What Does Michael Kors Holdings Limited’s (NYSE:KORS) PE Ratio Tell You?
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
Michael Kors Holdings Limited (NYSE:KORS) trades with a trailing P/E of 16.1x, which is lower than the industry average of 21.2x. While KORS might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
Check out our latest analysis for Michael Kors Holdings
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in 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 KORS
Price-Earnings Ratio = Price per share ÷ Earnings per share
KORS Price-Earnings Ratio = $69.46 ÷ $4.322 = 16.1x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as KORS, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since KORS’s P/E of 16.1 is lower than its industry peers (21.2), it means that investors are paying less for each dollar of KORS’s earnings. This multiple is a median of profitable companies of 25 Luxury companies in US including Kingold Jewelry, Vince Holding and Ever-Glory International Group. You can think of it like this: the market is suggesting that KORS is a weaker business than the average comparable company.
Assumptions to be aware of
Before you jump to conclusions it is important to realise that our assumptions rests on two assertions. Firstly, our peer group contains companies that are similar to KORS. 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 KORS, 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 KORS to are fairly valued by the market. If this is violated, KORS’s P/E may be lower than its peers as they are actually overvalued by investors.
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 add more of KORS to your portfolio. 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 KORS’s future growth? Take a look at our free research report of analyst consensus for KORS’s outlook.
Past Track Record: Has KORS 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 KORS’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 editorial-team@simplywallst.com.
