Future Earnings per Share question

[yakatan]

I'm new to fundamental analysis and would like to ask a question.

If a company achieves EPS of £1 in 2007 and the est EPS is also £1 in 2008 then what does that mean in terms of PEG? The growth rate is zero so is PEG of no use in this situation?

I think that £1 per share earnings is quite respectable when the price of a share is at £5. How would analyst view a company that makes the same EPS each year meaning earnings growth is zero but £1 of earnings is still high?

 

[Rhody Trader]

You're right on the PEG with 0 EPS growth.

It depends on whether the company is paying out a nice dividend or not. If so, then at the right yield analysts and portfolio managers (of income funds, for example) would be quite happy. If the company wasn't generating free cashflow with its steading income, though, it wouldn't be too popular. Shareholders want you to do one of three things: pay a dividend, grow earnings, grow book value.

 

[Bagehot]

A P/E of 5 is cheap, but that's very different from being good value. It may be cheap for a reason. If the market is discounting the stock to that level, it is telling you something - you need to able to decipher it. From the information you'ev given it's impossible to see the bigger picture: if EPS is stable, why? Are revenues not growing, are margins being squeezed, are financing or tax costs increasing faster than the top-line? What do any of these mean for the business's prospects a few years out? My guess, in the current environment, is that the balance sheet or cash flows don't look too healthy and the market is worried it's going to go bancrupt. Does it pay a dividend? What's the dividend cover? What's the interest cover? What percentage gearing does it have? Any big loans coming to maturity that it may have trouble refinancing? A fundamental analyst would need to consider all of these things to take a view on whether a P/E of 5 offered any value or not - it's about far more than just the valuation itself, which in this example is flashing a big red light saying 'there's something here to be cautious about'.

 

[yakatan]

Thanks for your responses.
They were very informative. I didn't realise you had to take so much into account. On the news channels they just mention p/e and eps growth rate.
You are right, the the example I found was from UK banks and they have no visibility for earnings at the moment and there could be trouble ahead for them on sub-prime and UK house prices.