value
Peg Price To Growth
The rule
A fair price tag (P/E) roughly matches how fast profits grow. So PEG near or below 1 is cheap, and well above 2 is costly.
Where it flips
PEG breaks when the growth number cannot be trusted. A one-off jump, an accounting trick, or a rate that won't last makes a low PEG a trap. The fix is to use a steady, believable, multi-year growth rate. Distrust any PEG built on a single dazzling year.
The price tag on profits (P/E) means little on its own. It only makes sense next to how fast the company's profits are growing. Divide the P/E by the profit growth rate to get the PEG. A company growing profits at 20% a year is fairly priced at a P/E around 20 (PEG of 1). Below about 1, you are paying less than the growth is worth. Well above 2, you are paying up for growth that may not come. It is a rough check, not an exact rule. It stops you calling a low-P/E slow grower 'cheap', or a high-P/E fast grower always 'costly'.
A worked example
Aarvi compared two firms, both at a P/E of 40. One grew profits at 45% (PEG ~0.9). The other grew at 12% (PEG ~3.3). So she saw the first was fair, and the second was priced for a dream. [illustrative]
How to spot it
- ·you always pair the P/E with a growth rate
- ·PEG comfortably under 1 with lasting growth
- ·you check the growth number for one-offs
Peter Lynch · One Up on Wall Street