Hyster-Yale Materials Handling Inc (NYSE:HY) is trading with a trailing P/E of 26.1x, which is higher than the industry average of 24.3x. While HY might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. 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 Hyster-Yale Materials Handling
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 HY
Price-Earnings Ratio = Price per share ÷ Earnings per share
HY Price-Earnings Ratio = $76.99 ÷ $2.955 = 26.1x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to HY, 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. HY’s P/E of 26.1x is higher than its industry peers (24.3x), which implies that each dollar of HY’s earnings is being overvalued by investors. Therefore, according to this analysis, HY is an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your HY shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to HY, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with HY, 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 HY to are fairly valued by the market. If this does not hold true, HY’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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 rebalance your portfolio and reduce your holdings in HY. 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 HY’s future growth? Take a look at our free research report of analyst consensus for HY’s outlook.
- Past Track Record: Has HY 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 HY’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.