Over the long run, it is earnings that drive total returns. The multiple can come and go, with sentiment.
AMP, for example, has been driven entirely by the decline in earnings. 1 & 2 are blended forward earnings, R is the total return, and the number (16.23) is the forward PE.
Dominos; the market got very excited (pizza franchise growth to the moon!) leading to material multiple expansion. Eventually something goes awry (it always does, a slowdown in growth, a change in consumer preferences, limits to expansion, whatever it might be) and now, the stocks’ return is fully explained by the earnings growth over the past 7 year. Mind you, in our view 26x is still expensive for a stock of DMP’s quality into a downturn.
Likewise, it is hard not to conclude that the ASX is still expensive, even after de-rating quite a bit. Lots of multiple expansion, minimal growth, in return for some questionable execution. Still on 24x forward with expense uncertainty.
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