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Is City Holding Company (NASDAQ:CHCO) Attractive At Its Current PE Ratio?

Andrew Carroll

I am writing today to help inform people who are new to the stock market and want to learn about the link between company’s fundamentals and stock market performance.

City Holding Company (NASDAQ:CHCO) is currently trading at a trailing P/E of 20, which is higher than the industry average of 17.9. While this might not seem positive, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, 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 City Holding

What you need to know about the P/E ratio

NasdaqGS:CHCO PE PEG Gauge September 12th 18
NasdaqGS:CHCO PE PEG Gauge September 12th 18

A common ratio used for relative valuation is the P/E ratio. 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 CHCO

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

CHCO Price-Earnings Ratio = $79.76 ÷ $3.99 = 20x

The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to CHCO, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. CHCO’s P/E of 20 is higher than its industry peers (17.9), which implies that each dollar of CHCO’s earnings is being overvalued by investors. This multiple is a median of profitable companies of 25 Banks companies in US including Great Basin Financial, Mercantil Servicios Financieros C.A and CIB Marine Bancshares. You could think of it like this: the market is pricing CHCO as if it is a stronger company than the average of its industry group.

Assumptions to be aware of

Before you jump to conclusions it is important to realise that there are assumptions in this analysis. Firstly, that our peer group contains companies that are similar to CHCO. If this isn’t the case, the difference in P/E could be due to other factors. For example, City Holding Company could be growing more quickly than the companies we’re comparing it with. In that case it would deserve a higher P/E ratio. Of course, it is possible that the stocks we are comparing with CHCO are not fairly valued. Just because it is trading on a higher P/E ratio than its peers does not mean it must be overvalued. After all, the peer group could be undervalued.

What this means for you:

You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to CHCO. 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 CHCO’s future growth? Take a look at our free research report of analyst consensus for CHCO’s outlook.

  2. Past Track Record: Has CHCO 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 CHCO’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.