When Is The PEG Ratio Superior To The P/E Ratio? Part 2

Nevertheless, when we review the historical graph of Express Scripts Holding Company (NASDAQ:ESRX) since the Great Recession, we once again see a reset of the PEG ratio based on earnings growth slowing down to 19.3%.  For the shorter timeframe, a PEG ratio of 1 (P/E ratio 19.3) produces a rational valuation reference for this timeframe.

However, shortening the timeframe even more from 2011 to current we discover that average annual earnings growth has fallen to 15.7%.  Since this is above 15%, we still utilize the formula P/E equal to earnings growth rate and draw the valuation reference line and a P/E of 15.7.  Once again, the valuation reference is highly correlated to stock price over this even shorter timeframe.

I specifically chose this example because a reader mentioned it in the comment thread of part 1 of this series as follows: “Maybe, now, we should talk about Express Scripts!”

As earnings growth has clearly slowed down over time, it is even more relevant that it is expected to continue slowing down over the next 5 years to an estimated 3 to five-year earnings growth rate of 11.4%.

Since forecast earnings growth is now below 15%, I no longer utilize the P/E ratio equal to earnings growth rate is my valuation reference. Instead, the “Forecasting Calculator” is utilizing the traditional formula that more realistically applies to companies growing earnings at rates below 15%. However, as an interesting aside, Express Scripts Holding Company (NASDAQ:ESRX) is currently trading at a PEG ratio of approximately 1. The current blended P/E ratio is 11.1 and the forecast long-term earnings growth rate is forecast at 11.4%.

The following summary of the analysts’ record on accurately estimating earnings for Express Scripts has been extremely accurate. Although this doesn’t guarantee that the record will continue, it does engender a high level of confidence that they might be reasonably accurate.