The Interpretation Of The Earnings and Price Correlated F.A.S.T. Graphs™ Made Simple
At their core, F.A.S.T. Graphs™ are easy to interpret and understand. When you are clear on what the
lines and shaded areas on a F.A.S.T. Graphs™ represent, you will experience an instantaneous and
comprehensive understanding of the business behind the stock, and how the market has, and is, pricing
it.
The Orange Line and Green Shaded Area
First, F.A.S.T. Graphs™ plots the earnings of the company and calculates its growth rate for the time
period being graphed. Then as a metaphor for intrinsic value, an orange line with white triangles is
drawn based on applying widely-accepted formulas for valuing a business. The orange line represents
the same P/E ratio on every point on the graph and is also reported in the orange rectangle in the FAST
FACTS box to the right. The green shaded area is simply a mountain chart of the company’s earnings
each year.
For companies growing earnings at a rate of 15% or better, the classic formula P/E equals growth rate,
commonly referred to as PEG, and made famous by Peter Lynch is applied. Therefore, when a
company’s earnings growth is 15% or greater, the orange line will have a P/E ratio that is equal to its
growth rate. When this formula is used, it is designated with the letters “PEG” in the orange rectangular
box on the FAST FACTS to the right. The following F.A.S.T. Graphs™ on Accenture is an example of a
fast-growing company utilizing the PEG formula.
For the time frame graphed below, Accenture (ACN) achieved an operating earnings growth rate of
17.1% which is listed in the green rectangular FAST FACTS box to the right. Then notice that the P/E
ratio of Accenture’s orange line is also 17.1% which is equal to its earnings growth rate. The designation
PEG in the orange rectangle designates what formula the F.A.S.T. Graphs™ has used to calculate fair
value.
Our second example is Southern Company (SO), a slow-growing utility stock whose operating earnings
growth rate has only averaged 3.6% during the 11-year timeframe graphed. Here we see the operating
earnings growth rate of 3.6% shown in the green rectangle on the FAST FACTS to the right. However, in
this case the P/E ratio of the orange line is 15, and was calculated using the famous formula authored by
Ben Graham. The designation GDF, which stands for Graham Dodd Formula, is included in the orange
rectangle in the FAST FACTS to alert the reviewer to the formula used, and to the growth rate the
company has achieved.
Across the entire span of the graph, the P/E ratio in this low growth example is 15. Additionally, the
slope of the orange line in this example is 3.6%, or the earnings growth rate of Southern Company in this
example. Once again, the green shaded area represents a mountain chart of Southern Company’s
earnings.
Our third example is Colgate-Palmolive Company (CL), which has a moderate rate of operating earnings
growth that has averaged 10% per annum. When earnings growth is above 5% but below 15%, the P/E
ratio is calculated utilizing an extrapolation of the two previous formulas (PEG and GDF) with the
connotation PEG-GDF (note that the dash between them is not a minus sign, instead it is utilized to
indicate that the extrapolated formula is being used).
Once again, the fair value P/E ratio that applies to the orange line is listed in the orange rectangle under
the FAST FACTS to the right of the graph. In the Colgate Palmolive example the P/E ratio of the orange
line is 15 across the entire span of the orange line on the graph. However, the slope of the line is equal
to the company’s 10% growth rate, which is listed in the green rectangle in the FAST FACTS to the right.
To summarize, the orange line and green shaded area depict the company’s operating earnings during
the timeframe graphed. The intrinsic value, or P/E ratio, is calculated as listed in the orange rectangle in
the FAST FACTS. The earnings growth rate, which is also the slope of the orange line, is listed in the
green rectangle in the FAST FACTS to the right of the graph. Finally, the green shaded area represents a
mountain chart of the company’s earnings.
More simply stated the orange line and green shaded area give you a graphic portrayal and instant look
at the business behind the stock. This is the most distinguishing and salient feature of the F.A.S.T.
Graphs™ (Fundamentals Analyzer Software Tool) stock research tool. Most other stock graphing tools
plot price only. As you will soon see, F.A.S.T. Graphs™ in contrast, reveals the earnings and price
relationship of the stock and the business behind the stock.
Dividends are Expressed in Two Important Ways
First, dividends are expressed on the F.A.S.T. Graphs™ reflecting that they have been paid out, by the
light blue shaded area sitting on top of the orange earnings justified valuation line. Later when price is
included on the F.A.S.T. Graphs™, you will see how the market prices earnings, representing capital
appreciation and how the dividend represents the second component of total return - dividend income.
This is the primary reason why the blue shaded area representing dividends is included and depicted
outside the green shaded area, which depict earnings.
Another advantage of expressing the dividends paid out in this manner is that the reviewer of the
F.A.S.T. Graphs™ can instantly see whether or not a company pays a dividend, and for companies that
have just started paying a dividend, they can also see when the dividend has first been initiated.
In addition to expressing dividends after they have been paid out by the light blue shaded area on top of
the orange earnings justified valuation line, dividends are also expressed by a light pink line within the
green shaded earnings area. This serves two important purposes. First, it allows the reviewer to
instantly see whether dividends have grown consistently, or have been cut at any time during the
timeframe graphed. The pink line is simply a plotting of the company’s dividends each year utilizing the
same multiplier that applies to the orange line on the graph.
When expressed this way, the second purpose of the pink line is to graphically illustrate the dividend
payout ratio of the company. The entire area below the pink line represents the portion of the earnings
(the green shaded area) that are paid out and simultaneously expressed by the blue shaded area on top
of the orange earnings justified valuation line. In the case of our Church & Dwight Inc. example below,
the pink line also alerts the reviewer to any changes in the company’s payout ratio (Notice how Church
& Dwight Inc.’s payout ratio increased dramatically in 2012 and 2013). To understand this better, think
of the area below the pink shaded area as a blank spot in a puzzle, and the light blue shaded area as the
puzzle piece that would fit there.
This would still be true for a company with very cyclical earnings, however, the light blue shaded area
could give the illusion that dividends were being cut because they are stacked on a rising and falling
orange earnings line. This is an additional benefit of the light pink dividend line, it will instantly reveal
whether the dividend has been cut or lowered over the timeframe graphed.
Introducing Monthly Closing Stock Prices
The black line on a F.A.S.T. Graphs™ plots monthly closing stock prices for the timeframe being graphed.
When added to the earnings and dividend graph, the correlation between how well the business has
done and how stock price has reacted and correlated is vividly revealed. On graph after graph where
earnings go the price is sure to follow.
The Blue Normal P/E Ratio Line
Moreover, and as an oversimplification, when the black line is above the orange line overvaluation is
indicated. When the black line is touching the orange line, fair value is indicated. When the black line is
below the orange line, undervaluation is indicated. However, the real world does not always cooperate
as planned. There are certain companies that the market typically overvalues or undervalues, and the
F.A.S.T. Graphs™ research tool reveals these situations when they occur by adding an additional line to
the graph called the normal P/E ratio line (the dark blue line).
F.A.S.T. Graphs™ automatically calculates the P/E ratio that the market has most commonly applied to a
given stock over any timeframe that is graphed. This adds a second metaphor of valuation to the
F.A.S.T. Graphs™. It’s important to state here that F.A.S.T. Graphs™ were not designed to dictate fair
value. Instead, they were designed to reveal it. In other words, it is up to the user to decide whether or
not the blue normal P/E ratio line on the graph, or the orange earnings justified valuation line on the
graph, is the right one to base valuation decisions on. The essence of FAST Graphs™ is that they are “A
tool to think with.”
Therefore, with the Church & Dwight Inc. example below, there are two expressions of valuation
included. The blue line representing the normal P/E ratio, and the orange earnings justified valuation
line. The key to evaluating either of these metaphors of valuation is simply to look closely at the graph
and ask yourself which line most appropriately represents a reasonable valuation for the company over
the timeframe being graphed. It is also important to notice how the black monthly closing stock price
line trends and correlates with both lines. In other words, where earnings go price is sure to follow.
Understanding the Associated Performance Results
As a great convenience and benefit to the subscriber, F.A.S.T. Graphs™ automatically calculates the
performance of the company over the timeframe graphed. The performance results table is easy to
interpret and understand. Just under the company’s name and symbol is the performance table. The
top of the table shows the amount invested, the beginning shares purchased, and the split-adjusted
price for the date in which the graph begins. At the top right corner we see the closing values and
closing prices through the previous day’s close.
Next we have the dividend cash flow table. Here you see the fiscal year-end, the dividends per share,
the dividend growth rate, earnings per share payout ratio in percentages year-by-year and averaged for
the timeframe, the end of period shares, dividends paid, and finally, yield on cost. Tallies are given at
the bottom of the table for the appropriate columns.
Finally, the performance report shows total cumulative dividends paid, the amount of capital
appreciation and the annual return it represents, followed by total return information that includes
dividends in the total. In the example below, dividends are not reinvested, but F.A.S.T. Graphs™ are
given the option to calculate the same performance with dividends reinvested by simply checking a box
and redrawing the graph.
The Estimated Earnings and Return Calculator - A Forecasting Graph
Finally, the basic Earnings and Price Correlated F.A.S.T. Graphs™ set includes a forecasting graph. Before
we explain the components of this simple graph, the reader’s attention is drawn to the word
“calculator” in the description. Subscribers are given the option to input their own estimates into the
Estimated Earnings and Return Calculator (Note: The growth rate in the calculator may be different
than the growth rate on the historical graphs above.)
However, the default setting for F.A.S.T. Graphs™ is based on reporting the consensus estimates of
leading analysts reporting to Standard & Poor’s Capital IQ Company. The number of analysts and the
estimated five-year earnings growth rate is listed in the green rectangular box in the FAST FACTS to the
right of the Estimated Earnings and Return Calculator graph.
Additionally, there are two other estimates that the Estimated Earnings and Return Calculator provides.
The second estimate is a specific dollar amount for the current fiscal year’s (in the example below 2013)
earnings per share found directly below the graph, and is marked with a capital “E” for estimate. Finally,
the third estimate is also a precise earnings per share number forecast for the next fiscal year.
Summary and Conclusions
F.A.S.T. Graphs™ are easy to interpret and utilize when you know what you are reviewing. The orange
line on the graph shows earnings per share and reflects the growth rate of the company’s operating
history. The black line represents monthly closing stock prices and how they track those earnings. The
light blue shaded area shows dividends, and an additional dividend expression is given by the light pink
line in the dark green shaded earnings area. The dark blue line on the graph calculates the price
earnings ratio (normal P/E) that the company has historically traded at during the timeframe being
graphed.
Now you know why we state that F.A.S.T. Graphs™ provide essential fundamentals at a glance. In an
instant you can see how well the business behind the stock you are reviewing has done, how the market
has historically priced it, how the market is currently pricing it, what type of performance this has
generated for shareholders, and finally, how the stock is currently being valued by the market place.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.