Skip to main content
No. of Recommendations: 1
> This is the one thing that has bother me on stock evaluation, Mohit. I
> follow your evluation and have no problem with the arithmetic. But, to
> me, the fly in the ointment is the future PE. Yahoo shows the forward
> PE to be 13.65 and the trailing PE to be 17.38. If we assume the 12.3%
> growth to be accurate, the rule of thumb for PE multiple that Mr
> Graham used would be about 15.2 (approx 9 + growth/2). If we used the
> latter figure for future PE multiple, the 10 year value would be
> approx $ 132 and the Present Value would be approx $ 33. It seems that
> a miss on the assumned P/E multiple can make quite a difference.

You're right - this is a bit of a debatable inference. Two factors drove
my decision to choose a P/E of 20.
(1) If the growth is 12.3%, then a P/E of anything less than 15 looks
very conservative.
(2) If you look at the historical P/E charge over the past 10 years,
it seems that 20 is a good pick - it was hit around 2005.
Overall the P/E has been declining since 2002 - today the P/E is
around 16.5 and seems to be at its historical low - even though the
EPS growth and Equity growth are consistent. As often happens with
price fluctuations, price often doesn't come to a reasonable value
- it overshoots it. Similarly, in this case it might have overshot
a reasonable P/E.

But there's nothing wrong with being even more conservative and choosing
a lower P/E. That'll make WMT look more unattractive at current prices.
But who cares - you can find other stocks that will be attractive. In
fact, I routinely choose very conservative P/Es when buying high growth
stocks. Also, for high growth stocks, I do the Rule#1 computation for
only 5 years and not 10 years (a typical company is unlikely to have sustained high growth for the next 10 years).

The higher the P/E you choose, you have to understand that
there's greater risk involved - you can do the trade if you're
comfortable with it.

- Mohit
Print the post  



The 2009 BMW Method Conference has been cancelled, due to minimum attendance numbers not being met. We hope to continue the annual BMW Method Conference tradition next fall.

Learn about the first four conferences on the BMW Method Website.

The BMW Method FAQ

BMW Method Website
Annual Conference Videos and Other Resources & Services
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.