sales CAGR. This is fine, but do you feel comfortable with your understanding of the business and the industry? Do you know what the firm’s relations with its suppliers and customers are? Can you explain that in a Porter-like framework? Do you know how their distribution works? Do you really know what their main competitive advantage is and what challenges they are currently facing? Can you quantify all these factors and model the various sensitivities? Can you quantify any potential FX or other macroeconomic impact on their financials? Can you model a potential LBO or other M&A scenario of the company? Do you know what is going on in the industry in general? Who are their main competitors now and what are they doing?
Etc. etc. This is the stuff that analysts spend years researching. A good analyst will know exactly where in the cycle each of his/her companies is and what are the critical short/long term challenges. A P/E ratio is merely one of very many data points that are used to arrive at investment decisions, and in many cases not nearly the most important one.
If you are doing this as a learning exercise then I suggest you build out a DCF model in excel and see how the stretched your assumptions have to become to make the current share price look reasonable.
I would have started with something more transparent…Goldman Sachs for example. If you can read their balance sheet, you can do anything. Seriously, anything.
Or you can become Kevin Garnett