Is Agilent Technologies Inc (NYSE:A) A Sell At Its Current PE Ratio?
This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Agilent Technologies Inc (NYSE:A).
Agilent Technologies Inc (NYSE:A) is trading with a trailing P/E of 86.4x, which is higher than the industry average of 39.6x. While A might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. View out our latest analysis for Agilent Technologies
Breaking down the Price-Earnings ratio
P/E is a popular ratio used for relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for A
Price-Earnings Ratio = Price per share ÷ Earnings per share
A Price-Earnings Ratio = $63.52 ÷ $0.735 = 86.4x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to A, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. At 86.4x, A’s P/E is higher than its industry peers (39.6x). This implies that investors are overvaluing each dollar of A’s earnings. Therefore, according to this analysis, A is an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your A shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to A. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with A, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing A to are fairly valued by the market. If this does not hold true, A’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on A, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for A’s future growth? Take a look at our free research report of analyst consensus for A’s outlook.
Past Track Record: Has A been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of A’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
