Why choose between growth and value when you can have both. Investors love high growth stocks with a reasonable valuation. The PEG Ratio, defined as the stock's P/E ratio divided by the growth rate of its company's earnings, is a good empirical tool for identifying undervalued growth stocks.
A popular rule of thumb is to consider a stock underpriced if its PEG falls much below 1, and overpriced if the PEG is much greater than 1.
PEG Analysis for China Internet Stocks
NCTY sports the best PER (0.15), followed by GIGM (0.54). At the other extreme, SINA has the worst PER (3.38) followed by LONG and CTRP.
Calculating PEG requires some assumptions, the most controversial being the estimate of the earnings growth rate. For the sake of this analysis, the earnings growth rate was calculated as the two year average of the analyst consensus growth rate estimates for 2006 and 2007 (see methodology section below). In general, you should not base your investment decisions solely on PEG. Instead, you should use PEG as a validating tool, to gain more confidence in your decisions.
2006-2007 P/E Ratios and Earning Growth Rates
Data in Table Format
| Symbol | Price (June 5, 2006) | 2006 Analyst Consensus Earnings Est | 2007 Analyst Consensus Earnings Est | 2006 Earnings Growth Est | 2007 Earnings Growth Est | P/E (2006 Earnings Est) |
| BIDU | 83.26 | 0.61 | 1.08 | 238.90% | 77.00% | 136.49 |
| CTRP | 48.42 | 0.98 | 1.32 | 14.00% | 34.70% | 49.41 |
| GIGM | 9.00 | 0.25 | 0.36 | 92.30% | 44.00% | 36.00 |
| JOBS | 26.90 | 0.49 | 0.68 | 81.50% | 38.80% | 54.90 |
| JRJC | 5.66 | 0.11 | 0.17 | -50.00% | 54.50% | 51.41 |
| LONG | 15.01 | 0.01 | 0.29 | 103.70% | 2800.00% | 1501.00 |
| NCTY | 27.03 | 1.35 | 1.96 | 275.00% | 45.20% | 20.02 |
| NTES | 20.63 | 1.10 | 1.31 | 34.10% | 19.10% | 18.75 |
| SINA | 24.20 | 0.74 | 0.95 | -6.30% | 28.40% | 32.70 |
| SNDA | 14.50 | 0.32 | 0.48 | 14.30% | 50.00% | 45.31 |
| SOHU | 24.90 | 0.79 | 1.05 | 2.60% | 32.90% | 31.52 |
|
Symbol |
P/E (2007 Earnings Est) |
Average Compounded 2005-2007 earnings growth rate |
PEG (2006 P/E Divided by the Average Earnings Growth Rate) |
|
BIDU |
77.09 |
145% |
0.94 |
|
CTRP |
36.68 |
24% |
2.07 |
|
GIGM |
25.00 |
66% |
0.54 |
|
JOBS |
39.56 |
59% |
0.93 |
|
JRJC |
33.26 |
(12%) |
(4.25) |
|
LONG |
51.76 |
669% |
2.25 |
|
NCTY |
13.79 |
133% |
0.15 |
|
NTES |
15.75 |
26% |
0.71 |
|
SINA |
25.47 |
10% |
3.38 |
|
SNDA |
30.21 |
31% |
1.46 |
|
SOHU |
23.71 |
17% |
1.88
|
Methodology
When calculating PEG, we are faced with the following questions:
1. Which earnings to use?
For growth stocks historical earnings are usually irrelevant, investors buy these stocks for their future earnings. A good number to use is the current year (or next year) analyst consensus earnings estimate.
2. How to estimate earnings growth.
Ideally, you should use a long term growth estimate. However, most analysts usually provide estimates for only one or two years out. Longer term growth rates can be very difficult to estimate for growth stocks.In this article we are using a 2 year compounded average growth rate derived from average analyst consensus earnings estimates for 2006 and 2007. Not quite a long term growth rate, but the best we can get.
Stock prices used in our calculations: Monday June 5, 2006 market closing prices.
Disclosure
The author owns NCTY shares and June Call Options.
About the Author
The Casual Analyst editor Daniel Vlad has a Ph.D in Physics and an MBA in Finance. He is particularly interested in Chinese Internet stocks. Drop him a line at dhvlad at CasualAnalyst.com