Ann: Market Update Presentation-CCP.AX, page-59

Kiwoz48

I only know about PEGY to the extent that I Googled for information recently. I have not read any of the material that the father of PEGY, Peter Lynch, wrote, so take what I write with the smallest grain of salt.

It is pretty obvious that if one used PEG as the basis of a trawling tool, then relative to using PEGY, the PEG-based trawl would be biased towards non-dividend-paying stocks – that is, PEG favours so-called growth stocks over so-called value stocks. Also, if one is an Australian resident investing in ASX-listed stock, one gets the tax advantage of franking credits, which is a topic that PEGY-related material that one finds on the Internet is unlikely to consider.

Pete Lynch, I have read, favoured using historical metrics, so using forward-looking estimates is a matter of taste. Also, if one uses more than two consecutive years, I imagine that one finds the average growth via the CAGR formula. For the three years ending FY2015, the EPS metrics are recorded by Morningstar as 69.8c, 75.4c and 83.0c. The latest CCP guidance suggests an EPS range of 95c – 97c, so I would be inclined to select 96c for EPS, and 48c for DPS. You are free to pick whatever range of time periods that you like, but I would be inclined to run with the four years ending in FY2016 – that is 69.8c, 75.4c, 83.0c and 96c. The CAGR for this would be =(96/69.8)^(3)-1 = 15.66%.

Because the EPS range that I used above ended in an estimated EPS for FY2016, I use the Estimated EPS for 2016 to derive the P/E Ratio, not the FY2015 EPS that you selected. Had I used published historical facts, and limited the top of the range to FY2015, then I would have chosen the 83c EPS that you elected to use. Where you start the range is also a matter of choice.

If you estimate the DPS for FY2016 is going to be 46c, and the EPS 96c, and you derive a CAGR of 15.66% as I did, then using an SP of $12.20 will give a PEGY of (12.20 / 0.96) / (15.66 + 3.7) = 0.66, which is close to your PEGY ratio, and being lower than 1, it suggests the stock is worth investigating. Alternatively, you could derive a formula based on a PEGY of 1, and by feeding in the relevant EPS and DPS metrics derive an SP below which you would consider buying CCP.

I have an appointment later this afternoon, so I'll not take this matter further. You wrote, “For CCP to become expensive, the PEGY ratio would have to rise above zero.” I think the sentence should have been “. . . above 1”. I have not thought about it, but one may find that the mathematics precludes the PEGY ratio approaching zero without suggesting an SP so low as to be silly.

I hope this helps. I did not modify PEGY to include franking credits, but I see no reason why this should not be done to accommodate the reality applicable to Australian residents.