On a trailing basis, shares in the a2 Milk Company Ltd (ASX: A2M) and Austal Limited (ASX: ASB) may meet Peter Lynch’s investment criteria.
Peter Lynch is widely regarded as one the world’s best investors. Lynch earned this title from his investment performance as the portfolio manager of Fidelity Magellan Fund. Between May 1977 and 1990, the fund outperformed every other fund manager on Wall Street, achieving an average annual return of 29% for investors.
Luckily for us, he kindly shared his years of wisdom in his book One Up on Wall Street. To quote Lynch, “I own stocks where results depend on ancient fundamentals: a successful company enters new markets, its earnings rise, and the share price follows along”.
Lynch detailed a valuation metric in his book, “if the p/e ratio is less than the growth rate, you may have found yourself a bargain”.
This has been popularised as the PEG ratio in which the current price/earnings ratio is divided by the estimated growth rate. If the growth rate exceeds the price/earnings value, the PEG ratio will be less than 1.
a2 Milk Company
Producer of premium-branded dairy nutritional products, the a2 Milk Company reported FY20 earnings per share (EPS) of NZ$0.5239. This represented growth of 34% on the prior year.
Converting into Australian dollars, EPS came in at $0.4818.
Based upon a2 Milk’s current share price of $16.30, it trades on a trailing PE ratio of 33.83. This gives a2 Milk a trailing PEG ratio of 0.995, only just under 1!
Looking forward, the company provided FY21 guidance for an EBITDA margin between 30% to 31% and “continued strong revenue growth”.
Austal
Australian global shipbuilding company Austal reported FY20 EPS of $0.25, up 42% on the prior year.
Based upon Austal’s current share price of $3.24, it trades on a trailing PE ratio of 12.96. This gives Austal a trailing PEG ratio of 0.309 – well below 1.
Based upon dividends paid to investors over the last 12 months, Austal shares also trade on a trailing dividend yield of 2.45%.
Growth will be supported by the company’s $4.3 billion order book, with 10 new ships ordered in FY20 and 45 ships under construction or scheduled.
