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Should You Buy Ferguson plc (LON:FERG) At This PE Ratio?

Ferguson plc (LSE:FERG) is trading with a trailing P/E of 14.6x, which is lower than the industry average of 15x. 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. See our latest analysis for Ferguson

Breaking down the Price-Earnings ratio

LSE:FERG PE PEG Gauge Apr 17th 18
LSE:FERG PE PEG Gauge Apr 17th 18

P/E is often used for relative valuation since earnings power is a chief 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 pound of the company’s earnings.

P/E Calculation for FERG

Price-Earnings Ratio = Price per share ÷ Earnings per share

FERG Price-Earnings Ratio = $75.61 ÷ $5.189 = 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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as FERG, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since FERG’s P/E of 14.6x is lower than its industry peers (15x), it means that investors are paying less than they should for each dollar of FERG’s earnings. Therefore, according to this analysis, FERG is an under-priced stock.

Assumptions to watch out for

However, before you rush out to buy FERG, 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 FERG, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with FERG, 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 FERG to are fairly valued by the market. If this does not hold, there is a possibility that FERG’s P/E is lower because our peer group is overvalued by the market.

What this means for you:

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 FERG. 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. 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:

  1. Future Outlook: What are well-informed industry analysts predicting for FERG’s future growth? Take a look at our free research report of analyst consensus for FERG’s outlook.

  2. Past Track Record: Has FERG 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 FERG’s historicals for more clarity.

  3. 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.

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