Is AXIS Capital Holdings Limited (AXS) A Buy At Its Current Price?
AXIS Capital Holdings Limited (NYSE:AXS) is currently trading at a trailing P/E of 12.5x, which is lower than the industry average of 15.7x. While AXS might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for AXIS Capital Holdings
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 AXS
Price-Earnings Ratio = Price per share ÷ Earnings per share
AXS Price-Earnings Ratio = 57.31 ÷ 4.58 = 12.5x
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 AXS, 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. At 12.5x, AXS’s P/E is lower than its industry peers (15.7x). This implies that investors are undervaluing each dollar of AXS’s earnings. As such, our analysis shows that AXS represents an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy AXS, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to AXS, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with AXS, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing AXS to are fairly valued by the market. If this is violated, AXS's P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Are you a shareholder? 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 AXS 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.
Are you a potential investor? If you are considering investing in AXS, basing your decision on the PE metric at one point in time is certainly not sufficient. I recommend you do additional analysis by looking at its intrinsic valuation and using other relative valuation ratios like PEG or EV/EBITDA.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on AXIS Capital Holdings for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn't properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
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.
