Does Manulife Financial Corporation’s (TSE:MFC) PE Ratio Signal A Selling Opportunity?
Manulife Financial Corporation (TSX:MFC) is trading with a trailing P/E of 24.3x, which is higher than the industry average of 15.2x. While MFC 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. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Manulife Financial
Demystifying 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 MFC
Price-Earnings Ratio = Price per share ÷ Earnings per share
MFC Price-Earnings Ratio = CA$23.89 ÷ CA$0.983 = 24.3x
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 MFC, 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 24.3x, MFC’s P/E is higher than its industry peers (15.2x). This implies that investors are overvaluing each dollar of MFC’s earnings. As such, our analysis shows that MFC represents an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your MFC shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to MFC. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with MFC, 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 MFC to are fairly valued by the market. If this is violated, MFC’s P/E may be lower than its peers as they are actually overvalued by investors.
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.
