Does Quanex Building Products Corporation’s (NYSE:NX) PE Ratio Signal A Buying Opportunity?
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 begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
Quanex Building Products Corporation (NYSE:NX) is trading with a trailing P/E of 19.2, which is close to the industry average of 19.4. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. 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 Quanex Building Products
Breaking down the P/E ratio
P/E is often used for relative valuation since earnings power is a chief 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 NX
Price-Earnings Ratio = Price per share ÷ Earnings per share
NX Price-Earnings Ratio = $16.93 ÷ $0.881 = 19.2x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to NX, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Quanex Building Products Corporation (NYSE:NX) trades on a trailing P/E of 19.2. This isn’t too far from the industry average (which is 19.4). This multiple is a median of profitable companies of 24 Building companies in US including Masonite International, Patrick Industries and Jewett-Cameron Trading. You can think of it like this: the market is suggesting that NX has similar prospects to its peers in the same industry.
Assumptions to watch out for
However, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to NX, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with NX, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing NX to are fairly valued by the market. If this does not hold true, NX’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to NX. 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. 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for NX’s future growth? Take a look at our free research report of analyst consensus for NX’s outlook.
Past Track Record: Has NX 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 NX’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
