Question
You are tasked with valuing of Variant Technology using the PEG ratio. Variant is trading at $24 per share and reported earnings per share of
You are tasked with valuing of Variant Technology using the PEG ratio. Variant is trading at $24 per share and reported earnings per share of $ 2.00 over the last four quarters. Analyst consensus is that these earnings will grow 10% a year over the next 5 years. The rest of the sector trades an average PE ratio of 15 and sector earnings are expected to grow 12% a year over the next 5 years.
a. Based purely on a comparison of PEG ratios, how under- or over-valued is Variant?
b. Now assume that you are told that Variant will be in stable growth after year 5, growing 3% a year forever. Variant is expected to have a return on equity of 12% and a cost of equity of 9% (for the next 5 years and beyond). Based upon these fundamentals, estimate the intrinsic PEG ratio for Variant.
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