target 16 to 24, page-9

david25 has a point in that WES's forward PE is concerningly high.

However the reason for this has little to do with WES and a lot to do with interest rates / cost of capital. As interest rates decrease it increases the present value of future (expected) profits for investors today which inflates the share price resulting in a higher PE. This isn't unique to WES but is something that continually effects asset prices world wide, more notably of late.

If you overlay Australian 10 year government bond yields with WES's share price, you can actually see this playout:

1. WES tends to rise when interest rates drop;
2. WES tends to fall when interest rates rise.

The recent rise in interest rates has resulted in a decrease of the present value of future cash flows and as a result, a lower forward PE for WES and as a result, a substantial decline in WES's share price over the last month as the following graph demonstrates.

WES in yellow, change in Australian 10 year bond yields in the black bars (note the yield going from say 1% to 1.5% is a 50% increases etc, the bond prices themselves are not moving as violently as the graph suggests).



Today you had the RBA step in and force these interest rates lower and thus the rebound in WES's share price.

For the forward PE to drop back from ~25 to ~18 you would need:

1. Interest rates to increase substantially (precisely what the RBA is actively preventing from happening); and
2. For WES's earnings growth rate to not increase if interest rates increase.

You'd have to think the most likely scenario is for interest rates to increase with a pickup in economic activity which means the increase in interest rates maybe offset by an increase in earnings growth (i.e. WES's forward PE falls, but earnings increase and the two offset each other).

Anyway that is the mechanics, the rest of david25's post is hocus-pocus prophecies, maybe right, significantly more likely to be wrong as "forecasts" tend to be.