ACNB Corporation (NASDAQ:ACNB) is currently trading at a trailing P/E of 15.9x, which is lower than the industry average of 18.6x. While this makes ACNB appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for ACNB
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in 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 ACNB
Price-Earnings Ratio = Price per share ÷ Earnings per share
ACNB Price-Earnings Ratio = 28 ÷ 1.765 = 15.9x
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 ACNB, 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 15.9x, ACNB’s P/E is lower than its industry peers (18.6x). This implies that investors are undervaluing each dollar of ACNB’s earnings. Therefore, according to this analysis, ACNB is an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy ACNB immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to ACNB, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with ACNB, 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 ACNB to are fairly valued by the market. If this is violated, ACNB’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Are you a shareholder? Since you may have already conducted your due diligence on ACNB, the undervaluation of the stock may mean it is a good time to top up on 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.
Are you a potential investor? If ACNB 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 ACNB 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.