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Relative Value Average P/E’s & Toolkit

Relative Value Average P/E’s & Toolkit. Relative Value. Relative Value is a ratio that compares the current P/E to the Average P/E. Projected Relative Value is a ratio that compares the Projected P/E to the Average P/E. Why Look At PE?.

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Relative Value Average P/E’s & Toolkit

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  1. Relative Value Average P/E’s & Toolkit

  2. Relative Value • Relative Value is a ratio that compares the current P/E to the Average P/E. • Projected Relative Value is a ratio that compares the Projected P/E to the Average P/E

  3. Why Look At PE? • Do you always buy the smallest box of cereal because it is cheapest? • Price per Ounce vs. Price per Box • Like the price of a box of cereal depends upon how many ounces in the box, the price of a stock depends upon how much the company is earning.

  4. Why Look At Relative Value? • Today the price of a gallon of gasoline is $1.40. Is that higher or lower than average? • Relative Value compares today’s PE to the average PE to determine if today’s price is higher or lower than average?

  5. Toolkit • Toolkit makes the assumption that the Average P/E in Section 3 is the one you are using. • What if you threw out all the P/E’s in Section 3 and arbitrarily selected a new Average High P/E and Average Low P/E for Section 4? • In that case, Toolkit will calculate the Relative Value and Projected Relative Value using the wrong Average P/E

  6. This is Dollar Tree The high P/E’s for all of the last five years are above 30 and I have decided to be conservative and not go above 30 for my average high P/E. I also notice that in all but one of the last five years the low P/E is less than half the high P/E. Therefore I want my average low P/E to be 15 or lower

  7. This is the history of the of Dollar Tree’s P/E’s.

  8. My Average P/E would be 22.5 not 29.

  9. My Relative Value based on my judgment is 91.1 and my Projected Relative Value is 77.

  10. Unfortunately using the historic P/E’s and eliminating outliers until you get something close to what you want, will not change the computers projections.

  11. Sungard Data Systems Sometimes we are able to eliminate enough outliers in Section 3 to come up with an average high P/E and average low P/E we can use. Then our Relative Value and Projected Relative Value are correct.

  12. Conclusion • If you arbitrarily change the average high P/E and the average low P/E in Toolkit your Relative Value and Projected Relative Value will be wrong. • In that case you have to calculate the Relative Value and Projected Relative Value Manually.

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