We've also seen the P /
E valuation multiple slowly start to increase for the S&P 500 as well.
Not exact matches
When you purchase a broad swath of equities, say an S&P 500 index fund, the returns you can expect over the next decade or so comprise four building blocks: the starting dividend yield, projected growth in real earnings per share, expected inflation, and the expected change in «
valuation» — that is, the expansion or contraction in the price / earnings (P /
E)
multiple.
Domestic - facing stocks have faster expected sales and earnings growth but trade at a nearly two point P /
E multiple valuation discount relative to stocks with high international sales.
It's important to emphasize that I don't view any of these groups as «undervalued» - even the largest stocks are above historical norms of
valuation (with various individual exceptions), and even apparently «low» P /
E multiples should be evaluated critically since they're on record earnings.
But in the late 90s, when small technology companies with excessive
valuation premiums displaced big businesses from the large - cap universe, investors who thought large caps were low risk got a double whammy — large - cap stocks» earnings and P /
E multiples both declined sharply.
These periods are driven by generally rising
multiples of
valuation as measured by the price / earnings ratio (P /
E).
Why does the value investing community focus so heavily on
valuation multiples (P /
E, P / B, P / S, EV / EBIT, etc.)?
The P /
E ratio is a
valuation multiple defined as market price per share divided by annual earnings per share (EPS).
With low
valuations, investors have enjoyed the prospect for high expected returns even if
valuations contracted further, and also faced a high probability that a future increase in P /
E multiples would add further to their returns.
In actuality, the median constituent of the S&P 500 has a Forward P /
E of 18.4 — a
multiple that rests in the 99th percentile of historical
valuation levels.
The price - to - earnings ratio, or P /
E ratio, is an equity
valuation multiple defined as market price per share divided by annual earnings per share.
Even if they did, and you value the company at an appropriate P /
E and / or P / S
multiple based on those metrics, I'd be hard pressed to come up with a
valuation much higher than today's market price.
[At this point, I don't believe a P /
E multiple's a practical (or effective)
valuation alternative to also incorporate here].
On balance, a
valuation based simply on current metrics seems neither too harsh nor too optimistic — there are still plenty of higher TV / radio M&A
multiples to reference, but I think a 12 P /
E and a 2.0 P / S ratio (based on a 21.8 % operating profit margin) are pretty neutral values to apply.
In fact, the Monaghan stake is ultimately responsible for my
valuation premium to Book: A 15 P /
E multiple for this stake may seem aggressive, but it's on what looks like a temporary profit dip, and the implied
valuation is undemanding considering their recent EUR 100 mio capex programme.
But using a Price / Sales
multiple as a
valuation tool (as long as it relates back to the operating profit margins) is v well - established, and certainly just as good / probably better than a P /
E multiple.
As a result, the distribution of S&P 500 P /
E multiples was now its tightest in at least 25 years, implying less differentiation of companies based on
valuation.
Price / Earnings (P /
E) is usually the worst
multiple to focus on — it's an exceedingly narrow lens for any investor to peer through & discern an appropriate
valuation.