Is The Chefs’ Warehouse Inc’s (NASDAQ:CHEF) PE Ratio A Signal To Sell For Investors?
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning the link between The Chefs’ Warehouse Inc (NASDAQ:CHEF)’s fundamentals and stock market performance.
The Chefs’ Warehouse Inc (NASDAQ:CHEF) trades with a trailing P/E of 46.6x, which is higher than the industry average of 21.3x. While this makes CHEF appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for Chefs’ Warehouse
Breaking down the Price-Earnings ratio
P/E is a popular ratio used for relative valuation. 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 CHEF
Price-Earnings Ratio = Price per share ÷ Earnings per share
CHEF Price-Earnings Ratio = $28.9 ÷ $0.621 = 46.6x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to CHEF, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. At 46.6x, CHEF’s P/E is higher than its industry peers (21.3x). This implies that investors are overvaluing each dollar of CHEF’s earnings. Therefore, according to this analysis, CHEF is an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that CHEF should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to CHEF. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with CHEF, 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 CHEF to are fairly valued by the market. If this does not hold true, CHEF’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on CHEF, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 CHEF’s future growth? Take a look at our free research report of analyst consensus for CHEF’s outlook.
Past Track Record: Has CHEF 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 CHEF’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.
