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Author: rharmelink Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 2003  
Subject: Re: The PEG is Garbage Date: 7/5/2000 12:59 AM
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The PEG has no sound investment basis.

In fact, a 1-year PEG value can be mathematically shown to be nonsense.
That's because both the P/E ratio and the growth rate are based on the same
thing -- current earnings.  They cancel each other out, leaving just price 
versus the change in earnings.

That is, given:

   P    = Current price
   EPS0 = Latest 12-month EPS
   EPS1 = Forecast 12-month EPS

We get:

                P                  P
              ------             ------
               EPS0               EPS0                   P
   PEG = ---------------- = ----------------- = -------------------
               EPS1               EPS1 - EPS0   100 * (EPS1 - EPS0)
         100 * ---- - 100   100 * -----------
               EPS0                   EPS0

Examples:

#1:  Given:  Stock = $9
             EPS   = $6
             Estimated EPS = $7
     Then:   P/E = $9 / $6 = 1.5
             Growth rate = $7 / $6 = 16.7%
             PEG = 1.5 / 16.7 = 0.09

#2:  Given:  Stock = $9
             EPS   = $1
             Estimated EPS = $2
     Then:   P/E = $9 / $1 = 9
             Growth rate = $2 / $1 = 100%
             PEG = 9 / 100 = 0.09

I know which stock I'd rather own!
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