Is Dean Foods Company’s (NYSE:DF) PE Ratio A Signal To Sell For Investors?
Dean Foods Company (NYSE:DF) is trading with a trailing P/E of 29.2x, which is higher than the industry average of 20.5x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Dean Foods
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 DF
Price-Earnings Ratio = Price per share ÷ Earnings per share
DF Price-Earnings Ratio = $10.13 ÷ $0.346 = 29.2x
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 DF, 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. Since DF’s P/E of 29.2x is higher than its industry peers (20.5x), it means that investors are paying more than they should for each dollar of DF’s earnings. Therefore, according to this analysis, DF is an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your DF shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to DF. 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 DF, 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 DF to are fairly valued by the market. If this does not hold, there is a possibility that DF’s P/E is lower because our peer group is overvalued by the market.
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.
