How to calculate P/E

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    Posted: 11 January 2011 06:07 PM

    Picking this up from a now-closed thread,

    Mav, I think there’s more to correct, or it could just be my preference for intraday prices. The edited table below puts the PE range at 17.7-24.5, excluding the day of the flash crash (including it gives a low PE of 16.9).

    The current period tops out at 22.6, quite a bit lower than the approx. 24 we’ve seen at the high end previously. We’re also a bit higher on the low end. I think this suggest a nice run in the next few weeks to catch up or release the coiled spring, if not before earnings.

    The time frame I use for historical PE is between earnings announcements, and I include intraday prices (regular trading hours only).

    Time Frame ........................ AAPL ttm earnings ....................... AAPL approx. Price Range (P/E Range)
    Fiscal Q4 ‘10 - present       $15.15                                                   298-343 (19.7-22.6)
    Fiscal Q3-Q4                         $13.29                                                   236-319 (17.7-24.0) *excluding flash crash
    Fiscal Q2-Q3                         $11.79                                                   225-279 (19.1-23.7)
    Fiscal Q1-Q2                         $10.25                                                   190-251 (18.5-24.5)

    Mav - 09 January 2011 09:25 PM
    asymco - 09 January 2011 05:26 PM
    PurpleApple - 09 January 2011 05:03 PM

    Horace,

    If you see iPhone growing 70% this year (if I recall correctly) and iPad more than doubles plus Mac growth continues, why such low estimates for stock price on high end?  Do you think the P/E ratio will decline from here?

    I’m assuming P/E from 15 to 20. Apple has been in that range for a while. If P/E creeps up again maybe I’d adjust the upper end of the range to P/E of 25. It’s nothing more than projecting forward what the present looks like.

    There are plenty of reasons to think that P/E should increase, but those same reasons have been around for a long time so it’s a coin toss whether it rises or not.

    I need to correct you, asymco.  A P/E of 15 (ttm basis) didn’t come close to happening in 2010.  I did a little research on AAPL’s historical P/E and came up with this (pardon the shoddy chart):

    Time Frame ........................ AAPL ttm earnings ....................... AAPL approx. Price Range (P/E Range)
    Fiscal Q4 ‘10 - present       $15.15                                                   300-338 (19.8-22.3)
    Fiscal Q3-Q4                         $13.29                                                   251-318 (19.0-23.9)
    Fiscal Q2-Q3                         $11.79                                                   235-270 (19.9-22.9)
    Fiscal Q1-Q2                         $10.25                                                   192-249 (18.7-24.3)

    Explanation:  Fiscal Q4 ‘10-present means the time period in between the earnings releases.  So Fiscal Q3-Q4 means Jul. 20, 2010 to Oct. 20, 2010.

    Top-end P/E compression?  Could be happening.  But AAPL hasn’t even seriously tested a P/E of 18, if my Yahoo! Finance 1-year Flash graph is correct.  Except MAYBE that one time during the flash crash.

    Oddly, Apple’s historical P/E in the past 12 months kinda validated my low P/E of 19.5 hypothesis in my target price home game estimates.  :oh:

    The AAPL/Apple story is more compelling than ever.  iPhone sales have shattered the 10 million/quarter barrier, and Apple looks to be taking its first steps towards addressing the “non-GSM” market, which is a sizable opportunity.  iPad is entrenched and looking to accelerate.  The Mac is still booming nicely.  iTunes revenue will keep growing as long as the iOS user base does.  Based on this, I think AAPL’s low P/E shouldn’t be appreciably lower than 19 at worst this year (repeating for the millionth time that the markets/world situation has to cooperate as well).  A conservative (IMHO) $23 fiscal ‘11 EPS projection has us at $437, with a pessimistic 19 P/E, by mid-October.

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    Posted: 11 January 2011 06:25 PM #1

    If an investor believes that inflation will remain low and stable, then PE ratios should increase. However, if inflation is rising, then PE ratios decrease. When inflation is very, very low, then PE ratios also decrease because investors are operating on the premise that soon enough inflation will increase. I believe what we’re watching unfold is this latter view that soon enough interest rate and inflation will rise and so investors want greater compensation for risk and the result is a slow contraction of PE ratios.

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    Posted: 11 January 2011 08:43 PM #2

    I posted another perspective on this today: http://www.asymco.com/2011/01/12/remembering-january-14-2008-the-day-the-market-lost-faith-in-apple/

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  • Posted: 11 January 2011 09:33 PM #3

    Nice job, as always!

    You led me down the path perfectly…. thought you had it all figured out.

    Looking at the PE plotted under stock price (at http://bigcharts.marketwatch.com), you can see the PE began its slide from 45 to under 15 over the course of a year (2008) as the stock price went from near $200 down to $90. Seems like it never recovered after that. Wondering if the PE would still be as low if the split many people have asked for had occurred and the price today would be in the more familiar territory of < $50.

    I wonder if a PE analysis of high priced stocks (say > $100 / share) would illustrate any change in PE vs stock price. GOOG and AMZN had similar PE drops over that time and GOOG’s PE stayed down while AMZN’s continued to rise to approach earlier levels where it is today. Obvious conclusions? None.

         
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    Posted: 11 January 2011 10:32 PM #4

    Apple II+, my Flash graph ignored intraday, so it could just be a methodology thing.  And for some reason the graph I brought up missed the high 230s in the Fiscal Q3-Q4 interval (maybe it was just me).

    But I think my point more or less holds.  The point of my informal exercise was to show that back when things seemed incredibly topsy-turvy, they weren’t really.  It was more a matter of many of us (including myself) setting expectations too high, and putting things like macro factors ahead of certain indicators like P/E ratios and price trends such as earnings run-ups.  A P/E of 17.7 is a aberration to be considered in light of the rest of the data, though there was extreme doubt about iPhone 4 sales at the time.  In any case, 17.7 isn’t 15.  I’ve learned much from 2010 and I still believe that AAPL’s path forward will be fairly predictable as long as earnings meet reasonable expectations.

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    Posted: 12 January 2011 04:11 AM #5

    Your point is well taken. We only saw 15 during The Great Recession, but the low back then (using new iPhone accounting) was much worse—11!

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