We all know the 'cover your a**' quip: "Past performance is no guarantee of future results." In other words, don't assume the past will repeat itself. While this is a good general rule for ensuring proper due diligence before investing in ASX shares, historical information can still be useful.
Analysts often use a valuation multiple, such as the price-to-earnings (P/E) ratio, to evaluate whether a company is cheap relative to the past. It's not a smoking gun, but it can offer an initial prompt for further investigation.
Why? Because a deviation from a multiple's historical averages can sometimes suggest an overreaction by the market.
This isn't always the case. Sometimes, a departure from a premium P/E ratio is warranted. However, every so often, the stock market exhibits its 'manic-depressive' tendencies, as Warren Buffett would put it, giving level-headed investors a chance to invest in good companies at cheap prices.
Where there could be value among ASX shares
Domino's Pizza Enterprises Ltd (ASX: DMP)
The numbers:
- Trailing P/E ratio of 34 times earnings
- Historical average P/E ratio of 40 times earnings
- 14% implied upside
Domino's has been in a world of hurt since late 2021 as pressures on the bottom line started to mount. Fast-forward to the end of FY2024, and the pizza franchise's net margin has melted to 3.9% from 8.4% in FY2021. At the same time, revenue growth has slowed as consumers tighten their belts.
The hazy future for Domino's explains the discount on this ASX share compared to its average historical earnings multiple. The company noted in its FY24 results that a return to 7% to 9% store growth won't happen in FY25 or FY26.
However, analysts expect Domino's net earnings to reach $196.8 million by FY27. This implies a forward FY27 P/E ratio of 16.2 times based on the current market capitalisation. So maybe there is value in this beaten-down business for the patient investor.
Corporate Travel Management Ltd (ASX: CTD)
The numbers:
- Trailing P/E ratio of 22 times earnings
- Historical average P/E ratio of 36 times earnings
- 64% implied upside
Shares in the travel management solutions company have glided 22% lower over the past year. The first major bump occurred in February when investors were displeased with the contents of the company's first-half results, which included weaker guidance than anticipated.
It seems investors are winding back the premium they're willing to pay as growth mediates. According to the latest report, Corporate Travel Management targets around 10% revenue growth in FY25, lower than its past annualised rate of 18%.
Analysts have $132.3 million of net income pencilled in for FY27, which would value the company on a forward P/E of 14.3 times FY27 earnings. Insiders have been heavily buying this ASX share over the past four months, including a sizeable $90.4 million purchase by ECP Asset Management on 4 July, increasing the Sydney investment firm's holding by 22%.
NIB Holdings Ltd (ASX: NHF)
The numbers:
- Trailing P/E ratio of 16 times earnings
- Historical average P/E ratio of 20 times earnings
- 25% implied upside
The last in line is a private health insurer whose share price has fallen 20% over the past year. Nearly all the valuation destruction has played out since NIB Holdings released its FY24 full-year results to the public on 26 August.
A rise in claims seemed to steal all the spotlight, with investors skipping past the 9.3% increase in revenue and a 67% jump in net income to $181.6 million. However, with long-time NIB leader Mark Fitzgibbon retiring, some may be wondering whether the success will continue.
Consensus estimates have NIB's FY27 earnings pegged at $223 million. Based on today's price, this would equate to a forward P/E ratio of about 13 times the FY27 forecast income.
