Also the magnitude of this derating do me not justified

Ratio price/earnings, the famous PER ("price earnings ratio"), is decidedly not one tool like the others. Regarded as ,

Abandoned during the technology bubble, despite the protests of a handful of investors who saw it as a tangible sign of drift, returning in force in the fall of 2001 was the return to reality. In the name of this same principle of reality, a part of the managers today urge investors to take their distance to this ratio. Fearing a bubble on the raw and the financial, they accuse him of being this time above the main vector of illusions, recalling that the PER is not relevant to assess cyclic companies. In essence, benefits increase significantly when these areas go to full, which has the effect of acquiring their PER to give unfairly the impression that valuations are attractive.

With the introduction of the new IFRS accounting standards, the PER was also found in the centre of the controversy. Despite greater volatility during the transition phase, this ratio was supposed to be the main beneficiary of these new standards, which jolts accounting specificity, facilitated the comparisons on the basis of the PER term. Currently, management professionals did in no less divided on its impact. In the camp of doubters, Jérôme Lieury, Manager at Louvre management, considers that "IFRS standards introduced greater volatility of results, with consequently a greater dispersion of forecast and the consensus, which impact the PER and make them less reliable.". "Also reduce them still more their use only companies whose results and margins are stable".

If all managers recognize the PER the merit of simplicity to enhance the future of a society and compare to its competitors, they do it are no less a multitude of defects. "Among other things, it does not reflect the financial structure", art Fabrice Théveneau, Director General of the research actions in Société Générale. "For example, if a society is indebted to redeem its shares, Pex will mechanically down, giving the illusion that the valuation is attractive, although the balance sheet quality is degraded."

Then how to make good use of this ratio As explains Vincent Guenzi, head of the strategy of investment in Cholet-Dupont, "the PER is an excellent instrument to achieve a first sorting, although it should be in a second time evaluate it to other ratios and parameters such as the risk premium." Among other things, it highlights the highest anomalies or discrepancies with the rest of the market. Rhodia, for example, clearly, stands with a 40 times and 11 times 2006 PER the consensus. "This recovery implies that investors are speculating on a recovery of its future results and agree, in advance, pay more dear."

Steering tool

Taking the PER for what it's worth, management professionals use it to put into perspective the attractiveness of stocks over bonds, comparing depending on the model of the US Central Bank, the Fed the reverse of the average PER of the shares to the performance of the 10-year bonds. In this model, equity markets are expensive when the PER is significantly lower than the performance of the obligations and, conversely, attractive where the PER is higher. "An average PER 15 times corresponds to a correct level today, as it would mean a performance required of the shares of 6.7 (the inverse of the price-earnings ratio) which is attractive to the obligations to 10 years (currently at 3.7).". By extension, the PER may serve as a tool of pilotage of portfolios. As the average PER of the portfolio exceed 15 times, need to make adjustments and possibly to take profits, and vice versa when the average PER drops below this bar 15 times.

But the main interest of the PER is to serve as "memory" of the market. As summarized Jean-Luc Allain, managing in Trusteam Finance, "it is the tool on which historical data are the most comprehensive to make comparisons." Recently, my team and I have thus sought the extent of the contraction of many over the last ten years with this ratio, comparing the PER of the SBF 120 in 1996-1997 with the forecast for the period 2006-2007. Unsurprisingly, this review highlighted a rehabilitation of holdings, especially of Eurazeo and Fimalac companies with the haircut has declined significantly, and a contraction of the multiple in cosmetics, pharmacy and retail. "However, these comparisons have highlighted what we appears to be"anomalies"of valorisation in the insurance and case by case in software and media".

In insurance, the average PER of AXA fell to 18 times in 1996-97 against 10.5 times in 2006-2007, while that of AGF turned to 19 times against 11.8 times over the same periods. "This compression of multiple reflects a distrust of the market after the earthquakes of 2001 and 2002." However, the management of insurers improved markedly in recent years. Their combined ratios are generally higher and their profitability is strongly improved through restructuring and cost reduction efforts. Also the magnitude of this "de-rating" do me not justified.

In software, Jean-Luc Allain isolates Dassault systems, of which the average PER is reduced by 45 times in 1996-1997 (i.e. before the technological bubble deformations) 23 times forecast 2006-2007, attributing this contraction to the bad memories of the year 2000.

In the media, it highlights Publicis and SR Téléperformance, including the PER average moved to 15.5 times 19 and 21 to 15.5 times respectively. "Meanwhile, Publicis has become a global player, which would justify a more substantial bonus." But the title resulted in the wake of the media, without rationale, the evolution of the advertising media should even strengthen the weight of Publicis in his role as Council. Small specialized agencies have certainly penetrated the market of the Internet, but Publicis has financial resources enabling, where appropriate, to make acquisitions to strengthen its offering in this segment. At this level, the current PER gives a signal of clear purchase of Publicis.