Does RE/MAX Holdings Inc’s (NYSE:RMAX) PE Ratio Warrant A Sell?
RE/MAX Holdings Inc (NYSE:RMAX) trades with a trailing P/E of 71.2x, which is higher than the industry average of 9.6x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. In this article, 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 RE/MAX Holdings
Breaking down the Price-Earnings 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 RMAX
Price-Earnings Ratio = Price per share ÷ Earnings per share
RMAX Price-Earnings Ratio = $53.35 ÷ $0.749 = 71.2x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as RMAX, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. At 71.2x, RMAX’s P/E is higher than its industry peers (9.6x). This implies that investors are overvaluing each dollar of RMAX’s earnings. As such, our analysis shows that RMAX represents an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that RMAX should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to RMAX. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with RMAX, 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 RMAX to are fairly valued by the market. If this does not hold, there is a possibility that RMAX’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 RMAX. 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 RMAX’s future growth? Take a look at our free research report of analyst consensus for RMAX’s outlook.
Past Track Record: Has RMAX 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 RMAX’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.
