As a young boy, I dreamed of accompanying Jim Hawkins on his quest to find the hidden treasure of Captain J. Flint of the pirate ship The Walrus. The ghosts of six murdered crewmen were said to protect padlocked chests of golden doubloons, precious gems, and jewelry buried on a remote island, the only guide to its location being a tattered old map found in the bottom of a dead man’s chest.
Stories about lost pirate booty, sunken ships filled with the gold and gems of the New World, and missing treasures of antiquity have been repeated generation after generation, mesmerizing listeners with the possibilities and perils of searching for them. Some of the tales are fiction, but others have a nucleus of truth. Whatever their source, the possibility of found treasure continues to inspire adventure-seekers to action.
Famous Fictional Treasure Hunts
Long before steel vaults and guarded treasure rooms, people sought to safeguard their valuables by hiding them in the ground in locations kept confidential via coded maps and complex ciphers. In many cases – such as imprisonment, wars, or death – those privy to the secret were unable to recover the buried assets, resulting in new tales and searches. Plundered gold and gems were lost at sea in transports sunk by pirates, privateers, or storms, plummeting to the depths and scattering across the seafloor to be covered by shifting sands.
These caches of lost valuables sparked the imaginations of storytellers and adventurers alike. Authors and movie-makers are especially adept at mining the lost treasure genre.
Stock investors are constantly searching for ways to determine whether a stock is under- or over-valued. Logically, they seek to buy securities in companies that are under-valued and sell the securities of companies that are over-valued. The Price Earnings (P/E) Ratio is a common way to quickly assess how investors value a company based upon its future earnings projection.
Calculation of P/E Ratio
The P/E ratio is the result of dividing the common stock market price by its reported or projected earnings per share. For example, the common stock of XYZ Corporation sells for $22 per share. The latest reported annual earnings are $1.75 per share. The P/E ratio of XYZ would be 12.6 ($22 divided by $1.75). Price earnings ratios are used to compare different companies or the same company over different time periods.
Companies with higher P/E ratios are expected to have higher rates of future earnings growth. For example, web-based Amazon (AMZN) had a P/E ratio higher than its brick-and-mortar competitor Walmart (WMT) even though the latter’s earnings per share (EPS) were more than seven times greater than Amazon’s in 2015. Simply stated, investors are willing to pay more today for a dollar of Amazon’s earnings than a dollar of Walmart’s earnings because they believe Amazon’s earnings per share in the future will grow faster than Walmart’s.
P/E ratios can vary substantially based upon the earnings components used to calculate the ratio. Most analysts seek to understand and project operating earnings, rather than total earnings that may include extraordinary events unlikely to recur.
In the example of XYZ, the reported earnings of $1.75 per share included the sale of a division that added the equivalent of $0.30 per share to the final earnings result. Securities analysts typically deduct the financial impact of extraordinary events to arrive at a true operating profit. In this case, reported earnings of $1.75 would be reduced by $0.30 to get operating earnings per share of $1.45 and the newly calculated P/E ratio would be approximately 15 ($22/$1.45).
Price earnings ratios can also vary according to three factors:
Trailing Actual Earnings. Earnings may be for the latest reported calendar year or adjusted as each quarter is reported. For example, a year includes quarters 1, 2, 3, and 4 of the most recent year. When the first quarter of the new year is reported, the analyst would omit quarter 1 of the previous year and add quarter 1 of the current year so the annual earnings would include quarters 2, 3, and 4 of the previous year and quarter 1 of the current year. This approach ensures that the analysts are using an earnings figure for the most recent 12 months.
Projected Earnings. Sometimes referred to as a “Forward P/E,” the earnings figure is based upon an analyst’s estimated earnings per share over the next 12 months. The projected earnings may be the opinion of a single analyst or a consensus of a number of analysts. It is important to know who is making the estimate and that person’s qualifications to ensure that projected earnings are realistic.
Combination of Actual and Projected Earnings. Some analysts may use two quarters of actual earnings and two quarters of projected earnings to arrive at an earnings per share number.
Testing the Validity of the Price Earnings Ratio
Theoretically, companies with higher rates of annual earnings growth have higher P/E ratios. From time to time, investor optimism pushes the price of a security to unrealistic highs with expectations of excessive growth. Using the Price/Earnings Growth (PEG) ratio is a quick and easy way to determine whether the P/E ratio is justified or if a security is over-, under-, or fairly priced based upon your expectation for its average annual growth during the next five years.
The PEG is calculated by dividing the Price Earning ratio by the projected annual five years earnings growth (a three-year period can also be used if desired). For example, Company B’s stock selling at a 13 P/E with an estimated annual growth rate of 25% per year would have a PEG of 0.52 (13/25) while Company A’s stock selling at a 10 P/E with an estimated annual growth rate of 25% would have a PEG of 0.4 (10/25). Analysts consider a ratio less than 1.0 as under-valued, equal to 1.0 fairly valued, and over 1.0 as over-valued. While the shares of both companies are undervalued based upon their projected earnings growth, Company A would be the better purchase due to its lower PEG ratio.
As with all indicators, neither the P/E nor the PEG are completely reliable, especially since stock prices are rarely rational in the short-term. It is this volatility that provides opportunities to buy and sell.
Nonetheless, it’s important to recognize that companies with very low earnings can provide skewed results. It is much easier for a company earning a million dollars to grow 100% per year for five years to $16 million than a company earning $100 million to grow to $1.6 billion in profit. When establishing a projected earning growth rate, consider your own common sense as well as any public estimates of growth from reliable analysts.
Limitations of the P/E and PEG Ratios in Analysis
Both ratios are simple and easy to calculate, but are best used as general indicators of value due to their superficiality. Their limitations in deterring value include the following:
Calculations of Company Earnings Are Complex and Frequently Managed by Corporate Executives. Accounting and tax rules are complicated and constantly changing, making comparisons between earnings of different periods and companies difficult. Since the market typically rewards higher P/Es to companies with a trend of consistent earnings growth than companies with erratic earnings, corporate executives try to manage reported earnings to meet investor expectations and maintain high stock valuations.
High Growth Rates Cannot Be Extended Indefinitely. Extraordinary earnings growth is difficult to achieve as companies mature. Competitors recruit company employees, leapfrog technologically, and capture market share from industry leaders. Additional suppliers generally reduce product or service prices and profit margins. As companies grow larger and grow staff, reacting to changing market conditions is more difficult, making them more vulnerable to those very market conditions.
P/E Multiples Tend to Fall Over Time. Earnings projections tend to be optimistic. When earnings projections are not met, ratios tend to contract.
Some Companies Are Not Valued Based on Their Earnings. Entrepreneurial companies like Facebook (FB) and Amazon spend heavily in their early years to capture a dominant market share, thereby delaying earnings. Natural resource companies invest heavily in exploration activities to find assets that will be converted to cash in future years. Since those activities are generally expensed in the year they occur, the company produces accounting losses even though assets may grow signficantly.
Financial Leverage Impacts Earnings. P/E ratios consider only the equity of a company, not its entire capital base. Leverage, using debt in the capital structure, increases shareholders’ risk since debt has a multiplier effect when earnings on the borrowed capital exceed the cost of that capital. Conversely, when the rate of earnings is lower than the cost of borrowed capital, shareholder losses are exaggerated. Looking at a P/E ratio without considering the debt owed by the company often leads to invalid results.
P/E Ratios May Be Misleading. While a low P/E ratio may indicate an under-valued, over-looked opportunity for profits, it can also mean that the company’s earnings will decline in the future and astute investors are selling the stock to avoid losses. Relying on P/E ratios alone to buy or sell stock is a risky and foolish practice.
Final Thoughts
P/E ratios are excellent tools for a superficial analysis such as determining which company in an industry to further investigate or selecting one industry over another. Nevertheless, it is important to ascertain the underlying reasons for a multiple before making an investment decision.
In the short-term, stock prices can be very volatile since they reflect investor hopes and fears. For example, a suspected change in an analyst’s opinion or rumors about the economy, an industry, a company, or its competitors affect stock prices and P/E multiples whether valid or not. P/E and PEG ratios should always be used with other metrics before taking investment action.
Taking a commercial flight today is “the equivalent of traveling via Greyhound bus in the 1970s,” according to Victoria Person-Goral, one of USA Today’s panel of frequent travelers.
It’s not hard to see why she says this. Today’s flight passengers are herded through slow-moving security checks that require the removal of shoes and jackets, as well as being subject to an invasive X-ray. Complain too loudly, and you may be placed on the Federal Government’s No Fly List or charged with a civil fine.
When you finally board the plane, you discover your assigned seat is between two strangers, one who keeps sniffling and another whose elbow continually trespasses into your space. There’s no room in the overhead bins for your carry-on. To add your misery, the child behind you spends the entire flight kicking the back of your seat. If you’re really unlucky, you discover on landing that your checked bags are on a different plane headed to the other side of the continent.
Fortunately, there is a better way to fly, and it’s not as expensive as you might think.
The History of Private Planes
The Piper J-3 Cub was one of the first airplanes designed for personal use. It sold for just under $1,000 in 1939 and became synonymous with the term “tail-dragger.” In the early years of flight, all planes were designed with a wheel under each wing and another under the tail, hence the name tail-dragger. This design was subsequently modified to simplify ground travel, takeoffs, and landings by moving the third wheel from the tail to the nose of the plane in a tricycle configuration. The Piper Cub carried one passenger and flew at a maximum airspeed of 74 mph. More than 20,000 Cubs were purchased by aspiring pilots, and many of these planes are still flying today thanks to committed hobbyists.
The personal aircraft market took off after World War II, with Piper, Cessna, and Beech offering multi-passenger, propeller-driven aircraft that could cruise at more than 100 mph. These light planes could utilize very short runways made of pavement or level pasture. The years between 1960 and 1980 were known as the “Golden Age of Flying” as small and large businesses used airplanes as a substitute for automobiles, trains, and commercial airlines.
Today, there are 14,485 private airports in the United States, according to the Federal Aviation Administration (FAA) – nearly three times the amount of public airports (5,116). There are almost 175,000 FAA-certified private pilots. According to the General Aviation Manufacturers Association (GAMA), more than 200,000 private planes were active in the U.S. in 2016, including almost 128,000 single-engine, piston-driven models. Pilots spent more than 24 million hours in flight that year, averaging 135 hours per plane. The average age of private pilots was 44.8 years, with most student pilots learning to fly in their early 30s.
My Experience as a Plane Owner & Pilot
I know from experience how rewarding private aviation can be.
In the 1980s, my company had subsidiary operations in small towns from New Mexico to Mississippi. The officers, including myself, visited each site monthly, so every week someone was on the road. Commercial airlines didn’t serve the small communities where our facilities were located, so we had to rent a car and drive several hours to and from our plants and larger airports. Missing a flight led to an overnight motel stay, wasting time and money.
In the summer of 1984, two of the traveling executives and I purchased a used 1969 Cessna 210 airplane. The plane had room to carry four to six people with luggage with a load limit of 1,012 pounds. The Cessna cruised at over 200 mph and utilized the short runways common to our sites.
The #MeToo movement exploded into America’s consciousness in the Fall of 2017, shaking executive offices and boardrooms across the country. Initially promoted in 2006 by women of color who had suffered sexual abuse, the movement became mainstream on social media after actress Alyssa Milano’s tweet, “If all the women who have been sexually harassed or assaulted wrote ‘Me too.’ as a status, we might give people a sense of the magnitude of the problem.” The massive response to her tweet was unexpected and became the basis for a national movement.
Encouraged by movie stars recounting their experiences, millions of women (and some men) have written or spoken about their mistreatment by powerful men and women. For many, the extent of sexual harassment and abuse in our male-dominated society was a revelation as it became clear that no sphere — schools, sports organizations, government agencies, churches, or workplaces — has been immune to the powerful exploiting the powerless for generations.
The consequences of sexual misconduct are swift in today’s climate. As TIME magazine reports, “Nearly every day, CEOs have been fired, moguls toppled, icons disgraced. In some cases, criminal charges have been brought.” Time’s Up, an advocacy group formed in 2018, focuses solely on sexual harassment and women’s issues in the workplace. One of their aims is to bring about additional federal and state legislation to punish companies that tolerate harassment.
While many companies have had sexual harassment policies in place for decades, this new atmosphere places managers under even stronger pressure to uphold these policies and provide employees with a safe, supportive working environment. If you’re a manager wondering how the #MeToo movement affects your responsibilities, here is what you need to know.
How Extensive Is the Problem?
WIRED magazine reports that the extent of harassment in the workplace is unknown due to the increased use of non-disclosure agreements (NDAs) in settlement negotiations. Confidentiality provisions can hide the acts of serial abuse by powerful, wealthy men such as current President Donald Trump, former President Bill Clinton, and Roger Ailes for years. As former Fox News host Gretchen Carlson, who sued Ailes to escape the NDA she signed with Fox in 2013, told WIRED, these agreements “both silence the victim and fool our culture into thinking we’ve come so far when we have not.”
Women have silently endured sexual harassment in the workplace for generations. In previous generations, they rarely reported or spoke of these instances for fear they might lose their jobs or chances for promotion. A 2016 study by the Equal Employment Opportunity Commission (EEOC) found that three-quarters of working women had experienced unwanted sexual attention or sexual coercion (including physical touching) on the job, but less than 10% filed a formal complaint.
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