Does Qantas Airways Limited’s (ASX:QAN) PE Ratio Warrant A Sell?
Qantas Airways Limited (ASX:QAN) is trading with a trailing P/E of 12.4x, which is higher than the industry average of 10.4x. While this makes QAN 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 explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for QAN
What you need to know about the P/E ratio
P/E is a popular ratio used for relative valuation. 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 QAN
Price-Earnings Ratio = Price per share ÷ Earnings per share
QAN Price-Earnings Ratio = 5.72 ÷ 0.46 = 12.4x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to QAN, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. QAN’s P/E of 12.4x is higher than its industry peers (10.4x), which implies that each dollar of QAN’s earnings is being overvalued by investors. As such, our analysis shows that QAN represents an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your QAN shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to QAN. 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 QAN, 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 QAN to are fairly valued by the market. If this does not hold, there is a possibility that QAN’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Are you a shareholder? You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to QAN. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision.
Are you a potential investor? If you are considering investing in QAN, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.
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 Qantas Airways 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.
