Is Bridge Bancorp Inc’s (BDGE) PE Ratio A Signal To Buy For Investors?
Bridge Bancorp Inc (NASDAQ:BDGE) is currently trading at a trailing P/E of 18.1x, which is lower than the industry average of 18.3x. 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. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for BDGE
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in 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 BDGE
Price-Earnings Ratio = Price per share ÷ Earnings per share
BDGE Price-Earnings Ratio = 34.65 ÷ 1.918 = 18.1x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to BDGE, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. BDGE’s P/E of 18.1x is lower than its industry peers (18.3x), which implies that each dollar of BDGE’s earnings is being undervalued by investors. As such, our analysis shows that BDGE represents an under-priced stock.
A few caveats
However, before you rush out to buy BDGE, 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 BDGE, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with BDGE, 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 BDGE to are fairly valued by the market. If this does not hold, there is a possibility that BDGE’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Are you a shareholder? You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to BDGE. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision.
Are you a potential investor? If BDGE has been on your watch list for a while, it is best you also consider its intrinsic valuation. Looking at PE on its own will not give you the full picture of the stock as an investment, so I suggest you should also look at other relative valuation metrics like EV/EBITDA or PEG.
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 Bridge Bancorp 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.
