P/E Forwards and Their Orbits

Martin L. Leibowitz

Financial Analysts Journal, 1999, vol. 55, issue 3, 33-47

Abstract: From a theoretical viewpoint, earnings growth that follows the consensus should—all else being equal—result in rising or falling P/Es that provide the equity investor with the price appreciation needed to just meet the market's total return expectation. For a given earnings growth rate, this expectational equilibrium should move a fairly priced P/E toward a sequence of “forward” values that ultimately trace out an implied “P/E orbit.” For two-phase models with the typically higher level of first-phase growth, the P/E orbit will trace a smooth year-by-year descent from the starting P/E to the terminal, second-phase P/E. These descending forward P/Es provide a baseline that represents the inertial pricing paths implied by an unaltered consensus. Analysts who assign P/E estimates that diverge from this baseline path presumably believe that they have special insights that justify such a departure from the consensus-implied level. Awareness of the P/E orbit concept should help analysts avoid falling for the classic trap of “P/E myopia”—misestimating the prospective return by automatically applying a current P/E to future earnings levels derived from consensus growth projections.

Date: 1999
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.2469/faj.v55.n3.2270 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:ufajxx:v:55:y:1999:i:3:p:33-47

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/ufaj20

DOI: 10.2469/faj.v55.n3.2270

Access Statistics for this article

Financial Analysts Journal is currently edited by Maryann Dupes

More articles in Financial Analysts Journal from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().