In the morning meeting on January 5, 2023, you talked about high P/E stocks being too expensive and gave an example. Then you advertised the STZ as “buy”. Isn’t the P/E very high? My research says its P/E (not forward P/E) is around 500. Is my resource wrong? -Bill How to calculate price-to-earnings multiples We have seen this and similar problems before. So Bill’s question gives us the perfect opportunity to solve a problem when figuring out stock multiples: Make sure you’re using the earnings everyone else is using. Automated data providers pull from companies’ quarterly releases to calculate lasting price-to-earnings (P/E) sometimes yield numbers that aren’t those offered by Wall Street. use. That’s not technically wrong, but it can cause you to disagree with others when it comes to stock analysis. There are many financial metrics that investors should consider when evaluating companies. However, for extended P/E purposes, the adjusted earnings per share figure is usually the number used. When provided, this adjusted number — also known as the comparable number in the case of beer, wine and spirits giant Constellation Brands (STZ) — is the headline EPS you see. reported on CNBC and elsewhere than analyst estimates. It removes one-time entries including fees and profits, and provides a look at the fundamentals, which can be compared to previous quarters. One-time items are just that, they may change from quarter to quarter or not happen at all. It should be noted that many investors, myself included, tend to use forward P/E, using an estimate of the next 12 months’ earnings, rather than the actual 12-month results after reviewing. valuation ratio of the stock. If we look at FactSet, one of our main data providers, we see a sky-high multiples on a trailing basis for Constellation Brands. Obviously, there’s a difference between what the rest of the Streets and Clubs are using in our calculations and what FactSet — and presumably Bill’s data provider — has automatically filled in. to determine that multiple. Of the four previous earnings reports – multiples followed using the four most recent quarterly reports – multiples above the numbers reported at Constellation (again, not adjusted or comparable numbers) comparison) seems to be even higher than the P/E that Bill indicated in his earnings statement. question: near 630 on STZ stock price of $220. That’s because it includes a heavy loss in the second quarter of fiscal 2023, which was caused by a large loss charge. The adjusted EPS numbers for the fiscal second quarter eliminated the approximately $1.06 billion loss charge associated with Constellation’s stake in cannabis company Canopy Development (CGC). That, along with several other adjustments — outlined in the company’s 10th quarter report — brings the reported EPS for the second fiscal quarter from a loss of $6.30 per share to an adjusted profit. adjusted at $3.17 per share. Using Constellation’s adjusted numbers, which changed not only the fiscal second quarter but all four quarters, the latter P/E is close to 20 — just slightly above the latter multiple for the S&P 500. It is up to you whether you agree or disagree with the exclusion of disposable items. The need to reduce value like this is directly related to previous decisions by management, which is a factor worth considering. In the case of Constellation, we are pleased to see management remove the dual share structure as it prevents shareholders with excessive voting power from promoting adverse transactions. We take that impairment into account in our thinking. But we’re less interested in it, because it’s non-recurring — and more importantly, solved by removing the two-layer sharing structure in the future. When Jim Cramer mentions high-return stocks, he’s talking about stocks that trade much higher than the S&P 500 — and in particular, earnings stocks that take on more risk. in a troubled macro environment. Based on the Club’s belief in Constellation as a recession-proof stock — people don’t tend to stop drinking regardless of the economic situation — and the coefficients are relative to the market, we I consider STZ a buy, as indicated by our 1 rating of the stock. The bottom line In addition to calculating the multiples yourself to make sure you’re really looking at what everyone else is looking at, keep in mind that expectations of future performance will help determine a possible stock price. much higher than past performance. That’s why instead of using forward earnings as a measure, we use expected earnings expectations. No one can predict the future. It’s also why portfolio managers always want to pay attention to companies’ guidance and what’s being said on post-earnings conference calls. Both are useful sources of management insight into the current operating environment and expectations for future quarters. (The long-term Jim Cramer Charitable Trust is STZ. See here for a full list of stocks.) As a subscriber to the CNBC Investment Club with Jim Cramer, you’ll receive trading alerts. before Jim made the transaction. Jim waits 45 minutes after sending the trading notice before buying or selling shares in his charity’s portfolio. If Jim had talked about a stock on CNBC, he would have waited 72 hours after issuing a trading warning before taking a trade. INFORMATION ABOUT THE ABOVE INVESTMENT CLUB IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, PLUS OUR DISCLAIMER. 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Constellation Brands’ Corona Light for sale at a grocery store in New York.
Scott eel | Bloomberg| beautiful pictures
On January 5thorderIn the morning meeting of 2023, you talked about high P/E stocks being too expensive and cited an example. Then you advertised the STZ as “buy”.
- Isn’t the P/E very high?
- My research says its P/E (not forward P/E) is around 500. Is my resource wrong?
-Bill