Is The Blackstone Group LP.’s (NYSE:BX) PE Ratio A Signal To Buy For Investors?
The Blackstone Group LP. (NYSE:BX) is trading with a trailing P/E of 14.6x, which is lower than the industry average of 15.6x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View our latest analysis for Blackstone Group
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 BX
Price-Earnings Ratio = Price per share ÷ Earnings per share
BX Price-Earnings Ratio = $32.25 ÷ $2.21 = 14.6x
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 BX, 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. Since BX’s P/E of 14.6x is lower than its industry peers (15.6x), it means that investors are paying less than they should for each dollar of BX’s earnings. As such, our analysis shows that BX represents an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy BX, 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 BX, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with BX, 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 BX to are fairly valued by the market. If this is violated, BX’s P/E may be lower than its peers as they are actually overvalued by investors.
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.
