Does Amphenol Corporation’s (NYSE:APH) PE Ratio Warrant A Sell?
Amphenol Corporation (NYSE:APH) is currently trading at a trailing P/E of 28.4x, which is higher than the industry average of 24.1x. While this makes APH 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 Amphenol
What you need to know about the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 dollar of the company’s earnings.
P/E Calculation for APH
Price-Earnings Ratio = Price per share ÷ Earnings per share
APH Price-Earnings Ratio = $91.83 ÷ $3.229 = 28.4x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to APH, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 28.4x, APH’s P/E is higher than its industry peers (24.1x). This implies that investors are overvaluing each dollar of APH’s earnings. Therefore, according to this analysis, APH is an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your APH shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to APH, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with APH, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing APH to are fairly valued by the market. If this does not hold true, APH’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Are you a shareholder? If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in APH. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above.
Are you a potential investor? If you are considering investing in APH, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.
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 Amphenol 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.
