The investment philosophy of legendary fund manager Peter Lynch focuses on finding well-run, growing companies trading at sensible prices, a strategy often called Growth at a Reasonable Price (GARP). Lynch supported a long-term, buy-and-hold method, concentrating on firms with sustainable earnings growth, strong financial health, and valuations that do not overpay for future prospects. His approach uses specific filters to find such companies, stressing a five-year earnings growth rate between 15% and 30%, a Price/Earnings to Growth (PEG) ratio at or below 1, conservative debt levels, solid profitability, and sufficient liquidity.
A recent screen built on these Lynch principles has identified PTC Inc. (NASDAQ:PTC) as a possible candidate. The Boston-based software company, which provides digital solutions for product design, manufacturing, and service, seems to fit several key parts of the strategy.
Examining the Lynch Criteria
The screen's main filters are made to find companies with a specific profile: profitable growth without too much financial risk or high valuation. PTC's current numbers suggest it fits this profile.
- Sustainable Earnings Growth: Lynch looked for companies growing steadily, not explosively. PTC's earnings per share (EPS) has grown at an average yearly rate of 25.6% over the past five years. This falls within Lynch's preferred 15-30% range, pointing to a strong yet possibly sustainable growth path that avoids the problems of overheated expansion.
- Sensible Valuation (PEG Ratio): Perhaps the most important Lynch metric is the PEG ratio, which adjusts the common P/E ratio for a company's growth rate. A PEG of 1 or less suggests the stock may be sensibly valued relative to its growth. PTC's PEG ratio, based on its five-year growth, is 0.83. This shows that, when its historical growth is considered, the stock's price may not be too high.
- Conservative Financial Structure: Lynch preferred companies with strong balance sheets. PTC's Debt-to-Equity ratio of 0.31 is below the screen's limit of 0.6 and matches Lynch's own liking for ratios below 0.25. This indicates the company is funded more by equity than debt, lowering financial risk.
- Profitability and Liquidity: The screen requires a high Return on Equity (ROE) and enough short-term liquidity. PTC's ROE of 19.2% is above the 15% minimum, reflecting efficient use of shareholder capital. Its Current Ratio of 1.12 meets the limit of 1, showing it has enough current assets to cover its short-term debts.
A Broad Fundamental View
A wider look at PTC's fundamental health supports the initial screening results. The company receives high scores for profitability and financial health, which are central parts of the Lynch philosophy.
- Excellent Profitability: PTC's margins are a notable feature. Its operating margin of 36.8% and profit margin of 26.8% rank in the top group of its software industry peers. This operational efficiency is a key sign of a strong business model.
- Firm Financial Health: The company's balance sheet is solid. An Altman-Z score of 5.73 indicates a very low near-term bankruptcy risk, and its Debt-to-Free-Cash-Flow ratio of 1.4 is very good, meaning it could pay off all debt with just over a year of cash flow. While its current and quick ratios are lower than many peers, the analysis states this is probably not a worry given its strong overall solvency and profitability.
- Balanced Valuation: On its own, PTC's P/E ratio of 21.2 might seem high. However, compared to the software industry average and when adjusted for its growth via the PEG ratio, the valuation seems more sensible. The fundamental analysis finds that its excellent profitability may support its current valuation multiple.
You can review the complete fundamental analysis for PTC here.
Fit for GARP Investors
For investors looking for growth at a sensible price, PTC offers a strong example. It works in the important field of industrial software (CAD and PLM), which can be viewed as fitting with Lynch's idea of investing in understandable, if not "dull," sectors that form the foundation of modern manufacturing. The company shows the characteristics Lynch valued: a history of solid, double-digit earnings growth, exceptional profitability numbers, and a conservative capital structure. Most importantly, its PEG ratio suggests the market has not yet overvalued this growth story.
The Lynch strategy is not about following the most popular trend but about finding durable companies for a long-term portfolio. PTC's fundamentals indicate it is a financially healthy company growing at a sustainable speed, which is exactly the profile this method tries to find.
Interested in finding other companies that match the Peter Lynch investment profile? You can run the screen yourself and see the latest results here.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, an endorsement, or a recommendation to buy, sell, or hold any security. Investing involves risk, including the potential loss of principal. Always conduct your own due diligence and consider consulting with a qualified financial advisor before making any investment decisions.
