An analyst plans to use P/E and the method of comparables as a basis for recommending purchasing shares of one of two peer - group companies in the business of manufacturing personal digital assistants. Neither company has been profitable to date, and neither is expected to have positive EPS over the next year. Data on the companies€™prices, trailing EPS, and expected growth rates in sales (five - year compounded rates) are given in the following table:

Unfortunately, because the earnings for both companies have been negative, their P/Es are not meaningful. On the basis of this information, address the following:
A. Discuss how the analyst might make a relative valuation in this case.
B. State which stock the analyst should recommend.

Transcribed Image Text:

Company Trailing EPS Expected Growth (Sales) P/E Price Hand $22 -$2.20 45% NM Somersault $10 -$1.25 40% NM