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Author: ahobbs Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 2003  
Subject: Re: Help with Pegulator Inputs Date: 1/22/2008 11:26 PM
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This is my understanding of how the PEGulator works:

PEG = P/E0 / {[(E1/E0)^(4/Nq)-1]*100}

Where
P = Current Price
E0 = Current Earnings (trailing 12 months, or ttm)
E1 = Future Earnings (also ttm, but at a future date)
Nq = Number of quarters for Future Earnings (E1)

"Forward Estimates" in the PEGulator refers to the future earnings per share (E1) value -- not a percentage of current earnings.

For SNHY, you can get the earnings estimates from Yahoo:
http://finance.yahoo.com/q/ae?s=SNHY
Price: P = $19.13 (as of the close 1/22/08)
EPS Actual for the TTM: E0 = 0.23 +0.35 +0.36 +0.32 =$1.26
P/E Ratio = P/E0 = 19.13/1.26 = 15.18

As for selecting the future earnings, you have a lot of options.
You can use the current quarter estimated earnings by adding it to the last 3 quarters of earnings (E1 = 0.35 +0.36 +0.32 +0.28 = 1.31, Nq = 1), you can use the next quarter estimated earnings (E1 = 0.36 +0.32 +0.28 +0.41 = 1.37, Nq = 2), you can use next year estimated earnings (E1 = 1.45, Nq = 5), or you can calculate the 5 year estimated earnings (E1 = 1.26*(1.24)^5= 3.69, Nq = 20).

Here's what I get when I do the math:
Nq E1 PEG
1 1.31 0.902
2 1.37 0.834
5 1.45 1.278
20 3.69 0.633

So, which future earnings value should you use? Some say the furthest out (5 year) estimate to get a better picture of the long term prospects of the company. Others don't put any faith in 5 year estimates, and would rather use 1 quarter, 2 quarter, current year, or next year estimates. And there are some who say that the PEG ratio is junk and shouldn't be used at all to value stocks (you'll have to go back a couple of years to see those posts).

Bottom line is that the PEG should never be used blindly as the only reason to invest in a company. There are some companies with PEG ratios above 1.5 that are good investments, and some with PEG ratios less than 0.5 that are bad investments. The PEG ratio is just one small tool in the tool box, and you'll have to do a lot more investigating before deciding to invest.

Hope this helps.
A
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