Does Hub Group Inc’s (NASDAQ:HUBG) PE Ratio Signal A Buying Opportunity?
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning the link between Hub Group Inc (NASDAQ:HUBG)’s fundamentals and stock market performance.
Hub Group Inc (NASDAQ:HUBG) is currently trading at a trailing P/E of 12.5x, which is lower than the industry average of 20.7x. While this makes HUBG appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. 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 Hub Group
Demystifying the P/E ratio
A common ratio used for relative valuation is the P/E ratio. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for HUBG
Price-Earnings Ratio = Price per share ÷ Earnings per share
HUBG Price-Earnings Ratio = $53.15 ÷ $4.239 = 12.5x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to HUBG, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 12.5x, HUBG’s P/E is lower than its industry peers (20.7x). This implies that investors are undervaluing each dollar of HUBG’s earnings. As such, our analysis shows that HUBG represents an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy HUBG, 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 HUBG, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with HUBG, 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 HUBG to are fairly valued by the market. If this is violated, HUBG’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of HUBG to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. 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 HUBG’s future growth? Take a look at our free research report of analyst consensus for HUBG’s outlook.
Past Track Record: Has HUBG 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 HUBG’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 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.
