Does Pilgrim’s Pride Corporation’s (NASDAQ:PPC) PE Ratio Warrant A Buy?
Pilgrim’s Pride Corporation (NASDAQ:PPC) is currently trading at a trailing P/E of 9.9x, which is lower than the industry average of 21x. While this makes PPC appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Pilgrim’s Pride
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 PPC
Price-Earnings Ratio = Price per share ÷ Earnings per share
PPC Price-Earnings Ratio = $25.14 ÷ $2.531 = 9.9x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to PPC, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since PPC’s P/E of 9.9x is lower than its industry peers (21x), it means that investors are paying less than they should for each dollar of PPC’s earnings. Therefore, according to this analysis, PPC is an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy PPC, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to PPC, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with PPC, 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 PPC to are fairly valued by the market. If this does not hold true, PPC’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.
