If we take a more recent picture, the dynamic nature of the tool takes form. More specifically, since the beginning of 2009, shares of Sysco have exchanged hands at a normal P/E of about 15 as compared to 21 since 2000. Clearly the P/E ratio has been lower in recent history. Note that operating earnings only grew by about 2% per annum during this time.
However, we can also see that shares went from a P/E of about 12 to today's previously specified 21. As such, an investor would have seen the share price accelerate much faster than the actual growth of this company during the more recent time frame. If we look at the performance table below, we can see that the share price increased by nearly 10% per year this despite the idea that the business only grew by about 2% annually.
What a difference buying at solid valuations can make.
Thus, on a forward-looking basis the potential investor of today would likely want to get a handle of how they felt about the earnings multiple moving forward (in addition to the necessary first step of determining the viability and growth prospects of the business). For instance, I demonstrated that Sysco had a normal P/E of about 21 over the last 15 years. Yet, consider that this ratio varied dramatically ranging from a high around 40, to a low of nearly 12 back into the mid-range at 21.
Since the end of 2008, shares of Sysco have had an average P/E ratio of about 15. Considering that the higher P/Es were generally reflective of higher growth rates it might be prudent to scale back one's expectations. In other words, it is true that the normal P/E since the turn of the century has been 21 and that is the current P/E. Yet, of late an earnings multiple of 21 has been higher than average.
Here's the bottom line. If you're an investor looking at shares today trading around 21 times earnings and you expect 21 to be a fair multiple in the future, then your performance results will likely follow business results over the long term. If you expect that 21 is too high a multiple and sometime in the future it will be lower, then your performance results might trail business results over the long term.