The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to better understand how you can grow your money by investing in PBF Logistics LP (NYSE:PBFX).
PBF Logistics LP (NYSE:PBFX) is currently trading at a trailing P/E of 10.3x, which is lower than the industry average of 13.4x. While PBFX 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 PBF Logistics
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 PBFX
Price-Earnings Ratio = Price per share ÷ Earnings per share
PBFX Price-Earnings Ratio = $21.3 ÷ $2.059 = 10.3x
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 PBFX, 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 10.3x, PBFX’s P/E is lower than its industry peers (13.4x). This implies that investors are undervaluing each dollar of PBFX’s earnings. As such, our analysis shows that PBFX represents an under-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that PBFX is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to PBFX. 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 PBFX, 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 PBFX to are fairly valued by the market. If this does not hold, there is a possibility that PBFX’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 add more of PBFX 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 urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for PBFX’s future growth? Take a look at our free research report of analyst consensus for PBFX’s outlook.
- Past Track Record: Has PBFX 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 PBFX’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.