easimoni:

I'm confused (very confused). Why wouldn't you want your PE to drop? (or do you mean price?) They only way PE drops is for earnings to go UP UP (a good thing) or for prices to drop. If you mean prices (not PE) are dropping, simply say so. If EPS goes up, and PE goes down, most investors would be deliriously happy. A PE of 2 = cloud 9 (as long as it's not price that's dropping).

Anyway, my point is: if it's price that's causing PE to drop, let's use Price, otherwise I'm assuming it's EPS going up and who wouldn't love that?

babaife:

@easimoni
most times, the reduction in market price of shares cause the drop in PE. if EPS goes up, the market reaction is to INCREASE SHARE PRICE. theoretically, the increase in EPS is built in to determine the share price. therefore, an increase in EPS CANNOT AND WILL NOT RESULT IN LOSS OF SHARE VALUE IN A NORMAL CIRCUMSTANCE (all things being equal). rather the opposite.

pumping777:


@ babaife - You are yet to tell me a reason why a company with a low PE is a weak company. I don't get it. So is a company with a high PE a strong company?

Let's look at this from both the point of view of the buyer and the seller.

- Buyer- low PE is the target because the stock is undervalued. The whole discussion I believe was based on how to select a stock to buy into so this is the scenario we should be looking at.

yes i agree with you. however a company with a low PE will be a target ONLY if its management demonstrate THE ABILITY TO IMPROVE, else ITS A BAD BUY!

- Seller -High PE is perfect because the stock is overvalued and he/she now happy to sell because he/she bought the stock at low PE and can now make cool profit. So as a seller you don't want low PE if you want to sell at that point in time, but this is really a matter of price. Using PE here is confusing.

The value of every company is determined by it by its market price. the market price of every company has an in built of both QUANTITATIVE AND QUALITATIVE INFORMATION including INVESTORS ATTITUDE. the PE on the other hand shows the relationship BETWEEN PRICE AND EARNINGS. In the market, INCREASE in EARNINGS USUALLY CAUSE AN INCREASE IN PRICE AND ULTIMATELY, THE PE.

The price of a stock does not usually have anything to do with strength but more with perceived value. As an investor, if I find a sound company with low PE my antenna is stimulated. The lower the better.

Am in TOTAL DISAGREEMENT HERE. the price of stock shows how capitalized a company. it is the ONLY VERIFIABLE MEANS OF VALUING THE COMPANY. therefore, the higher your stock price, the better for the company and its members (shareholders). I quite understand your risk profile as an investor, i must nevertheless advise that you RESEARCH properly the REASON a company has A LOW PE, and determine whether there was a time the PE was high. ensure that the management are QUALIFIED, COMPETENT AND RESULT ORIENTED

You see, as a general rule of thumb we cannot base an arguement on exceptions. There will always be exceptions. For instance, it is not all companies that make profit but this is not the norm. All acquistions may not result in better value but like I said this is the result in most cases. A company that is not acquired can also go under by itself but this is an exception so I won't use it in an arguement.

I will allow this to stand

So do you mean that if  I don't want competition to acquire my company, the action I should take is to make sure I have high PE? What about the investors that hold your shares? Won't they be concerned that the stock is overpriced and dump? Why do we have good projected PEs in these companies prospectus? See how everyone is screaming after seeing the 22x PE being projected for Bagco 

[color=#990000]This is one of the causes of CREATIVE ACCOUNTING AND WINDOW DRESSING in the corporate world. Every management has the MANDATE to IMPROVE SHAREHOLDERS WEALTH!. This is improved through INCREASING share price. if you have a high PE and a company intends to acquire your company, your high PE makes your COMPANY EARNS MORE compared to a low PE. For instance, in a share for share acquistion, your shareholders will earn more shares in the new company than otherwise. Numerically speaking, lets assume Coy A with PE of 10 wants to acquire any of Coy B or Coy C with PE ratio of 5 and 7.5 respectively to form coy D.

it is calculated thus: PE of the targeted coy divided by the PE of the Acquirer coy. therefore to acquire coy B= 5/10; 1/2. this therfore means that for every 2 shares coy A has in D, coy B has 1. Further to acquire coy C, it becomes 7.5/10; 3/4. similarly, for every 4 shares coy A has in D, coy C must have 3. (this is ONE of the methods of company valuation). Here i ask, which is better to the company and its shareholders? you may use you logic.

Low PE will usually mean others are not seeing the true value of the company. This is not a bad sign on its own. Do you realize that there were many penny stocks as at last year with single digit projected PEs? Check them out now and tell me if these companies are weak. eg Costain and  Nahco. Also go and check out the current PE of Transnationwide Express and tell me if this means it is a weak company. Haba.

the penny stock or value stock as we call it in finance, MUST have shown traces of improving performance. in valuing a company, you MUST LOOK FOR BOTH THE QUALITATIVE AND QUATITATIVE INDICES. investment is about committing your fund to earn FUTURE stream of income. when buying a stock, you are indeed buying into a company's future earnings irrespective that you buy and sell the same day. Moreso, investment is a RISKY venture that may result to GAIN or LOSS depending on LUCK and DECISIVENESS

babaife:

@ Pumping
I think you have really missed the point. For an investor, the lower the projected PE of a company compared to others in the SAME sector, the better, provided the company has not cooked it's books. You are looking at the sentimental position of the Executives and Management of the company. Agreed PE cannot be used in isolation of course.

well, i believe our opinions differ because of our individual investment strategy and instinct. we saw the issue from " a buyer" and "a seller" point of view.

The arguement about possible takeover does not apply here. Takeovers in most cases will increase the value of a company. This could be a problem for the Executives and Management of the company who do not want to give up ownership but definitely not for the shareholders because they will end up being offered the fair value of their stocks. It could be an issue whereby the new owners decide to delist the company but that is a different story. The net result of a takeover for investors is the realization of the future benefit of a company before it is due.

I must say without ant fear of contradiction that NOT ALL ACQUISITION INCREASE THE SHAREHOLDERS WEALTH. In reality, the essence of due diligence is to ensure that a party to the acquisition is not a liability to the other. also both the targeted company and the acquirer must contact or appoint FINANCIAL CONSULTANTS to study the offer and ensure that the SHAREHOLDERS WEALTH will be increased else the deal is put off. we were all living witnesses how GULF BANK could not merge with the intercontinental group.

If Afribank is acquired by Access bank how is this a loss to the investors? The investors will have to be offered a fair value for their shares. This is in fact a very desirable position for any investor to be. Look at Standard bank and IBTC saga. Have investors lost out? Low PE or not, many companies are still being acquired. Even with a high PE a company is easy to acquire if the total value (capitalization) is low. In other words, being a small company, buying it is affordable for those that think they can do better with it (Ability to generate an even lower PE based on current prices).

it is also known practically that company's with lower PE than it competitors are good for any wealthy and healthy competitor to acquire. the assumption is that the management is NOT EFFICIENT ENOUGH to ginger the share price of such companies, hence under a new and efficient management team, the share price may go up and ultimately increases the PE. a company with a low PE is referred to as VALUE STOCK. all other things being equal, such company should have the ability to operate for the unforseeable future. @ pumping is an individual with an instinct to "acquire" companies with low PE. This is acceptable ONLY IF SUCH COMPANIES HAVE THE POTENTIAL TO GROW, ELSE THE INVESTMENT IS LOST

And what do you mean by saying the PE of a company is nose-diving? Nose diving is a negative term for something undesirable and should not be used for PE. PE could be falling because the price of the stock is crashing due to maybe some negative news that could impact the returns of the company in future. However, in this case, the projected income will be adjusted to reflect a more realistic PE.

Nose diving is a term is the most appropriate words when you hold a share whose PE continues to reduce in value. for instance, you bought a share when the PE is 20, any the last 3 quarterly results shows a PE of 15, 10, and 5. i ask what should an investor do? hold the shares till the PE becomes 2? you have to sell. the reduction in PE may be due to accurate information being made available in the market. How i wish i could explain better on CREATIVE ACCOUNTING and its EFFECTS on SHARE PRICE. A topic for another day

It is like saying the expenses or debts of a company is nose-diving. Is this not desired?

when expenses and debts nose dive, it is HIGHLY DESIRABLE because the effect is that earnings increase, share price increase, confidence in the management increases and ULTIMATELY, PE INCREASES

Having a low PE ratio does not imply that a company is WEAK. It simply means that it is likely to be undervalued and it could also be a target for investors which will eventually increase the price due to bargain hunters. If the projected PE of Zenith banks drops to 10, tell me wether the price will not rise or someone will not try to acquire it. Either of these will benefit the current owners of the stock.
A Weak or Low PE is a value stock. it is one of the criteria to adjudge the efficiency of the management team. investors WANT TO BUY SHARES WITH LOW PE THAT HAVE THE ABILITY TO GROW OVER TIME, BUT DO NOT WANT TO SEE THEIR SHARES PE DROP. or what is the point in buying a share whose PE is likely to drop?

babaife,
I really dont understand why you are deliberately complicating issues.pumping 777 gave out the facts in very simple words.There should be no contest on all he said because they are facts.over elaboration could be a problem for neophytes who depend on this forum for education on such issues.
Low PE means a coy is attractive(all things being equal)
acquisition is good for shareholders(all things being equal)
you said low PE will expose a coy to a takeover.This simply means that the low PE has generated interest on its being a bargain.
I dont think(my opinion)there is anything like weak PE.Its either low or high.

I dont know anyone else that will create any argument from the basic FACTS Pumping777 has presented.
This is my own widow's  mite.

MC Usman:

Don God somebody should reply me back. i invested 100:00 grd to buy Access Bank Plc shares Mid 2007. Yet notting has been said regarding the certificate not to talk of the anticipated dividents. Anybody with ideals.

babloboi:

Hail the brokers!!!You guys r dong quite a wonderful job but my question isn't far-fetched.Please can anyone clarify the difference(s) between shares and stocks or r they the same?