Does Loral Space & Communications Inc’s (NASDAQ:LORL) PE Ratio Signal A Buying Opportunity?
Loral Space & Communications Inc (NASDAQ:LORL) trades with a trailing P/E of 18.1x, which is lower than the industry average of 20.4x. While this makes LORL 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 Loralce & Communications
Demystifying 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 LORL
Price-Earnings Ratio = Price per share ÷ Earnings per share
LORL Price-Earnings Ratio = $47.65 ÷ $2.639 = 18.1x
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 LORL, 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. Since LORL’s P/E of 18.1x is lower than its industry peers (20.4x), it means that investors are paying less than they should for each dollar of LORL’s earnings. Therefore, according to this analysis, LORL is an under-priced stock.
A few caveats
However, before you rush out to buy LORL, 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 LORL, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with LORL, 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 LORL to are fairly valued by the market. If this does not hold, there is a possibility that LORL’s P/E is lower because our peer group is overvalued by the market.
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.
