OUTSIDE THE BOX
THE Philippine Stock Exchange Index (Phisix) closed yesterday at 4,934. The Phisix has gained over 11 percent since 2012 began and that 11 percent pales in comparison to the performance of many individual issues. Ayala Corp. is up over 25 percent. Ayala Land has gone up over 35 percent, as has Union Bank. And we have seen price increases of 50 percent and more for several mining stocks.
On Tuesday the question of the day was whether the current stock-market rally was for “real” and I noted that investors would ultimately decide the answer through either buying or selling stock in the near and distant future. The reason people buy stocks is that they believe the share price will increase and sellers think the opposite. In order for prices to go up, there must be a constant and continuing flow of money into the stock market. The stock market is not a zero-sum game in that there is always fresh cash available for investment. It is my belief that the cash is available and the stock market is one of, if not the most attractive investment right now. At some point investors change their perception about where stock prices will be in the future, and selling overpowers buying, causing prices to fall.
However, in one sense buying a stock is no different from buying a shirt. We look for value. The value of a stock is that its price will be higher in the future. The value of a shirt is the way it looks. A shirt with solid gold buttons would have a higher price but if it did not fit or look good, you probably would not buy it. Even with gold buttons the price might be too expensive in relation to its value as apparel.
Every stock has an underlying corporate value based on the intrinsic value of the company and its profitability. But the stock price is more dependent on what investors think the future value will be rather than the current value.
In July 2011 stock-market icon Mark Mobius said the PSE was “getting expensive.” The Phisix was then 4,300. A few days ago, he said “The good stocks are very expensive.”
The most common measure of expensive/cheap is the price earnings ratio (PER), stock price divided by earnings per share (EPS). The idea here is that if all the profits were taken out of the company each year and given to shareholders, how long would it take to get your money back.
“The local market is quite pricey relative to our regional counterparts at 17 trailing PER [for the Phisix]. It is also expensive by historical standards as we are trading way average multiples,” said one local stockbroker.
Let’s analyze Ayala Land (ALI). For 2011, ALI’s EPS was P0.55. That is a PER of 38, which is relatively very high. If all of ALI’s profits were paid out, it would take 38 years to get the P21 share price back. Yet ALI just hit a new historic high. However, PER is a snapshot of price against earnings and not against earnings growth. In ALI’s case, for the last two years profits were up 30 percent annually. Another measure of value is the price/earnings-to-growth ratio (PEG).
PEG is a measure by which you can judge if a stock’s PER and price are reasonable for its growth rate. ALI’s PEG based on 2011 PER is a low 1.3. The lower the PEG ratio, the bigger the bargain you are getting. This is the true test as to whether a stock is expensive or not. By comparison, Jollibee (JFC) has a PEG of 1,040 because of relatively flat profit growth and a PER of 33. MetroBank (MBT) has a PEG of 0.9 because the current PER (20) is lower than ALI.
Current PEG evaluates if the current PER is justified based on past earnings growth. Now we project into the future. If, and it’s a big if, current PER stayed the same into the future and current growth continued the same over the next three years ALI would be P45. MBT would be P158. JFC would be P104.
However, if all the PER of these issues in the future was 20 (like MBT), then ALI would trade at P23, MBT at P149 and JFC at P60.
Therefore, based on past earnings growth relative to current price and future projections, ALI is now fairly valued, MBT is undervalued, and JFC is overvalued.
Are PHL stocks too expensive? The answer is simple and obvious: yes, no, and maybe. That is why you must do your homework and be selective when buying your stocks.
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