Is Anthem Inc (NYSE:ANTM) A Buy At Its Current PE Ratio?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Anthem Inc (NYSE:ANTM)’s fundamentals and stock market performance.
Anthem Inc (NYSE:ANTM) trades with a trailing P/E of 15.3x, which is lower than the industry average of 21.9x. While this makes ANTM appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View out our latest analysis for Anthem
Breaking down the Price-Earnings ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for ANTM
Price-Earnings Ratio = Price per share ÷ Earnings per share
ANTM Price-Earnings Ratio = $244.82 ÷ $15.984 = 15.3x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to ANTM, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. ANTM’s P/E of 15.3x is lower than its industry peers (21.9x), which implies that each dollar of ANTM’s earnings is being undervalued by investors. Therefore, according to this analysis, ANTM is an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy ANTM immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to ANTM. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with ANTM, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing ANTM to are fairly valued by the market. If this does not hold true, ANTM’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of ANTM to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for ANTM’s future growth? Take a look at our free research report of analyst consensus for ANTM’s outlook.
Past Track Record: Has ANTM 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 ANTM’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.
