Does AptarGroup Inc’s (NYSE:ATR) PE Ratio Warrant A Sell?
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.
AptarGroup Inc (NYSE:ATR) is trading with a trailing P/E of 29.9, which is higher than the industry average of 18.8. 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 break down what the P/E ratio is, how to interpret it and what to watch out for.
Check out our latest analysis for AptarGroup
Breaking down the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 ATR
Price-Earnings Ratio = Price per share ÷ Earnings per share
ATR Price-Earnings Ratio = $104.7 ÷ $3.5 = 29.9x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as ATR, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 29.9, ATR’s P/E is higher than its industry peers (18.8). This implies that investors are overvaluing each dollar of ATR’s earnings. This multiple is a median of profitable companies of 21 Packaging companies in US including WestRock, International Paper and Vitro. de. You could think of it like this: the market is pricing ATR as if it is a stronger company than the average of its industry group.
A few caveats
However, you should be aware that this analysis makes certain assumptions. Firstly, that our peer group contains companies that are similar to ATR. If this isn’t the case, the difference in P/E could be due to other factors. For example, AptarGroup Inc could be growing more quickly than the companies we’re comparing it with. In that case it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to ATR may not be 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 ATR. 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for ATR’s future growth? Take a look at our free research report of analyst consensus for ATR’s outlook.
Past Track Record: Has ATR 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 ATR’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 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.