Does National Bank Holdings Corporation’s (NBHC) PE Ratio Signal A Selling Opportunity?
National Bank Holdings Corporation (NYSE:NBHC) is currently trading at a trailing P/E of 26.7x, which is higher than the industry average of 18.6x. While NBHC 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. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for NBHC
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 NBHC
Price-Earnings Ratio = Price per share ÷ Earnings per share
NBHC Price-Earnings Ratio = 35.47 ÷ 1.327 = 26.7x
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 NBHC, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. NBHC’s P/E of 26.7x is higher than its industry peers (18.6x), which implies that each dollar of NBHC’s earnings is being overvalued by investors. As such, our analysis shows that NBHC represents an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your NBHC shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to NBHC. 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 NBHC, 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 NBHC to are fairly valued by the market. If this does not hold, there is a possibility that NBHC’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Are you a shareholder? 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 NBHC. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above.
Are you a potential investor? If NBHC has been on your watch list for a while, it is best you also consider its intrinsic valuation. Looking at PE on its own will not give you the full picture of the stock as an investment, so I suggest you should also look at other relative valuation metrics like EV/EBITDA or PEG.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on National Bank Holdings for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn't properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
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.
