Does James Hardie Industries plc’s (ASX:JHX) PE Ratio Warrant A Sell?
James Hardie Industries plc (ASX:JHX) trades with a trailing P/E of 30.2x, which is higher than the industry average of 23.5x. While this makes JHX appear like a stock to avoid or sell if you own it, 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. See our latest analysis for James Hardie Industries
Breaking down the P/E ratio
P/E is a popular ratio used for relative valuation. 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 JHX
Price-Earnings Ratio = Price per share ÷ Earnings per share
JHX Price-Earnings Ratio = $16.97 ÷ $0.563 = 30.2x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to JHX, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 30.2x, JHX’s P/E is higher than its industry peers (23.5x). This implies that investors are overvaluing each dollar of JHX’s earnings. Therefore, according to this analysis, JHX is an over-priced stock.
A few caveats
Before you jump to the conclusion that JHX should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to JHX, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with JHX, 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 JHX to are fairly valued by the market. If this does not hold, there is a possibility that JHX’s P/E is lower because our peer group is 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 JHX. 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for JHX’s future growth? Take a look at our free research report of analyst consensus for JHX’s outlook.
Past Track Record: Has JHX 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 JHX’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.
