Does Halozyme Therapeutics Inc’s (NASDAQ:HALO) PE Ratio Signal A Selling Opportunity?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to learn about the link between company’s fundamentals and stock market performance.
Halozyme Therapeutics Inc (NASDAQ:HALO) trades with a trailing P/E of 31.9, which is higher than the industry average of 24.7. Though this might seem to be a negative, 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.
View our latest analysis for Halozyme Therapeutics
Breaking down the Price-Earnings 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 HALO
Price-Earnings Ratio = Price per share ÷ Earnings per share
HALO Price-Earnings Ratio = $17.1 ÷ $0.536 = 31.9x
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 HALO, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since HALO’s P/E of 31.9 is higher than its industry peers (24.7), it means that investors are paying more for each dollar of HALO’s earnings. This multiple is a median of profitable companies of 24 Biotechs companies in US including Portage Biotech, Ophthotech and Concert Pharmaceuticals. You could think of it like this: the market is pricing HALO as if it is a stronger company than the average of its industry group.
Assumptions to be aware of
However, it is important to note that our examination of the stock is based on certain assumptions. The first is that our “similar companies” are actually similar to HALO. If not, the difference in P/E might be a result of other factors. Take, for example, the scenario where Halozyme Therapeutics Inc is growing profits more quickly than the average comparable company. In that case, the market may be correct to value it on a higher P/E ratio. Of course, it is possible that the stocks we are comparing with HALO are not fairly valued. So while we can reasonably surmise that it is optimistically valued relative to a peer group, it might be fairly valued, if the peer group is 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 HALO. 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for HALO’s future growth? Take a look at our free research report of analyst consensus for HALO’s outlook.
Past Track Record: Has HALO 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 HALO’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.
