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Up2
Question: If the justified leading P/E for BMC stock is 14.1X, then the BMC stock is best described as:
I decided to compare the 14.1 by computing the justified leading P/E by using (1-b)/(r-g) however the solution compared the leading P/E to the trailing P/E to determine if it was overvalued/undervalued/fairly valued.
It is given in the question that BMC is currently trading at $26.5 and has 1,000 million shares outstanding.
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Up2
@diya – To compare whether it’s fairly valued or not, this needs to be compared with the actual multiple.
The solution compares justified trailing P/E (by multiplying justified leading P/E with (1+g)) to get 14.6x (the g was not given in image above). Then it uses that to compare with current actual P/E.
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Up1
The way i see this is when a P/E is given (probably obtained from a mean average of the specific industry) you have to remove the E (your specific firm’s EPS) to get the P (price).
So you’ll know whether the specific company you are researching on is over or undervalued in relative to the industry’s mean P/E as larger firms might have higher NI compared to smaller firms but EPS could be lower due to higher amount of outstanding share.
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Up1
Thanks guys! I figured that it didn’t make sense to compare the justified leading P/E by calculating the justified P/E. Would I be correct to assume that all fundamental ratios should be compared to market ratio’s to determine if they are over/under/fairly valued?
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Up1
Yup @diya, that should be the case.
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