Does CVB Financial Corp’s (undefined:CVBF) PE Ratio Warrant A Sell?
CVB Financial Corp (NASDAQ:CVBF) is trading with a trailing P/E of 22.8x, which is higher than the industry average of 16.4x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. In this article, 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 CVB Financial
Breaking down the P/E ratio
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 CVBF
Price-Earnings Ratio = Price per share ÷ Earnings per share
CVBF Price-Earnings Ratio = $23.74 ÷ $1.04 = 22.8x
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 CVBF, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since CVBF’s P/E of 22.8x is higher than its industry peers (16.4x), it means that investors are paying more than they should for each dollar of CVBF’s earnings. Therefore, according to this analysis, CVBF is an over-priced stock.
A few caveats
However, before you rush out to sell your CVBF shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to CVBF, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with CVBF, 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 CVBF to are fairly valued by the market. If this does not hold, there is a possibility that CVBF’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Are you a shareholder? 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 CVBF. 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.
Are you a potential investor? If CVBF 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 CVB Financial 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.
