Does Harris Corporation’s (NYSE:HRS) PE Ratio Warrant A Sell?
Harris Corporation (NYSE:HRS) is trading with a trailing P/E of 26.3x, which is higher than the industry average of 21.2x. 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. Today, 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 Harris
Breaking down the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 HRS
Price-Earnings Ratio = Price per share ÷ Earnings per share
HRS Price-Earnings Ratio = $142.78 ÷ $5.42 = 26.3x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 HRS, 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 HRS’s P/E of 26.3x is higher than its industry peers (21.2x), it means that investors are paying more than they should for each dollar of HRS’s earnings. As such, our analysis shows that HRS represents an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your HRS shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to HRS. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with HRS, 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 HRS to are fairly valued by the market. If this is violated, HRS’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Are you a shareholder? Since you may have already conducted your due diligence on HRS, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above.
Are you a potential investor? If you are considering investing in HRS, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.
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 Harris 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.
