Does Paramount Group Inc’s (NYSE:PGRE) PE Ratio Signal A Selling Opportunity?
Paramount Group Inc (NYSE:PGRE) trades with a trailing P/E of 38.2x, which is higher than the industry average of 21.4x. While this makes PGRE appear like a stock to avoid or sell if you own it, 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. View our latest analysis for Paramount Group
What you need to know about the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 PGRE
Price-Earnings Ratio = Price per share ÷ Earnings per share
PGRE Price-Earnings Ratio = $14.25 ÷ $0.373 = 38.2x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to PGRE, 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. At 38.2x, PGRE’s P/E is higher than its industry peers (21.4x). This implies that investors are overvaluing each dollar of PGRE’s earnings. As such, our analysis shows that PGRE represents an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your PGRE shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to PGRE, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with PGRE, 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 PGRE to are fairly valued by the market. If this does not hold true, PGRE’s lower P/E ratio may be because firms in our peer group are 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.
