TweetYou may be surprised to find out that a stock can sell for $800 a share and not be considered the most expensive stock.
That is because price on its own does not tell us how expensive the share of a particular stock is. One way we can identify the most expensive stock is by having a look at the price to earnings ratio.
Find the Most Expensive Stock in Seconds by Comparing P/E
So if Google (GOOG) earned $32.21 in the last twelve months and it costs $800, then you just divide the stock price by the earnings to get the price to earnings ratio (P/E). This multiple tells us the value of the stock. If you do the math you will see that Google trades at 24.82 times trailing twelve months earnings.
The best thing about knowing this multiple is that you can use it to compare one business to another on the same basis.
Let’s do a comparison so that you can get a better picture. Google has a 24.82 multiple on its trailing twelve months earnings. Apple, one of the best known tech companies, earned $44.11 in the last twelve months and it costs $450.81. If you do the arithmetic, Apple trades at 10.22 times trailing twelve months earnings.
So we can say that Google is way more expensive than Apple.
To further confirm that Google is indeed more expensive than Apple, we need to look at the growth rates for both these businesses. You need to understand that Wall Street pays big money for growth, specifically for earnings that are increasing quickly every year.
Companies that are characterized by slow growth usually have the most expensive stock in their particular sector.
Google’s five-year expected annual growth rate is 13.72%. You can get this number for free from the analyst estimates page on Yahoo Finance. Apple, over the next five years, is expected to grow its earnings at 18.98% per year.
Apple is growing a lot faster than Google and it deserves the higher multiple. In other words, Google is the most expensive stock out of the two.
If a stock ever trades at two times growth or above, it is too expensive and you should sell it.
PEG Ratio
PEG is the price to earnings multiple divided by the company’s growth rate. We would say that Google trades at 1.8 (24.82/13.72) times growth. Apple, with a 10.22 multiple and 18.98% growth, trades at just 0.5 times growth. Google is by this very important measure (PEG) the more expensive stock.
The lower the PEG ratio, the cheaper the stock is.
Book Value: an Indicator of Long-Term Growth
To further confirm that Google is the most expensive stock, you can analyze the book value per share growth rate. Book value is what Google would have left over if they sold off everything, paid off any debt, and took the money that was left. In other words, what the business is worth if it is no longer a business.
For a business, book value per share is an excellent indicator of the long-term growth of intrinsic value and helps us identify expensive stocks.
The image below shows the book value per share 10 year summary for Google and Apple. MSN Money provides us with these numbers for free.
Apple 10 year book value per share (left) and Google book value per share (right)
Using the above numbers, you can calculate the 5 year, 3 year, and 1 year book value growth rate.
5 year growth rate
3 year growth rate
1 year growth rate
25%
24%
21%
Apple
5 year growth rate
3 year growth rate
1 year growth rate
50%
53%
53%
Apple’s book value is growing a lot faster than Google’s. These numbers are in line with the five year future growth rate analyst estimates provided by Yahoo Finance. Judging by its book value per share growth rate, Google is indeed the most expensive stock.
In addition to book value per share, you can compare sales growth rates and free cash flow per share.
Growth rates are important because they tell us about the future of the business and that in turn tells us the value of the business today. A business that can grow its earnings at 20% forever has a higher value placed on its earnings than a company that is going to grow at only 10% a year. The most expensive stock is always going to be the business that is struggling to grow and has debt.
Bad Balance Sheet Can Point Out the Most Expensive Stock
Lots of debt can also be a factor that determines how expensive a stock is. Make sure the stock you are considering has a healthy balance sheet. This means either no debt or the cash to pay off its debt on time.
Debt takes away a business’s flexibility and just weighs it down. There is nothing worse than paying a high price per share for a business that carries a lot of debt and low future growth rates. That is precisely why you should run these type of analysis.
