formingtheindependentvariables.Inthissection,wepresent
the results of market regressions for each of the equity
multiples.
P/E Ratio
Intheregression,runin January2006,theP/Eratioswere
regressedagainstpayoutratios(inmostrecentfinancialyear),
betas (from Value Line), and expected growth (analyst
consensusestimatesforthenextfiveyears)forallfirmsinthe
market.
With the sample size expanding to 2,163 firms, this
regression represents a broader measure of relative value.
Other things remaining equal, this regression suggests that:
- The P/E ratio increases 1.131 for every 1 percent
increaseintheexpectedgrowthrateinearningsper
share over the next five years. - Anincreaseinthebetaof 1 reducestheP/Eratioby
roughly 0.92. - Anincreaseinthepayoutratioof 1 percentincreases
the P/E ratio by 0.07.
For instance, a firm with an expected growth rate of 12
percent,abetaof1.2,andapayoutratioof 20 percentwill
have a predicted P/E ratio: