Stanley Black & Decker, Inc. (NYSE:SWK)
Stanley Black & Decker, Inc. (NYSE:SWK) is my first example where earnings growth is above the average earnings growth of the S&P 500. Once again we see the value of utilizing the 15 P/E ratio as a standard valuation reference. In this case, the normal P/E ratio of 15.6 and the fair valuation reference P/E ratio of 15 are closely aligned. The correlation between price and these valuation references are undeniable.
Ryder System Inc. (NYSE:R)
Ryder System Inc. (NYSE:R) has also generated an above-average earnings growth rate of 7.2%. However, in this example we see a significant earnings drop during the Great Recession. This example provides the opportunity to illustrate why the P/E ratio must always be looked at relative to other metrics. In other words, even though the 15 P/E ratio is a valid valuation reference, it doesn’t tell the whole story. This example clearly shows that the P/E ratio is a relative metric.
WEC Energy Group Inc. (NYSE:WEC)
WEC Energy Group Inc. (NYSE:WEC) (formerly Wisconsin Energy Corporation) is one of the fastest-growing utilities in America. Since 2001 earnings growth has averaged 8.6% per annum. However, once again we clearly see the validity of the 15 P/E ratio valuation reference. Even though this company has grown at an above-average rate, the P/E ratio of 15 represents a sound valuation level to consider investing in it.
VF Corp (NYSE:VFC)
With VF Corp (NYSE:VFC) we see an example where earnings growth is approaching double-digit levels at 9.4% per annum. Nevertheless, we see how valuable and insightful the 15 P/E ratio as a valuation reference has been over this historical timeframe. Additionally, since 2013 the stock price had become significantly disconnected from that fair valuation reference level. But price is clearly gravitating back towards that level over the last two years.
With J M Smucker Co (NYSE:SJM) earnings growth of 11.5% is more than double the average earnings growth of 5% as represented by the S&P 500. As we have now entered double digit earnings growth, we see an example where the normal P/E ratio of 17.9 might be considered a better valuation reference than the P/E ratio 15 standard.
However, even with this faster growing company, the 15 P/E ratio valuation reference has still manifested many times since 2001. The point is that the 15 P/E ratio valuation reference should not be thought of as an absolute. Instead, it should be thought of as a rational valuation reference even when growth is double digits.
Ball Corporation (NYSE:BLL)
Even though we saw a tendency for a higher normal P/E ratio with J M Smucker Co (NYSE:SJM) above, the 15 P/E ratio valuation reference on faster growing Ball Corporation is quite profound. Ball Corporation (NYSE:BLL) has grown earnings at 13.9% since 2001, but in this example both the normal P/E ratio of 15.3 and the fair valuation standard P/E ratio of 15 are almost identical. I will utilize this same example with a complete F.A.S.T. Graphs™ later in this article to illustrate the relative nature of the P/E ratio to a company’s earnings growth rate towards generating total returns.
With the above examples I demonstrated how the 15 P/E ratio represents a rational standard of valuation across various earnings growth rates from low to mid double digits. Moreover, from this perspective the P/E ratio of 15 as a standard valuation reference is not an indicator of future returns. Instead, it simply represents a rational level of soundness and/or prudence.
