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The Procter & Gamble Company Message Board

  • sharkbitemcnasty sharkbitemcnasty Apr 14, 2013 2:53 PM Flag

    high PE's and future returns


    I repeat the fact that value is always relative, but let's assume PG is "overvalued". It's true that the P/E is at the upper end of its range. But it's also true that a high P/E is not predictive of lower stock prices. A high P/E is simply predictive of lower returns going forward. Think of it as borrowing capital appreciation from the future.

    To see this at work, look at a chart for JNJ. It entered the millennium valued at 40x earnings. Despite the high PE, it spent the next 12 years or so rangebound, except during the market crashes of '00 and '08. Earnings eventually caught up with price, and then it broke out to new highs. Despite its "overvaluation" there was no big crash, and no big correction. On the contrary, it actually BEAT THE S&P 500.

    I estimate fair value for PG is around $75, but at $80 PG is hardly a"sell" and definitely not a "short".

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