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Does Banco Bilbao Vizcaya Argentaria SA’s (BME:BBVA) P/E Ratio Signal A Buying Opportunity?

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to learn about the link between company’s fundamentals and stock market performance.

Banco Bilbao Vizcaya Argentaria SA (BME:BBVA) is currently trading at a trailing P/E of 9.8x, which is lower than the industry average of 10.7x. Although some investors may jump to the conclusion that this is a great buying opportunity, 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 Banco Bilbao Vizcaya Argentaria

Breaking down the P/E ratio

BME:BBVA PE PEG Gauge October 30th 18
BME:BBVA PE PEG Gauge October 30th 18

P/E is a popular ratio used for 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 BBVA

Price-Earnings Ratio = Price per share ÷ Earnings per share

BBVA Price-Earnings Ratio = €5.13 ÷ €0.524 = 9.8x

The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to BBVA, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. Since BBVA’s P/E of 9.8 is lower than its industry peers (10.7), it means that investors are paying less for each dollar of BBVA’s earnings. This multiple is a median of profitable companies of 6 Banks companies in ES including CaixaBank, Banco Santander and Unicaja Banco. One could put it like this: the market is pricing BBVA as if it is a weaker company than the average company in its industry.

A few caveats

Before you jump to conclusions it is important to realise that our assumptions rests on two assertions. Firstly, our peer group contains companies that are similar to BBVA. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with BBVA, 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 BBVA to are fairly valued by the market. If this does not hold, there is a possibility that BBVA’s P/E is lower because our peer group is overvalued by the market.

What this means for you:

You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to BBVA. 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:

  1. Future Outlook: What are well-informed industry analysts predicting for BBVA’s future growth? Take a look at our free research report of analyst consensus for BBVA’s outlook.

  2. Past Track Record: Has BBVA 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 BBVA’s historicals for more clarity.

  3. 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.

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