Why do PEG ratio values calculated on different financial web sites differ from each other?

Question

For example when I calculate the PEG of Microsoft (for the fiscal year 2017):

For P/E ratio:

P/E Ratio = Price per Share (last price before 10-k filing) / EPS (diluted)
          =  68.93 / 2.71  
          =  ~25.43 

But, Morningstar states a P/E of 30.23.

For EPS growth rate and PEG:

Growth rate = 2.71 (2017 EPS) / 2.10 (2016 EPS) - 1
            = ~0.29 = ~29%

PEG = 25.43 / 29
    = 0.88

But, Morningstar states a PEG of 2.78

I'm interessted in how and why my calculation differs so much from Morningstar data, and is my calculated PEG even usable?

Answer 1

There are two inputs to the PEG ratio calculation: The P/E ratio, and the growth rate. Each of these inputs can be calculated in a variety of ways. The P/E ratio, for instance, can use either trailing earnings, or forward earnings, etc. And then, earnings themselves could even be adjusted in a number of ways. e.g. excluding unusual one time gains or costs, etc.

When it comes to the growth rate, it is much the same: there's a lot of data to choose from, and many ways to arrive at a result. Your own calculation's growth rate is historical, using the most recent fiscal year's earnings per share over the previous fiscal year's earnings per share. Another way to do it with historical data would be to look at the trailing 4 quarters, over the 4 quarters before those. (This lines up with the way you're doing it but only when the most recent quarter was a company's 4th.)

However, Morningstar indicates they are/may be using a consensus forward growth rate. Refer to Morningstar - PEG Ratio:

PEG Ratio

A stock's price/earnings ratio divided by the company's projected EPS growth. [my emphasis]

The price/earnings ratio used in the numerator of this ratio is calculated by taking the current share price and dividing by the mean EPS estimate for the current fiscal year. A PEG Ratio means nothing in itself, so for comparison we show the industry and S&P 500 averages.

What isn't clear to me is if that page is just describing the PEG ratio in general, or if it is factually accurate about Morningstar's own calculation method. I'd lean toward the latter because they are precise about the inputs, but if you want to rely on that, check the numbers yourself in the way they describe.

In any case, I would caution against using just a single year of earnings growth. I would also caution against using anybody's forward-looking projection, unless you know how it was arrived at and agree with the methodology.

For instance, when I want to consider the PEG ratio for a stock, I like to calculate a compound annualized growth rate from three to five years' worth of earnings. Moreover, if earnings over that period were choppy, I'd not have much confidence in the prediction value of the resulting rate, and I might look at the best year in the set to see if there were special items I could exclude from the earnings to get a more realistic (but lower) growth rate.

Answer 2

Your calculation looks absolutely okay. I cannot say why Morningstar has different numbers, but I know that some other vendors calculate EPS (basic) instead of EPS (diluted). Some others use EPS (estimated) for next period. There is no generally valid rule for this ratio. This is why there are different values for this ratio.

Answer 3

What I notice is that the growth rate on various sites may differ along with the PE ratio, which will obviously throw off the PEG ratio. For example, one website may not adjust for stock splits and dividends, while another might. I know that google finance for example (as of a few months ago) did not adjust for stock splits, but Yahoo finance did. That can impact PEG ratio over the course of time. Also, PEG can be calculated at various growth rates in terms of duration (5 years, 10 year, 15 years). Depending on how many years are used in the calculation, websites can vary.