Question: May Stewart, CFA, a retail analyst, is performing a P/E - based comparison of two hypothetical jewelry stores as of early 2009. She has the
May Stewart, CFA, a retail analyst, is performing a P/E - based comparison of two hypothetical jewelry stores as of early 2009. She has the following data for Hallwhite Stores (HS) and Ruffany (RUF).
- HS is priced at $ 44. RUF is priced at $ 22.50.
- HS has a simple capital structure, earned $ 2.00 per share (basic and diluted) in 2008, and is expected to earn $ 2.20 (basic and diluted) in 2009.
- RUF has a complex capital structure as a result of its outstanding stock options. Moreover, it had several unusual items that reduced its basic EPS in 2008 to $ 0.50 (versus the $ 0.75 that it earned in 2007).
- For 2009, Stewart expects RUF to achieve net income of $ 30 million. RUF has 30 million shares outstanding and options outstanding for an additional 3,333,333 shares.
A. Which P/E (trailing or forward) should Stewart use to compare the two companies’valuation?
B. Which of the two stocks is relatively more attractive when valued on the basis of P/Es (assuming that all other factors are approximately the same for both stocks)?
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