Does Amphenol Corporation’s (NYSE:APH) PE Ratio Signal A Selling Opportunity?
Amphenol Corporation (NYSE:APH) is trading with a trailing P/E of 38.9x, which is higher than the industry average of 22x. 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. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for Amphenol
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 APH
Price-Earnings Ratio = Price per share ÷ Earnings per share
APH Price-Earnings Ratio = $82.77 ÷ $2.128 = 38.9x
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 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 38.9x, APH’s P/E is higher than its industry peers (22x). This implies that investors are overvaluing each dollar of APH’s earnings. As such, our analysis shows that APH represents an over-priced stock.
A few caveats
Before you jump to the conclusion that APH 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 APH. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with APH, then investors would naturally value it at a lower price since it is a riskier investment. 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, there is a possibility that APH’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
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. 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:
Future Outlook: What are well-informed industry analysts predicting for APH’s future growth? Take a look at our free research report of analyst consensus for APH’s outlook.
Past Track Record: Has APH 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 APH’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.
