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.
Landmark Infrastructure Partners LP (NASDAQ:LMRK) is trading with a trailing P/E of 19.3, which is higher than the industry average of 16.1. While this might not seem positive, 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.
What you need to know about 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 LMRK
Price-Earnings Ratio = Price per share ÷ Earnings per share
LMRK Price-Earnings Ratio = $13.3 ÷ $0.691 = 19.3x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to LMRK, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. At 19.3, LMRK’s P/E is higher than its industry peers (16.1). This implies that investors are overvaluing each dollar of LMRK’s earnings. This multiple is a median of profitable companies of 25 Real Estate companies in US including Sunrise Real Estate Group, Altisource Portfolio Solutions and Lai Fung Holdings. You could also say that the market is suggesting that LMRK is a stronger business than the average comparable company.
A few caveats
Before you jump to conclusions it is important to realise that there are assumptions in this analysis. The first is that our “similar companies” are actually similar to LMRK. If not, the difference in P/E might be a result of other factors. For example, if Landmark Infrastructure Partners LP is growing faster than its peers, then it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to LMRK may not be 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:
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 LMRK. 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 LMRK’s future growth? Take a look at our free research report of analyst consensus for LMRK’s outlook.
- Past Track Record: Has LMRK 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 LMRK’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 email@example.com.