While the standard price-to-earnings (PE) ratio can be a useful shorthand valuation tool, arguably the PE to growth (PEG) ratio is even better.
The PEG ratio is arguably a better valuation metric because it allows an investor to compare the pricing of a stock relative to the earnings per share (EPS) growth being generated.
For example, a high PE ratio can be justified by a high growth rate in EPS. Likewise, a low PE ratio can suggest fair value for a company with low growth prospects.
According to data supplied by CommSec, the PEG ratio of the market is around 1.5 times. This market multiple can act as a benchmark, however, many investors would prefer to buy companies when their PEG ratio is less than one.
Here are two companies with many appealing qualities. However, their PEG ratios could imply now is not the time to buy.
Amcor Limited (ASX: AMC) – the packaging giant is trading at around $15.50 a share. According to analyst consensus data from Reuters, EPS is forecast to increase from 73.8 cents per share (cps) in financial year (FY) 2016 to 77.8 cps in FY 2018 at current exchange rates.
This implies a growth rate of 5.4% and a PEG ratio of 3.9 times.
Breville Group Ltd (ASX: BRG) – shares in this small home appliance manufacturer are currently trading near $7.70. Analyst consensus forecasts from Reuters for EPS for the 2016 and 2017 financial years are 38.2 cps and 41.7 cps respectively.
This implies an EPS growth rate of 9.2% and a PEG ratio of 2 times.
