I came across a question asking to determine whether an INTRINSIC P/E was more or less attractive. As in Company A: intrinsic P/E = .4 / (.16 - .09) = 5.7 x Company B: intrinsic P/E = .4 / (.16 - .11) = 8.3 x The supposedly correct answer was company B was less attractive. My question is why?! Its an intrinsic P/E. Why would it be less or more attractive? Without an actual current market price, how can we even comment? Its especially weird since Co B’s P/E is higher due to a higher growth rate! Wtf.
for same level of earnings - you would be paying more for a share of company B than for company A - assuming all other factors between the two companies were the same. at this point, it is all relative… If however B had higher growth, lower risk, then it might be justified as having a better long term prospect, then maybe going and investing in B is justified.
where is this question from? i did many EOC Q like this and the company with the higher intrinsic P/E was consistenly the relatively undervalued one.
Interesting… I’ve always thought of Intrinsic P/E as the reference point that tells you whether a stock is overpriced or underpriced. However, I guess you can use intrinsic P/E in a relative sense as well. Generally, you prefer low P/E ratios (cheaper stocks, higher earnings yields), so if both are fairly priced given intrinsic values, the lower P/E would be more desirable because the stock is cheaper/earns more. It does seem that if both stocks are fairly priced though, the one that earns a higher rate of return should probably have higher risk to compensate, but I guess this question ignores that fact.
i mean company A and B above have same payout, same required return, but B has higher growth rate. intuitively and mathematically the ansswer should be that B is more valuable than A
HMMMM… All else equal…higher growth, higher intrinsic PE is higher value???
higher growth means a lower denominator, which makes the fraction and thus intrinsic P/E higher. higher intrinsic P/E, when compared to another compnays intrinsic P/E, i believe is better.
^^ I’m with you.