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Artificial Intelligence (AI) has been sweeping the world over the past year, affecting almost every field of human endeavour. The investment world is no exception. Today the private investor, through AI, has access to a range of analysis which is totally unprecedented and lightning fast. For example, if you pose the following to Google’s Gemini:
“Using a price: earnings growth ratio (PEG), with historical earnings figures over the past 10 years, compare Clicks and Dischem on the JSE for relative value at their current prices”.
A few seconds later, you will receive the following answer:
Based on a 10-year historical valuation framework using the Price/Earnings-to-Growth (PEG) metric, Clicks Group Limited (CLS) offers significantly better relative value than Dis-Chem Pharmacies Limited (DCP), with Clicks holding a PEG ratio of 1,07 compared to Dis-Chem’s elevated PEG ratio of 4,92. While both healthcare retailers have faced growth pressures over the past year, Clicks’ consistent long-term earnings growth profile maps to a far more sustainable valuation at current market prices.
It then goes on to say:
To understand the core drivers behind these valuation gaps, we normalize the current trailing Price-to-Earnings (P/E) ratios against their respective multi-year historical Compound Annual Growth Rates (CAGR) in Headline Earnings Per Share (HEPS).
Clicks Group (CLS) — Steady Compounder
- Robust Growth Track Record: Over the past decade, Clicks Group has compounded its diluted HEPS at an impressive 13,5% per annum, alongside a dividend growth rate of 14,2%.
- Defensive Cost Efficiencies: Its massive retail presence (~1,000 stores) gives it exceptional operating leverage. At a current P/E of 14,45x, the market has compressed Clicks’ historical premium rating (which typically sat closer to 30x), creating a much safer entry point where the earnings growth rate almost directly mirrors its multiple.
Dis-Chem Pharmacies (DCP) — Growth Disruption
- Earnings Volatility: While Dis-Chem Pharmacies initially listed with immense growth premium expectations in 2016, its long-term financial delivery has slowed down. For instance, its FY2026 annual performance saw a sharp 17,3% drop in HEPS to 113,7 cents due to significant operational and macroeconomic pressures.
- Depressed Growth Base: Compounding its HEPS from its first full year post-listing (74,7 cents in FY2017) to FY2026 yields a long-term compound growth rate of only 4,78%. A P/E multiple of 23,53x is highly mismatched against this lower single-digit structural growth pace, heavily inflating its PEG ratio.
Risk Guardrails & Framework
Peter Lynch’s traditional benchmark dictates that a PEG ratio near 1,0 indicates a stock is fairly priced relative to its growth, while any metric significantly exceeding 2,0 alerts investors to potential overvaluation relative to realized history. For long-term portfolios, Clicks presents a structurally sound baseline where you are paying a reasonable price for a stable, high-return business framework, whereas Dis-Chem requires aggressive operational margin expansions (such as its automated staffing framework 2.0 initiatives) to justify its present multiple.
This analysis shows that Clicks is cheap at current prices, while Dischem is probably overpriced. Of course, you could have come to the same conclusion if you had done the work yourself, but that would be extremely laborious and time-consuming. For many months now we have been watching Clicks closely. Its price has virtually halved since the middle of last year. And when the price of a blue-chip share like Clicks halves, it is always worth investigating.
Of course, before you know to ask such a question, you would need to have a basic understanding of how the PEG ratio works or even that there is such a thing as the PEG ratio. Even with the advantage of AI, you need to know enough to be able to ask the right questions – but AI can help you with that too.
We are not suggesting that you let AI make your investment decisions, but we are suggesting that when you find an investment idea, it can be a very powerful tool for analysis.
And we do believe that Clicks offers significant value at current levels. Certainly, we believe that it is far better value than Dischem. That is why we asked AI the question in the first place.
